Death, taxes and gravity. Here are some technical spots to keep in mind that developed as of yesterday’s close. The Value Line geometric equal weighted index of 1700 stocks that I like to watch as a broad cross section of the market closed 1% below its 200 day moving average. This index is now up just .8% year to date. The Transportation index closed about 35 pts below its 200 day MA and is below that trend line for the first time since August 2016 and higher by .8% year to date. The Russell 2000 closed 3 pts above its 200 MA and is up 1.1% year to date. The S&P 500 and NDX both closed a touch below its 50 day MA while the DJIA still remains well above with all three still having healthy gains this year as we know. Looking overseas, the Euro STOXX 600 index is literally sitting exactly on its 200 day MA. The Nikkei is below its 50 and at its 100 day MA. The Hang Seng is still about 2% above its 50 day MA while the Shanghai comp closed right on its 50 day MA.
I want to emphasize that since the last decent size US market correction in early 2016 right after the first Fed rate hike, whenever these key trend lines have been either broken or tested, they’ve held and provided a launching pad for another rally. As I worry (often) about how the stock market will behave once QT begins (I don’t care that it’s been well telegraphed) and ECB tapering enters its next phase I’m highly skeptical that this will occur once again. Thus, this selloff could be more than just a North Korea induced blip on the screen. Geopolitical impacts on stocks usually don’t last very long. For tape watchers, notwithstanding overall happiness with Q2 earnings, it’s obvious that the equity reaction to a slew of releases was a sell on the news. I’ll say again, instead of spending their time each day figuring out how to ease more, central banks are now focusing on how to do the opposite and exit. They are therefore not your BFF anymore at the same time market valuations are very high and thus providing no room for error.
IWM (Russell 2000)
In case you didn’t see yesterday, ag prices got slammed after the 12pm USDA estimates that showed higher than expected harvests for corn, soybeans and wheat. As a bull, it wasn’t fun to watch but I remain optimistic that a bottom is still being put into place. This is a chart of soybean imports into China according to the USDA. Impressive demand.
USDA SOYBEAN IMPORTS INTO CHINA
We got better than expected GDP prints out of two key Asian economies and confirms the improvement in global trade and the contribution that foreign earnings gave to US multinationals in this reporting season while US domestic was more sluggish. Hong Kong’s economy grew 1% q/o/q SAAR which is up 3.8% y/o/y, above the estimates of up .6% and 3.3% respectively. Exports and consumption in particular helped. The Hong Kong government said “In view of the likely positive developments on both the external and domestic fronts, the Hong Kong economy is expected to attain further solid growth in the rest of the year.” That said, Hong Kong is importing US monetary policy at the same time they have a huge property bubble. The Singapore economy was up by 2.2% q/o/q SAAR and 2.9% y/o/y, higher than the forecasts of up .5% and 2.2%. They were also helped by exports and services and manufacturing too. The better data for both countries did not immunize their stock markets from the global worries as the Hang Seng fell by 2% and the Straits index was lower by 1.3%.
With two weeks before Mario Draghi speaks in Wyoming, the German 10 yr yield is back down to .38%, retracing about 2/3 of the spike higher after his speech in Sintra, Portugal on June 27th. That yield went from .25% to .56% in 8 trading days. I reiterate my extreme bearishness on European bonds as the ECB embarks on another round of tapering.