Humanity is a Team Sport

“Being human is not about individual survival or escape. It’s a team sport. Whatever future humans have, it will be together.” Douglas Rushkoff

The quote applies to international trade as part of humanity’s economic future. More trade has always meant stronger economies, but global trade is complicated, especially when it comes to the US and its unique position as the world’s reserve currency, and requires constant improvement. In particular, aspects of trade other than the movement of goods and capital — labor, environmental, and tax regimens — are rarely included. This makes trade agreements maximally beneficial to those that have goods and capital, but not so much to those who only have their labor to trade, and who, ultimately, provide the foundation for all economic activity.

The only practical way of changing and improving trade agreements is to talk it out — as a team. Quitting the team and refusing to play by negotiated rules, is simply a form of bullying that ends up destroying the benefits of trade for everyone. We remind our readers that everything that Trump is doing against global trade is being done without congress. He is disingenuously using Section 232 of the Trade Expansion Act of 1962 (national security reasons) to adjust imports, by decree, without a vote in Congress. The republicans own both houses, so why such a dictatorial move?…Because there is no way his own congress would ever pass such insane legislation, that’s why.

The tariff war, which the Donald seems to be unleashing on the world is, to put it mildly, a blunt instrument. One that has self-harming side effects such as we are seeing with Harley Davidson, BMW (US production), and pig farmers to name just a few. If Trump had tried to actually legislate these tariffs, congress would have killed the bill immediately after doing any type of cost/benefit analysis, even one done on the back-of-an-envelope.

When it comes to trade, Trump is only taking manufactured goods into account, and ignoring services. It was Alvin Toffler, four decades ago, who predicted that America (and Europe) would stop MAKING things but start THINKING things. Let’s have a look at what has happened to the balance of trade for goods over the last 25-years (chart below).

Notice that the trade balance of goods was stable during the Obama administration (up to H2, 2017), but took a steep dive before the tax cuts helped bring it back somewhat. Notice also that the trade balance for goods improved during the two recessions. Let’s hope the US doesn’t end up paying for a better trade balance with a recession.

Now consider the balance of trade for services (chart below).

Since 2004, there has been a 450% increase in the value of services that America sells to others. America needs to concentrate on what it does well and continue to fill the expanding demand for information. Making coal great again or making T-shirts in America is economic foolishness.


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Equities
Sentiment

The AAII sentiment survey was relatively unchanged this week. Bullish sentiment remains well below average, and bearish sentiment well above average (table below).

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The CNN Fear&Greed indicator continues at a healthy fear level (below).

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The 8-week MA of the put-to-call ratio has made a down-spike which carries a 75% probability of indicating a local top in the SPX. This week, the average has flattened and may be forming an up-spike which ALWAYS is accompanied by a rally (chart below).

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We have been following the formation of similar trading patterns between the tech rally of 2000 and today’s situation. The two charts below show the patterns in the SPX labeled C3 and R4 in the year 2000 and again today in 2018, along with the yield on the SPX. If these patterns continue to replicate, we would expect new highs to occur as the rally (R4) progresses (charts below).

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Technical

The long-term technical picture continues to strengthen:

  • The 8-month MA remains above the 12-month MA.
  • The RSI is rising.
  • The S&P 500 has bounced off the 8-month MA.
  • The MACD continues to avoid a bear cross-over.
  • The ADX +DI has started to turn back up, and the -DI has started to turn back down.
  • The stochastic has turned up.

This pattern is similar to what happened during the 1998–2000 trading period (pink rectangles on the chart below). The only worry we have is that the ADX trend strength (black curve) has reached the down-sloping trend-line (dashed blue-line) which has acted as a turning point for the trend strength in the past. This indicator can, however, continue to rise above the blue dashed-line like it did in 1998 (chart below).

Last week, we were concerned that because of the last-minute drop that occurred the previous Friday, the SPX might drop down to test the 200-day MA. As it turned out, the index only tested the 2700 support, which held, and proceeded to close above the 62% Fibonacci retrace of the February correction.

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Fundamental
The GAAP earnings for the S&P 500 have grown by 5% in Q2 compared to Q1, and 22% above Q2 2017. This is indicative of a very healthy business cycle expansion which, when combined with the amount of fear present in the market, makes the perfect conditions for the bull market to continue.

In the chart below,

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Gold
Technically, and on the weekly time-scale, gold is starting to get over-extended like November of 2016. In both cases:

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At the daily time-scale, gold also looks like it is pulling back from an over-sold technical situation.

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Gold normally correlates negatively to the dollar, the USD/JPY FOREX ratio, and interest rates, while correlating positively to inflation expectations (as measured by TIP). Earlier this year, the correlations of gold with interest rates and inflation reversed, while the correlation with currencies remained normal. Eventually, gold returned to normal correlations, but recently it has, once again, decoupled from its normal trading patterns.

Below, is gold’s trading relative to the dollar and all three parts of the interest rate curve.

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Regards,

ANG Traders

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Disclaimer:

ANG Traders makes no guarantees concerning the profitability of our trades. Our trade notification service is not intended as investment advice in any way. It is simply providing information about the trades we ourselves are executing. Always consult a registered advisor for assistance with your investments. ANG Traders assumes no liability for any losses that may arise from replicating our trades.

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Forty years of private equity trading, and still learning.