Let’s call a spade a spade: The month of May was a month of collapse.
Collapse in bullish narratives, collapse in trade talks, collapse in yields, collapse in technical structures, collapse in rate expectations, collapse in growth projections and yes, collapse in stocks. While the price damage to equities for now seems reflective of a run of the mill correction the larger macro context is screaming danger. Danger that this long business cycle is turning or perhaps has already has turned.
Once again technical signals were ignored, people got bullish at the top, don’t sell in May was the mantra:
— Sven Henrich (@NorthmanTrader) May 31, 2019
A massive outside reversal month following negative divergences, weakening participation and leadership with price having once been driven by artificial impetus as opposed to organic growth. A dovish Fed, buybacks and political jawboning.
But the political jawboning came to a sudden end as optimism took a cold shower when the entire hope narrative collapsed under its own fictitious weight. China trade deal discussions collapsed and here come Mexico tariffs.
Overly optimistic growth estimates have to contend with a bond market that’s yelling recession risk from the rooftops. A Fed now being bullied into rate cuts by a market that demands them more urgently by the day. Three rates cuts being priced in now by the end of the year.
Not long ago the prospect of three rate cuts coming would have been greeted with feverish buying by the TINA crowd, but cycle theory tells you that rate cuts at the end of a cycle are not a sign of strength, they never were, but signs that the economy is heading toward recession:
But none of this should be a surprise, the bond market has signaled this since last year when the 10 year hit its multi decade long trend line and rejected:
What caused everyone to once again ignore that signal was price. The massive rally off of historic oversold conditions at the end of December, fueled by a Fed running scared, buybacks and trade optimism.
Reality check: All it’s done is retest the broken 2009 trend line and has now rejected that trend line again with marginal new highs on a negative divergence.
Index performances since the January 2018 highs, 15 months, suggest no bull market whatsoever, far from it:
These are not signs of stable markets and now prices are well back inside the larger 2018 range. Let me emphasize: While markets are still up for 2019 they remain largely below the January 2018 highs. In some cases by quite a bit.
No, these markets are in big, big trouble. Technical patterns have been triggered, structures have broken, support has broken pointing to much further downside risk. But signals are getting oversold and sentiment is lousy and increasingly getting worse suggesting aggressive counter rallies will come as well and could come at a moment’s notice on a tweet or shift in policy.
Let’s be clear: The current investment and trading climate is as complex as we’ve seen it. A single tweet can jerk price in every which direction. Policy is increasingly becoming unpredictable. What is advertised as an imminent deal for months can collapse without notice. New tariffs on a new country can be announced without warning. What was high confidence is suddenly shaken. Uncertainty is permeating the landscape. And there is no apparent endgame in sight which is a problem as macro data keeps deteriorating with a Fed seemingly completely behind the curve, seen too aggressive last year and now seen too slow to react this year. Expect to get flooded with Fed speeches next week. Let the great Fed jawboning begin anew.
There’s a LOT going with these markets, please see my detailed technical update below:
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Author: Tyler Durden