Fed Is Hawkish and I Am Bearish – That Was the Last Chance For A Year-end Rally
Posted by Pete Stolcers on November 09
Posted 9:30 AM ET – My bias is bearish. Democrats control the House, the Fed is hawkish and trade deals (China/EU) are nowhere in sight. Global economic activity is soft and Q4 comps will be hard to beat. Credit concerns are rising and corporate buybacks are declining. During the most bullish time of the year the market was not able to rally above the 100-day MA. Strong earnings reports were barely enough to keep the market afloat. Dark clouds are piling up and Asset Managers are in “risk off” mode. It takes a lot to shift my bias during a nine-year bull market.
Yesterday we got the final piece of the puzzle. The FOMC statement was as hawkish as ever and they only changed 30 words in the statement. They did not mention deteriorating global activity or the recent market correction. Moderate wage inflation (.3% annualized) gave them breathing room, but they did not relax their tightening schedule. As I mentioned in yesterday’s comments, a softer tone was critical to a year-end rally.
Democrats will obstruct Trump’s agenda and new investigations will pop up everywhere. The tax cut for middle income Americans won’t happen. On November 30th a trade deal with Mexico and Canada will be signed and hopefully Dems won’t stand in the way. The House controls the budget and we could see a government shutdown. Maxine Waters will run the Financial Services Committee and she has publicly stated that she plans to punish banks. Trump was proposing to relax banking regulations.
We are not going to see trade deals with China or Europe for many months. If the market starts to tank we will get lip service (deals are pending) to stop the bleeding. Tariff wars could spark a global recession.
China’s economic growth is faltering and that could spawn credit concerns. The shadow banking industry ($16 trillion) is filled with bad loans so the government restricted new lending. Consequently, cash strapped corporations started to pledge stock to secure loans. China’s stock market is down 20% this year and lenders are asking for more collateral. Brokerages engaged in the practice reported a 50% drop in profits due to slumping stock prices and write downs. The Chinese government has asked brokerage firms not to dump shares.
Italy is steadfast in its deficit spending for 2019. This is sparking major credit concerns within the EU. Italy has until November 13th to revise their budget and the consequences (if any) are unknown. Italy is the fourth-largest to In the EU. Brexit has already weakened the union.
Oil prices are typically a good indicator of global activity. Prices continue to slump even with sanctions imposed against Iran. Supplies will tighten and lower prices indicate a drop in demand.
Corporate buybacks are declining. This will soften the market bid.
Sellers are taking advantage of seasonal strength. They know that the bid is typically strong this time of year and they are reducing risk while they can. Corporate profits have been excellent and valuations are attractive. The concern is that earnings will decline due to tariffs and slowing global growth.
Swing traders should remain in cash. I don’t like shorting the market into year-end. If we get a nice push higher above the 100-day MA I will consider it when we drop back below it. The downside risks far outweigh the upside rewards.
Day traders should watch for choppy conditions early in the day. I will be favoring the short side and selling into bounces. If the market makes a new low after two hours of trading we can expect a gradual drift lower. If the market makes a new high after two hours of trading I won’t fight the trend and I will spend my time looking for shorts.
I’ve been telling you for the last few weeks to wait for clarity. Now we have it and I am bearish. The FOMC statement was the final straw.
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