[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.   

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Yesterday’s sea of red worsened today, as absolutely no bullish sentiment was found anywhere, which had the major indexes heading sharply south in one of the worst starts to a quarter since 2008. The downside leader was Transportations, which are now down 5% so far this week.  

In addition to Tuesday’s weak manufacturing report, traders now faced more pain in form of slower job creation with ADP’s employment gains simply collapsing. Things were bad when we learned that September’s miss of 135k vs. 145k expected hit the newswire, but they got worse when the report showed that August’s big jump of 195k was severely reduced to only 157k.

This does not bode well for Friday’s upcoming Labor Department non-farm payroll report, although sometimes these 2 data points can show some divergence.

Looking at the big picture, “we see that trade tensions, global growth concerns, geopolitical risks and signs of profit margin compression are likely to limit upside going forward,” according to BofA. The Global Maco Surprise Index seems to substantiate these concerns by collapsing sharply.

The markets reacted accordingly, for a moment considering reality, as all major US equity indexes showed signs of breaking down, with the Dow, Nasdaq and S&P 500 all sinking below their 100 DMAs. Far worse was the performance of the SmallCaps (Russell 2000), which has now taken out it 200 DMA (Daily Moving Average).

Despite a rescue effort by the Fed’s Williams announcing that they have the tools (I guess to deal with the weak economic picture) and promised to use them earlier this time, market participants would have none of that empty talk and proceeded to, as I said yesterday, sell first and ask questions later.

On a personal note, I will not be posting tomorrow and Friday. This time it’s not a business issue, but a personal one. My wife and I will be traveling to San Diego to be part of my son’s wedding. I will, however, monitor the markets and adjust our holdings, should that become necessary. Regular posting will resume this coming Monday.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

An early rally turned into a beating with the major indexes heading south all session long. The culprit was identified as downright ugly manufacturing information that had stocks and bond yields plunging.

The ISM manufacturing report came in at its worst level since 2009, as the index dropped to 47.8 in September from a prior 49.1. Expectations were for a 50.2 number. Any reading below 50 signals contraction, while any reading above signals expansion.

To many analysts, this was simply confirmation of an ongoing global slowdown and the conviction that US-China trade talks don’t look like they could contribute anything worthwhile in the near term.

Some of the brokerage houses imploded today, at least their stock prices did, when Charles Schwab came out and announced that they will do away with the $4.95 trade fee and offer zero commission for most stocks, ETFs and options as of October 7. While that will benefit all of us, brokerage businesses are extremely competitive and other firms will have to follow suit.

Disclosure: I have used Charles Schwab & Co as my custodian for clients’ assets since 1990, and I receive no compensation or any benefits from them.

Not covered by MSM is the continuing saga of the overnight lending issues between banks, as the Fed had to step in again this morning to financially “rescue” some of the participants. Not much is known as to what caused this problem, but it smells like a hidden bailout to me.

Analyst Sven Henrich had this to say:

We’re in the middle of an existential crisis. We must be. That’s what central bank policies are telling us.

After all the ECB cut rates to the lowest ever with its balance sheet being at record highs and expanding.

The central bank of Australia today cut rates to their lowest levels ever.

These are policies of absolute panic crisis levels are they not?

The Fed is intervening in repo markets every single day barely able to keep the effective Fed funds rate at target. They’ve already cut rates twice and are already expanding their balance sheet.

Without these interventions markets and the economy would fall apart. That’s the message that is being sent.

In any other time in history all these policy actions and their levels would be regarded as commensurate with a great crisis unfolding.

ZH summed the day up this way:

The moves today were quite shocking: Dow futures dropped 500 points from their overnight highs, 30Y Yields crashed 13bps from overnight highs, the dollar tumbled 0.6% intraday, and gold spiked $30. Additionally, rate-cut odds for October jumped higher to 60%…

I am sure that the month of October will have more surprises in store.