329 Days and 2 Chinese Weeks

At 329 days, the market is in the second-longest stretch since 1928 without a 5% correction (the longest being 399 days in 1995–1996). Why?

Is it because the Donald is an economic genius (even though he was bankrupt four times)? Let’s look at what he has done in just the last seven days:

  • signed a cruel executive order that attempts to dismantle Obamacare (he forgot to sign it before Pence prevented him from leaving the room)
  • suggested he would try to shut down a member of the free press (NBC)
  • continued his racist feud with hurricane-ravaged Puerto Rico
  • stated his desire to pull out of the the Iran nuclear deal (effectively castrating America’s international reputation)

Yes sir! That, is why the market continues to climb. Seriously though, what the last week (and his entire presidency so far) proves about Trump is that the markets are completely ignoring the orange clown. We are inclined to think that China has more of an influence on the U.S. stock market than he does.

Before you dismiss this, consider what happened after the 2008 crisis. The market did not bottom when the Troubled Asset Relief Program (TARP) was implemented on October 3, 2008. It bottomed only after China announced its own stimulus package six weeks later (chart below).

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The consumer price index (CPI) increased less-than-expected in September (+0.1%) sending the dollar and rates for a slide, but the dollar recovered by the close, and the market’s rate-hike expectations remained unchanged at 82.9% probability of a December rate hike even though the 10-year Treasury rate remained down on the day.

As the chart below illustrates, the “sticky-price” index has remained steady at 2.1% (orange line), but the flexible index was up 2.9% y/y. This data will not change the Fed’s plans of raising rates one more time before the end of the year.

Equities

Sentiment

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The NAAIM index has been dropping while the SPX has been rallying (negative correlation) since early summer. The last time this occurred was late in 2014 and early 2015 which resulted in the double-dip correction (chart below). The negative correlation will have to resolve itself in one of two ways: either the NAAIM turns around and rises with the SPX, or the SPX turns around and drops with the NAAIM. At the present moment, we see this indicator as neutral. Again, it may take a couple of Chinese weeks to resolve.

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The put:call ratio has spiked up and is now dropping. This is short-term predictive of a higher SPX (chart below).

Technical

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The long-term technical picture remains strongly bullish. There is no sign of danger at this time (chart below).

Fundamental

Industrial production, despite a recent pull-back, continues on an upward slope (chart below).

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Our Price Modelling System is neutral on the daily scale: positive/neutral on the weekly: and positive on the monthly.

We are of the view that the market will sustain these levels (or higher) for a couple of more weeks while the Chinese conduct their political conference, after which, a 5% correction becomes likely.

Gold

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The USD/JPY FOREX pair has pulled back, but remains above the 38% Fibonacci retrace level (111.0). The MACD has completed a bull cross-over, and the stochastic is recovering from over-sold levels.

Inflation expectations have increased over the last two weeks, but technically, TIP is at the 38% Fibonacci retrace level which is likely to provide resistance to the price of TIP and, therefore, gold. With the Fed both reducing its balance sheet, and planning to raise rates before the end of the year, we see the balance of probabilities favoring higher rates and lower gold prices (chart below).

The commitments of futures traders report, shows that managed money maintains a high net long position, and both commercial and swap dealers continue to hold high levels of net short positions. These types of levels imply lower gold prices (chart below).

While gold may rise further in the near-term, we think the balance of probabilities favor lower gold prices.

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We wish our subscribers a profitable week ahead and ask that email be monitored for Trade Alerts.

Regards,

ANG Traders

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Forty years of private equity trading, and still learning.