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The Bull Case

Welcome to August. In recent days I’ve been beating the drum about tech stocks and a potential peak emerging there (see Tech Alert and Peak Tech?) and so far the action still points to that possibility. However I also want to keep a close eye on the bullish side of the equation both from a technical as well as a macro perspective.

The reason I’m bringing this up now is because seasonality seems a bit off this year so far.

Specifically I’m talking about midterm seasonality which suggests downside to emerge ahead of mid term elections:

While on the micro front we also saw a July peak and an end of month bump and now weakness into early August, it should be pretty clear by now that we haven’t seen new lows, we haven’t even approached the February lows, in fact we’re close to all time highs on several indices. Even average year seasonality doesn’t seem to apply here. Yes it is an unusual year with the tax cuts and record buybacks and still easy central banks everywhere.

So this year is a bit odd and mid term seasonality does not seem to apply. So far. A point not lost on Jeff Saut:

“The S&P 500 is about to do something it hasn’t done in a midterm election year since Dwight D. Eisenhower occupied the Oval Office. It’s on track to end July in the green after a positive April, May and June.

That’s a rare bullish sign, according to Jeffrey Saut, chief investment strategist at Raymond James.

“There’s only been two years in the midterm election years going back decades where the market has been up in April, May, June and July and it was only 1954 and 1958,” Saut said on CNBC’s “Trading Nation.” “Each one of those times, the market, after a soft first part of August, rallied sharply into year-end.”

That’s 60 years ago and that’s a rather thin data sample. But nevertheless it’s there.

As readers may recall I’ve talked about a fib level above $SPX 3000 in January (2018 Market Outlook).

That level is still there and the technical confluence of previous key levels/pivots is quite convincing:

And if I step back away from all the noise and concerns and look at just 2 factors (GAAP earnings and industrial production) I can make the case this market has room to run:

GAAP earnings are at all time highs (thank you tax cuts) and industrial production is still rising.

If you look at major previous tops we observe that they occurred near peaks in industrial production. In 2000 markets peaked before GAAP earnings as the tech bubble burst. And one may argue it was the bursting of the bubble that slowed things down in the economy. In 2007 markets peaked just about the same time as GAAP earnings peaked and industrial production peaked.

All economists agree that the tax cut bump we are currently witnessing is temporary. So the turn is coming. It’s just a matter of when and so we have to watch data points such as industrial production closely in the months ahead. But without a clear sign of a turn we must keep an open mind about the 3,000+ bull case.

Now even Jeff Saut acknowledged early August weakness to emerge which is our outlook here as well.

Currently futures are reacting to a continued ping pong between the US and China on tariffs. China has responded saying they will not be bullied. So that headline ping pong continues, but the clock is ticking as mid term elections are approaching and my sense is this issue will be magically resolved before mid terms and both sides will claim victory. And perhaps that will be the trigger to get $SPX to 3,000+.

In lieu of that though downside risk remains and perhaps an escalation will find its way into industrial production data. You see, one never knows what the trigger will be.

After all there is a real life consequence to all this: Foreign investment into the US is dropping hard:

“This year, net inward investment into the United States by multinational corporations—both foreign and American—has fallen almost to zero, an early indicator of the damage being done by the Trump administration’s trade conflicts and its arbitrary bullying of companies and governments.

The numbers are clear. To compare like for like, look at flows of foreign direct investment (FDI) into the United States in the first quarter of 2018, the latest for which data are available from the U.S. Bureau of Economic Analysis, and in the same quarter of 2017 and 2016. In the first quarter of 2016, the total net inflow was $146.5 billion. For the same quarter in 2017, it was $89.7 billion. In 2018, it was down to $51.3 billion. This decline was not driven by changes in Chinese investment, which flows both ways and so contributes little to changes in the net figure. (In the first quarter of 2016, the United States saw a small net inflow of $4.5 billion from China, and in the same period in 2018, it saw a small net outflow to China of $300 million.) The falloff is a result of a general decline in the United States’ attractiveness as a place to make long-term business commitments. The overall trend in FDI shows the same picture. A four-quarter moving average of net FDI inflows to the United States shows that this year, it has fallen back to its postcrisis lows of 2012.”

Consequence free? Hard to imagine.

Indeed one can already see weakness emerging in manufacturing orders:

In this context I suggest everyone keep a close eye on industrial production data to come as it historically is so closely linked with major market pivots and the bull case seems very much dependent on it.

As of now no real downside has yet emerged and markets remain in a low volatility regime. However, the tech charts remain concerning and clearly reacted off of the larger long term trend line:

Nothing has broken yet and that leaves the bull case alive, especially if trade wars were to come to a sudden end. If not, watch industrial production and of course tech charts 🙂


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Categories: Market Analysis

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