How Many Bullets Can We Dodge?

Written by Dennis Slothower
Posted April 18, 2017 at 8:17PM

Traders were breathing a big sigh of relief that nothing major happened over the long weekend with North Korea.

What led the rebound yesterday were big bank and tech stocks, but all market sectors were up as well, leading to today — TAX DAY — April 18th. Tax Day was been extended this year because April 15th fell on a holiday.

While Friday was a holiday for the stock market, it was not a holiday for the government, which reported that retail sales fell for the second straight month in March. The Retail Sales Report for March was ugly, not only because it was weaker-than-expected, but also because it featured downward revisions of the February retail sales report.

It just illustrates the clear divide between the strong consumer confidence reports (more belief of the future or soft data) verses sluggish spending on goods by consumers (which is hard data).

This caused the Atlanta Federal Reserve to lower again its first quarter U.S. GDP forecast to 0.5%.

Yet, expectations are for the S&P 500 companies overall to have a 10.4% growth rate for the first quarter. This would be primarily because of the energy sector, which is projected to report earnings of $7.5 billion in Q1 2017, compared to a loss of -1.5 billion in Q1 2016.

This would make the energy sector the largest contributor as a sector for the S&P 500 this quarter on a year-over-year basis. This would be the first double-digit percentage growth since the third quarter of 2014, if corporation earnings come in based on these projections.

By the second quarter of 2016, crude oil prices had reached $50 a barrel, so based on a year-over-year basis this earnings advantage will begin to disappear going forward. The stock market is already factoring this well ahead, especially in a rising interest rate environment.

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In other news core inflation is slowing down abroad following the Fed’s tightening of monetary policy.

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Inflation in the U.S. is at 2%, where the Fed’s target is at, while Japan is back into a deflationary economy and the Euro zone barely above even. It is hard to imagine three or four more rate hikes with inflation numbers like this and no fiscal policy progress.

Getting back to the nervous sigh over North Korea yesterday, the United States is deploying two more aircraft carriers battle groups, (CVN-76 Ronald Reagan and the CVN-68 Nimitz carrier group) towards the Korea Peninsula/Sea of Japan to join with the CVN-70 Carl Vinson for joint drills.

The CVN-70 Carl Vinson is also joining forces with a squadron of warships from the Japan Maritime Self-Defense Force (JMSDF), which looks to include the new massive helicopter carrier JS-Kaga (DDH-184), which is outfitted primarily for anti-submarine warfare.

Vice President Mike Pence warned the “era of strategic patience” with North Korea is over. North Korea has said it will test missiles weekly now.

This military distraction has certainly taken the focus away from Congress, who must decide what it is going to do with the budget before the end of the month and on any fiscal policy reforms held up in Congress.

Bank Earnings Begin Amid Recession Signals

J.P. Morgan, Citigroup, and Bank of America reported good numbers. Goldman Sachs did not. Bank of Wells Fargo earnings came in flat. Even still, the bank sector closed down for the day on Monday and Tuesday was mixed as investors shun stocks.

It was also announced that Warren Buffet’s Berkshire Hathaway has been unloading millions of shares in its position in Wells Fargo, as it sours on this bank company and its dishonest practices. I think it’s a smart move on Berkshire Hathaway’s part as recessionary pressures increase.

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This is so significant. This illustrates that inflationary pressures are now accelerating, even as personal income has been decelerating, and at the end of 2016, the two had crossed over each other. In other words, when the consumer has less and less income but expenses continue to climb, what follows next?

I don’t think you have to be Harvard trained on this to figure this one out.

I think another key tell is the fact that the government receipts are plunging.

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This is the biggest drop since the summer of 2008. Much of this decline is coming from a collapse in corporate income tax. The United States has the highest corporate income taxes of any developed nation. Small businesses have shrunk dramatically over the last eight years under the weight of Obamacare, tax penalties, and red tape.

Over the last several years, major companies took their profits and bought back their shares rather than invest in the development of their company. They artificially boosted profits but over time they shrunk their companies, which is why revenues have been falling. This is why government receipts are falling as well, and when they turn negative year over year is when recessions materialize.

I think this is why the President is having a hard time trying to get Congress on board with income tax cuts, because they see government receipts plunging now. It is why they are having a hard time repealing Obamacare, because the tax penalties are helping to fund the government. It is also a poison pill. This isn’t going to end well.

Technical Top Set?

Our long-term “monthly” chart studies of the Russell 2000 index look extremely toppy now.

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Since the Federal Reserve began raising interest rates in December, the Russell 2000 index stopped advancing in the spike Trump rally, which began in November. Frankly, the broad market was in extreme conditions in November but the election results pushed things to a new level.

There are several studies on this long-term monthly chart I want to draw your attention to. The top chart is the MACD oscillator, against a five-month exponential moving average. First, notice the MACD oscillator that measures the oscillation of the Russell 2000, now trending BELOW its five-month average. The MACD oscillator peaked in February and is now trending downward.

Second, the Russell 2000 index stopped at a long-term resistance trend line connecting the monthly trend lines of 2013 and 2014 into 2017, so this is heavy resistance.

Third, the monthly stochastics are now negative with %K at 91 and %D at 92 cresting, where we typically see major tops leading to meaningful corrections.

Lastly, on the monthly relative strength index (RSI), the lowest study is trending downward. From a long-term perspective, notice the technical negative divergence (lower high from the 2013 high to 2017 high) compared to price (higher high in 2017 than in 2013). This is, technically, a big red flag.

All of these indicators are cresting just as we are about to move past April 15th and prepare for the most historically weak month of the year — the month of May.

Risk is extreme presently but this also means that in a few months we could be looking at some very outstanding opportunities later in the year.

To your wealth, 

Dennis Slothower Signature

Dennis Slothower
Editor, Outsider Club

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