1. Moving the markets

Softness in the markets prevailed for the third day, as a bunch trade news volleys made their way back and forth and kept the major indexes in limbo. An early drop shifted into rebound mode, an occurrence we’ve seen regularly in the recent past, but it fell short of conquering the unchanged lines.

Even though we closed slightly in the red, the continued resilience of the market, to shake off bad news and remain at ridiculously elevated levels, is remarkable. The see-saw moves over the past few days continued with utter abundance, with the market moving headlines being clearly recognizable in this chart.

With a record “trade deal on/trade off” reversals being the new norm, it now included “unnamed sources” saying that “the US would be willing to delay the December 15 tariffs, even if there is no trade deal,” but that the pro-Hong Kong human rights bill passed by Congress could be a major obstacle to any agreements.

Despite equity weakness, bond yields rose, which hurt bond prices and low volatility ETFs the most. The odds of a US-China trade deal plunged, which means, if those don’t reverse, a new driver will be needed to keep stocks on their northerly path.

1. Moving the markets

The markets started the session by meandering slightly below their respective unchanged lines when a sudden dive took the starch out of any existing support. As I posted yesterday, a new headline about how close the latest trade deal might be was sure to be on deck.

Well, we got trade headlines, but they revealed exactly the opposite of what was expected, namely that phase one of this much jawboned about event may not be completed this year. To stoke the fire of discontent even more, China condemned a US Senate resolution supporting human rights in Hong Kong.

Then it was the US’s turn to emphasize that “rolling back tariffs for a deal that fails to address core intellectual property and technology transfer issues will not be seen as good deal for the US.” That was the final nail in the coffin to seal the downward trend of equities.

But the mocking continued, as the editor of China’s Global Times, after his earlier threat that “China wants a deal but is prepared for the worst-case scenario, a prolonged trade war,”  proceeded to taunt the US farmers with “wait for a trade deal before getting bigger tractors.” You just can’t make this up, and it makes me wonder how long this soap opera will go on.

Despite all this negativity, a late day rebound lifted the indexes off their lows but fell short of moving them into the green. Nevertheless, the markets are showing tremendous resilience, especially when you consider that the Dow has been down 2 days in a row for its biggest drop in 6 weeks, and this very drop amounted to less than 1%.

The S&P 500 has not had 1% correction in 28 days and, as ZH points out, it went 36 days in June/July without one. Of course, as I have pointed out on many occasion, the main driver that controls market direction is global liquidity, which this chart (Source: Bloomberg) clearly demonstrates.

1. Moving the markets

Today we experienced a market condition, which we have not seen in a while, namely not just an intra-day sell off, but also a red close of more than the occasional shocking -0.01%, at least for the Dow. Of course, I am being facetious here, but the usual end of the day ramp saved the S&P 500 and Nasdaq.

However, given the relentless march higher, today’s partial retreat was more than overdue. A slightly positive opening gave way to a gentle slide into the red zone, but the bullish theme remained strong enough to assist in the recovery.

Not helping matters were disappointing earnings results and the good old standby excuse that a US-China deal has become questionable.

Home Depot’s shares took a hit with the company not just posting a miss in Q3 sales, but more importantly, they slashed their full-year sales guidance as well. Ouch! However, offsetting that poor report was a rise in US home building and permits for future construction.

Clearly, the economy, despite being hyped up, is mixed bag at best. Even the Fed’s John Williams seems to agree as he posted things like “the economy is clearly facing several challenges, primarily from overseas, but the three rate cuts since July should help sustain growth,” on which he elaborated further with the US “facing headwinds from slower global growth.”

In the end, nothing much was gained or lost, except the Nasdaq remained on the plus side all day and added +0.24%. At least the tech arena showed signs of life in the face of a sinking retail sector, where the stocks of Home Depot and Kohls were sent reeling.

With no obvious driver to help the markets today, I imagine that we will see a new rollout of “the trade deal is close” headlines latest by tomorrow, in order to pump stocks further into record territory.  

1. Moving the markets

When the Fed announced a few weeks ago that it would be buying up Treasury debt to the tune of $60 billion a month, it sure sounded to everyone on Wall Street that another round of QE (Quantitative Easing) had started. However, Fed chief Powell insisted that this is “in no sense is QE.” Yeah right.

Author Charles Hugh Smith wasn’t in agreement either and quoted in a recent post a riddle that Abraham Lincoln was known to have told: “If I should call a sheep’s tail a leg, how many legs would it have? — Five! — “No, only four; for my calling the tail a leg would not make it so.”

That is a great analogy to the Fed’s QE implantation which, despite all denials, is a bailout of some sort, most likely of the repo market, about which I have commented on from time to time. And, as this chart depicts, it may have been a panic reaction, and I am certain that this will not be the last we’ve heard about repo issues.

While the major indexes see-sawed throughout the day, the bullish bias remained intact with the Dow and Nasdaq eking out tiny gains, but the S&P slipped a fraction. These small moves were actual significant in that the usual driver, namely US-China trade news, was neutralized.

There were announcements about “progress” and “setbacks,” cancelling each other out, which is what market direction reflected. Over the weekend, we learned that top negotiators held “constructive” discussions, but other reports suggested that without rolling back existing tariffs, the outlook for a resolution looked questionable.

With trade news playing an immaterial role in the market today, traders focused on a meeting between Trump and Powell, with speculation running wild as to what these two discussed. Trump released this statement:

Just finished a very good & cordial meeting at the White House with Jay Powell of the Federal Reserve. Everything was discussed including interest rates, negative interest, low inflation, easing, Dollar strength & its effect on manufacturing, trade with China, E.U. & others, etc.

I am sure that by tomorrow morning, the computer algos may have found some more bullish meat on that bone, probably just enough to keep the ramp going. If that doesn’t work, there is always another short squeeze to be done, just like we saw today, which gave a big assist in pulling the indexes off their lows. (Source: Bloomberg)