[Chart courtesy of MarketWatch.com]

1. Moving the markets

The basic law of physics tells us that any ‘action’ is followed by an equal or greater ‘reaction.’ This became very clear today when, after Trump’s threat of additional tariffs last week, the Chinese retaliated by letting their currency, the Juan, float freely by removing the US dollar peg.

The Juan dropped to 10-year low causing equities around the word to freefall with the Dow being down at one point over 850 points. No one saw this coming, as analysts were of the opinion last week that trade tensions with China existed but that neither side was ready to escalate.

That was an incorrect assumption, as it now appears that the final nail was put in the trade coffin, unless one of the warring parties comes back to the negotiating table with major concessions. I don’t see that happen, at least not in the foreseeable future.

Trump took the opportunity to call out China and continued to push the Fed for lower rates with tweets like this:

China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!

What a difference a week can make, during which we went from ‘all is fine, new all-time highs and a goldilocks scenario’ to all hell breaking loose with the bears suddenly having outwitted the bulls.

The were no winners with the carnage affecting just about all areas of the globe. European equities were hammered by seeing their biggest 2-day drop in 3 years with the German DAX touching its technically important 200-day M/A. It’s 10-year bond crashed to new lows and now yields a sickening -0.53%.

Domestically, things did not look any better as SmallCaps and Transporations lost their 200-day M/As, while the S&P 500, Dow and Nasdaq dropped below their 100-day M/As.

The “jaws of death,” which I have repeatedly posted about, finally shows some closing, but the S&P 500 still has a substantial way to go in order to catch up with the 10-year yield, as this chart demonstrates.

Today’s action weakened our Trend Tracking Indexes (TTIs-section 3 below) considerably, with the International one sinking below its long-term trend line. Usually, a one-day event does not indicate a long-term trend change, so I will give it another couple of days before pulling the trigger and calling that “Buy” cycle to be over.

The Domestic one, remains on the bullish side of its respective trend line but, if there is more downside follow through from today’s bashing, we might end up heading for the safety of the sidelines soon.

Stay tuned.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

Sometimes you just have to laugh out load. Today was such a day, as data showing that US Manufacturing dropped to its weakest in 10 years, or more specifically since September 2009. One analyst suggested that the goods producing sector is “on course to act as a significant drag on the economy in the third quarter.”

That is truly terrible news, but it was greeted on Wall Street as “terrific” with the major indexes staging a huge rebound, after yesterday’s drubbing, with the Dow being up at one point over 300 points.

Then came unexpected “bad news 2.0” in the form of Trump’s announcement that he will add a 10% tariff on the remaining $300 billion of Chinese imports starting in September.

That caused an instant trend reversal, and the major indexes dove south with the Dow at one point being down over 300 points. All gains evaporated within minutes, while the 10-year bond yield also did its best swan dive imitation by reaching a yield that is now below the Trump election lows.

That caused the “jaws of death,” as ZH termed it, first to widen and then to narrow. In case you missed it, they simply represent a divergence between the 10-year yield and the S&P 500, which sooner or later will have to “normalize.” The question remains whether it will be via a crash in the S&P or a hike in bond yields or a combination of both.

Will history repeat itself as this chart comparison to 1987 seems to indicate? Only time will tell, but it’s good to have an exit strategy; just in case.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Fed did what was expected by cutting interest rates by 0.25% for the first time in 11 years. Of course, on Wall Street, expectations don’t mean much, unless you beat them. The Fed failed to do that, and the markets tanked with the Dow at one point being down some 400 points.

What created most of the damage was Fed head Powell’s press conference, during which he appeared dazed and confused, after a barrage of questions forced him to explain his reasoning. He said that the US economy is doing great, confidence is rebounding, while the 0.25% was an “insurance” cut.

Then he revealed that today’s rate reduction was just a “mid-cycle” adjustment and not the start of a “long series of rate cuts.” That shook and stunned the markets, as several more cuts were assumed to be forthcoming. One analyst summarized it like this:

“The market was fine with the statement, but as seems to be the case, the press conference reveals details that do not sit well with the market. The response that this is a mid-cycle adjustment and not part of a longer-term accommodative stance has raised concerns. The market has really talked itself into a need for lower rates. Obviously the FOMC still feels strongly the economy is resilient.”

That means the widely anticipated easing cycle over the next six months will not happen, which this cartoon sums up perfectly. Powell now holds the dubious record of having held 12 press conference, of which 10 of them were followed by stocks tanking.

Still, while volatility returned with a vengeance today, for the month, the major indexes gained, led by the Nasdaq, while SmallCaps fared the worst.

It will be interesting to see if the markets will adjust to the “Powell theme,” or if there is more fallout to come over the next week or so.