Sit & Wait …
The S&P 500 rallied to new all-times highs out of the June daily and weekly cycle lows as the Federal Reserve saved as interest rate cuts are likely on the horizon. Meanwhile, the underlying economic data continues to deteriorate. The Global Composite PMI printed 51.2, sitting at a 3-year low. In such market environments we must sit and wait and let the market tip its hat – more policy driven asset inflation or deflation and repricing of risk assets lower.
TRI stated in early June that the market might be setting up 2 more traps. First for the bears and the second one for the bulls. So far, the bears have been beaten up pretty good as the market rallied out of the June weekly cycle low. Now we wait for the setup to complete the bull trap … before market rolls over.
As of July 8, the S&P 500 is on bullish trend signal for the daily, weekly and monthly cycles. Higher prices can be expected as a break of 2,950 is needed to signal a potential top. Until then SPX can rally to next Fibonacci cluster at 3,045.
The daily cycle is expected to bottom between Jul 13 and Aug 2. If we see a weekly swing high and turn down in our indicators in conjunction with a daily bearish trend, then evidence will tilt towards the weekly cycle having topped. This top will be the first opportunity to cap the larger monthly cycle which bottomed in Dec 2018.
Negative divergences continue with the Russell 2000, Emerging Market and equally weighted indices not confirming the new highs in the S&P 500.
Global PMI in Downtrend
The JPMorgan Global Composite PMI is hovering around 3-year lows. The Global Manufacturing PMI has broken below 50. About 60% of countries PMI’s are now below 50. This poor breadth is not promising for higher sales and earnings into late 2019.
TRI continues to believe economic headwinds will continue into the first half of 2020, as per our proprietary indicators.
USD – Weekly Cycle Extended
The USD has been in a bullish posture since its 4-year cycle low in Feb 2018. In June, the USD appeared to have bottomed in the current weekly cycle and turned up. Based on price evidence, TRI believed the USD was starting its next leg up. However, the USD pulled back about 2% as what appears to be an extended weekly cycle lower into early July.
Last week, the USD formed a weekly swing low and had an upturn in our cycle turn indicator. We now have daily and weekly bullish trends in place. We will now need to see the June high exceeded along with a right-translated weekly cycle advance.
Fixed Income – 3-month T-bill Rolling Over
Yield curve inversion has been a topic of debate as the timing and economic impact has varied across previous business cycles. TRI has been vocal that interest rates are likely to fall, and the real risk of lower rates is when the 3-month T-bill yield begins to fall, and the curve begins to re-steepen. We are now seeing the first phase of this.
As seen below, the yield on the 3-month T-bill began falling in late May 2019. Last week, the yield did pop higher as the US printed a higher than expected Non-Farm Payroll number. Nonetheless, the up trend from early 2017 has been broken. There is significant amount of resistance in the 2.4% region. TRI expects the 3-month T-bill rate to fall to at least the 1% level, along with other forms of monetary stimulus.
TRI would like central banks to stop pushing on a string with such increase in monetary bases and low interest rates and pass the baton to address the fiscal and demand side of the economy. Fiscal policy needs to be amended to drive proper business and personal investment and spending incentives. It’s unfortunate how many roadblocks are in place for entrepreneurship and innovation to flourish
US 30-year Treasury bond yield have fallen almost 1% in the past several months. Daily, weekly and monthly cycle are all aligned for lower rates. Lower rates will not be a straight line, and we can have some pull backs and consolidations, which are healthy. Testing the 2017 low in yields is becoming a higher and higher likelihood.
TRI Cycle & Trend Signals*
The TRI Cycle and Trend Signals are shown below. These signals are as of market close on July 8, 2019. Please see the TRI Overview document for further information.
Source: Fieldhouse Capital Management
* TRI Cycle and Trend Signals are dynamic and may change on a daily, weekly and monthly basis, without notice. The indicators are at a point in time and do not imply that the current trend will persist and should not be considered investment advice.
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