[Chart courtesy of MarketWatch.com]

1. Moving the markets

Well, it sure didn’t take much effort to keep the markets going, as Trump successfully dangled the trade carrot again via this tweet:

“Big day of negotiations with China. They want to make a deal, but do I? I meet with the Vice Premier tomorrow at The White House.”

While this did not indicate really anything, the computer algos saw it as a positive, since China’s chief trade negotiator Vice Premier Liu He is staying in town till Friday, at least for now. That was all it took to ramp the markets higher in a vain attempt to get back to even for the week.

However, a US-China deal is based on nothing but hope, because as ZH noted correctly:

“The US has not changed its extensive and rigorous requests for China, nor has it responded to China’s core concerns,” Renmin University international relations professor Shi Yinhong said.

“Even if there is a deal, it could only be a mini-deal, even a minimal mini-deal. A currency pact, if true, does not bring any substance.”

But optimism is all that matters, so we’ll have to wait and see how this movie plays out. Given recent history, this could very well turn into another head fake.

In the meantime, the major indexes managed to whipsaw around above their respective unchanged lines and scored another winning session for the second day in row, which was in part supported by a short squeeze in SmallCaps.

Still, the S&P 500 needs to gain about 1.3% from today’s level in order to reach last Friday’s close.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

It seems like yesterday’s trade jawboning between the US and China had taken on too harsh of a tone, so both parties attempted to ease festering tensions. News reports indicated that China was open to a “limited or partial tariff solution” while offering to increase purchases of agricultural products from US farmers to $50 billion.

That was enough of a driver to push the indexes higher, despite weak domestic data showing Job Openings plunging to a 17-month low and confirming that Hiring/Quitting continues to remain on a slippery slope.

Then the Minutes from the last FOMC meeting on interest rates showed that officials have become somewhat concerned about the state of the economy with some members arguing that the chances of a U.S. recession “had increased notably in recent months.”

While that is a negative, it is not one in today’s environment, where stock market levels are largely supported by ever decreasing interest rates. And, a recessionary environment pretty much guarantees that rates will head lower, which is exactly what the markets anticipate when the Fed meets later this month.

While today’s rebound encouraged the bullish crowd, it’s noteworthy that this activity was accompanied by very low volume, about 30% below average, which means the rally was lacking conviction and may not have enough legs to continue.

Be that as it may, our Trend Tracking Index (TTI), after slipping below its long-term trend line yesterday, mustered enough strength to climb back above it by +0.49% indicating, at least for the time being, that the bullish trend is still alive.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

After the Chinese offered not much hope for a successful outcome of the upcoming trade meeting, today it was the US’s turn to up the ante by blacklisting 28 Chinese companies due to alleged human-rights violations against Muslim minorities.

Should this mutual hostility fest continue, Friday’s scheduled high-level trade meeting might be over before it even starts. So, it came as no surprise that the markets sold off sharply, as “trade hope” has been one of the constant drivers of equities.

Then Fed head Powell attempted, with modest success, to levitate equities by announcing something that sounded like QE (Quantitative Easing) but wasn’t given that name. Here’s part of what he said:

While a range of factors may have contributed to these developments, it is clear that without a sufficient quantity of reserves in the banking system, even routine increases in funding pressures can lead to outsized movements in money market interest rates. This volatility can impede the effective implementation of monetary policy, and we are addressing it.

Indeed, my colleagues and I will soon announce measures to add to the supply of reserves over time.

Consistent with a decision we made in January, our goal is to provide an ample supply of reserves to ensure that control of the federal funds rate and other short-term interest rates is exercised primarily by setting our administered rates and not through frequent market interventions. Of course, we will not hesitate to conduct temporary operations if needed to foster trading in the federal funds market at rates within the target range.

“I want to emphasize that growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase programs that we deployed after the financial crisis.”

ZH supplied the rough translation of the above:

Don’t confuse balance sheet growth for “reserve management” with balance sheet growth for “stock market management.”

While that helped equities to regain some footing, it was short-lived, as Trump stepped up by announcing notable actions against human rights abusers in China, which just about destroyed any gains from Powell’s talk and furthermore may have put a big temporary nail in the trade coffin.

Stocks had enough of this and south we went in a hurry with the major indexes closing not only at new lows for the day but also hitting critical technical levels.

For the last 1.5 years, ZH has been tracking current market direction compared to events leading up to the crash of 1987, as this chart shows.

While history may not repeat, the above chart makes a solid case, that it may. Additionally, our main directional indicator, the Domestic Trend Tracking Index (TTI), pierced its long-term trend line to the downside today by -0.39% for the first time since February.

While this is only a scant piercing, it nevertheless indicates that tough times for stocks could be ahead. I will watch developments closely, and if more weakness persists tomorrow, will start liquidating some of our more volatile holdings with the remainder being on the chopping block soon thereafter.

I would not be the least bit surprised, given current and recent chaotic events, if we find ourselves back on the safety of the sidelines very soon and watching the markets self-destruct.   

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