Market Brief – Thursday 11/08/18

The global economy continues to slow down as Japanese Machine Orders slumped -13.8% MoM, the largest monthly drop in more than two decades. Chinese automobile sales also fell double digits last month, indicating slowing consumer demand. Despite slower global growth, U.S. investors eagerly tried to bid up stock prices and bond yields as if our economy is immune to the rest of the world. It isn’t.

Trading volumes over the past week and a half have been very low, indicating the “Smart Money” and large money managers aren’t buying. Traders were counting on the big money to return to the market, but without them, it is more likely stock prices will revisit their October lows.

While I thought the Fed was meeting this month, it turns out they were just releasing their minutes from last month. Investors were hoping to read signs that the Fed is going to slow down the pace of tightening, but there were no such indications. There was nothing new in this report to indicate that the Fed is going to stop tightening monetary policy.

The probabilities are high that the Fed will raise the Federal Funds rate at the December meeting which concludes with a press conference on the 19th. As expected, stock prices and bond yields fell after the report.

I watched an interesting report on Treasury yields from a technical trader. I expected him to indicate that yields were going higher, but I was surprised when he said yields were headed lower. As I have pointed out, he too indicated that bank stock prices have been falling which usually means Treasury yields will fall as well. He also pointed out that momentum has not confirmed the recent peak, which is another indicator yields are likely to fall.

As I have mentioned, the “Smart Money” or Commercial Hedgers have been buying Treasuries. He pointed out that the “Smart Money” has taken the largest long position in Treasuries across 2-, 5-, 10-, and 30-year Treasuries. As he said, and I have as well, the “Smart Money” wouldn’t take such a large position if Treasury yields were going to continue rising.

He said to look for a break of 3% on 10-year Treasury yields to trigger the next bond Bull market. The only part of his presentation I disagreed with was his opinion that Treasury bonds would rise +10%. I believe they will go much higher.

Agricultural commodities sold down to their 100-day moving average and immediately found strong buying support. Repeated confirmations of a moving average are considered bullish.

In the minutes following the Fed minutes, stocks fell, and bonds rose. This is the proper move based on a tightening money supply. The computer algorithms reversed direction and tried to move stock prices higher and bond prices lower.

While this doesn’t make sense, the computer algorithms only know a post-Great Financial Crisis market, where stocks rise, and bonds fall. They are misinterpreting rising short-term interest rates to be the same as rising long-term interest rates. While they are trying to push yields higher, they are causing stock prices to fall as higher interest rates put downward pressure on asset prices – I will cover this in my Friday update.

Stocks closed slightly lower for the day, except for the DJIA which was up slightly. 10-Treasury yields where higher and are now staring at a double-top from their October highs. Meanwhile, 30-year Treasury yields were only up slightly. Equity trading volumes were lower than yesterday as the big money remains absent from the market. Defensive stocks continue to fall, which are highly correlated with Treasury yields, suggesting that 10-year Treasuries should be at 2.5%.

Physical gold held its 100-day moving average and needs to break over $1,240/oz with strong volume to show any signs of life. The gold and silver mining stocks were mixed on the day.

The growth rate of the M2 Money Supply fell slightly from 3.85% to 3.83%, just over the danger zone of 3.70% where recessions and depressions are prevalent. The back end of the data keeps falling, meaning the growth rate isn’t slowing as fast, but it’s on a smaller amount from one-year ago.