1. Moving the markets

For a change, the markets opened slightly to the upside, before a slow and steady decline pulled the major indexes into the red, however, a last hour buying effort saved the day and we ended up modestly in the green.

While the trade war battle continued in full swing, Wall Street traders apparently decided to take a break from the constant stream of news, including the accusation by China that the U.S. uses “naked economic terrorism,” “economic bullying” and the assertion that they will “fight until the end.”

Regarding economic news, we learned that after weakness in new- and existing-home sales in April, the pending ones were expected to do better, but no dice. Instead pending sales slipped -1.5% MoM, its worst decline since the financial crisis in 2008.

The bond market continues to paint an ugly picture with the 10-year yield plunging again after a late rebound yesterday. This prompted ZH to post this chart with the at this point unanswerable question “will the relationship between the S&P 500 and the 10-year yield revert like in 2016 (higher rates) or 2007 (lower equity prices)?”

With a little bit of patience, we will find out.

1. Moving the markets

Yesterday’s market dive into the close had indeed dire consequences, as the major indexes opened down without their usual morning bump. The Dow at one time had given back some 400 points but managed to recoup some of these losses late in the session, as did the S&P 500 and Nasdaq.

It was a one-two punch with trade tensions and global growth uncertainties combining to spook Wall Street, while bonds benefited from fears that the bears may get the upper hand. Global stocks have started to roll over as bond yields collapsed indicating economic weakness.

The Dow lost its 25k marker but managed to recover and close above it. The S&P 500 dropped below its widely watched 200-day M/A but was able to recoup that technically important level by a few points.

As I mentioned yesterday, our International Trend Tracking Index (TTI) had already been meandering below its long-term trend line, and it fell sharply during today’s session. Along with another lower close, this confirmed a new ‘Sell’ signal for that arena, which is defined as “broadly diversified international ETFs and mutual funds.”

For tracking purposes, the effective date will be tomorrow, May 30, 2019, although I already took the opportunity today to liquidate clients’ holdings.

There are stresses in bond markets wherever you look, including here in the U.S. as the 3-month/10-year spread has collapsed to new cycle lows, as this chart shows. What that simply means is that a 3-month T-bill will give you a higher yield than a 10-year bond. Huh?

These oddities usually occur at major inflection points in the markets, which our TTIs are already pointing to. Even our Domestic TTI, which a week ago was in solid bullish territory, has reached a point that is now within shouting distance of signaling a ‘Sell’ signal as well. (see section 3 for details)

What could turn these deteriorating markets around? Right now, there are two things. First, an announcement by the U.S. and China that a trade settlement has been reached and second, a move by the Fed declaring that interest rates will be sharply slashed. And let’s not forget that the PPT (Plunge Protection Team) could always be called upon to drive equities back up.

I will not wait around for either to happen and will execute our ‘Sell’ signals as they are being generated, because currently the downside risk looks far greater than the upside potential.