Market Brief – Thursday 10/18/18

One might think a -3% drop in the Chinese stock market, which is now down -30% from it’s January highs and at the lowest level since November 2014, might give U.S. investors a reason to back off their bullish bets. Despite the high correlation between the U.S and Chinese stock markets, U.S. investors eagerly continued buying this morning as the weight of the Fed’s balance sheet unwind continues to pull global asset prices down.

The Fed’s balance sheet and the Chinese stocks market are in sync and at some point, the U.S. stock market will find its way down as well. After Tuesday’s big rally, investors are being forced to defend their positions by selling what little bonds they have left to buy stocks.

Yields jumped in overnight trading and immediately ran into a wall at market open. As yields have started to fall, it’s clear the “Smart Money” is completing its rotation out of stocks and into bonds. Treasury yields have failed to reclaim their recent peak which is a sign there aren’t many sellers left or the buyers have reached their quotas. Either way, this is a signal that yields may have reached their cycle peak.

Equity bulls face a second headwind, which is the S&P 500’s 200-day moving average. In a bull market, the 200-DMA is a sign of support. In a bear market, it’s a sign of resistance. On Tuesday the bulls pushed the S&P 500 back over its 200-DMA, but if it fails to hold that a second time, look for the sellers to emerge. Not far below that is where the next round of selling occurs by the CTAs.

The Atlanta Fed posted its third-quarter GDP estimates which showed inventory accumulation is likely to represent more than half of third quarter GDP growth. The economy doesn’t need inventory accumulation, it needs sales. Should this hold true going into the holiday season, look for the economy to fall flat on its face as wholesales drop prices to clear inventories. This is another indication that we aren’t seeing money-price inflation, but cost-push inflation that is being rejected by consumers.

With seconds to spare the S&P 500 closed just over its 200-day moving average as all major indices erased their gains from earlier this week. Treasury yields were down slightly on the day. Physical gold, and the gold miners, both tried valiantly at their 100-day moving averages but failed. Agricultural commodities check in with their 100-day moving average and close a touch below. Early rallies can involve repeated confirmations against their moving averages, so another test of their 50-day moving average may not be out of line.

Tomorrow is options expirations day, so look for volatility to increase and stock prices to fluctuate. Bulls need the S&P 500’s 200-DMA to hold, while the bears want to see prices close below.