A Lopsided Rally & A Pivotal Moment Approaches

Written by Dennis Slothower
Posted April 27, 2018 at 8:00PM

Following Tuesday's strong sell-off, traders showed nervousness as index prices chopped back and forth.

Then, the entire stock market benefitted from some big blowout earnings reports on Thursday. Amazon, Facebook, Advanced Micro Devices, and Visa were among the big winners.

But it was Amazon that really took the market along for a bullish rebound as it reported $3.27 earnings per share compared to estimates of $1.27, nearly three times what analysts were expecting. Despite threats from the administration about a possible antitrust crackdown on Amazon, traders reacted positively to beats on revenue, earnings per share, and forward guidance from all of these big tech companies.

Earnings season is typically an excuse for companies to exploit data to their advantage, often by putting out lowered expectations, using cheap borrowing to make large buybacks so their earnings per share look better, and then releasing earnings data that beat expectations across the board.

Now I’m not saying that is all Thursday was about, it’s just that taking the entire earnings field into consideration will reveal a greater truth of economic condition than merely celebrating a few companies with virtual monopolies on large segments of our economy and society.

Amazon is not typical of the larger business climate, where many retail companies are trimming their store counts and contracting along with their real share of the market.

Thursday was a good day for a number of stocks, not because their outlook is improved by Amazon's and Facebook’s successes, but because short-term traders are willing to bet across the board on news-driven rallies and declines.

Meanwhile, the spread between the 50MA and the 200MA has dramatically narrowed, suggesting that the bounce from the early-week sell-off will quickly be met with another round of selling.

My interpretation of this is that a major market decision needs to be made.

Since the February correction, stocks have not been able to resume their bullish trend, resulting in a staggering sideways movement with lower lows and lower highs dominating the technical picture.

The probability of prices finally breaking out of this sideways-to-downward-trading trend is not very good. We are getting close to summer, where the stock market traditionally corrects or idles sideways.

Because this is an election year, and we remain convinced that the Federal Reserve will consciously battle the Republican administration in an attempt to improve Democrats' odds in the elections, interest rates will continue to be jacked up by the Fed as it continually unwinds its bloated balance sheet in ever greater amounts.

This will act as a tightening of liquidity in the stock market and prices will naturally be challenged, meaning we are going into a bear market, folks.

Yield Curve Threat Softens

It wasn’t much and it certainly won’t last, but the much-watched 10-year Treasury yield dropped back below 3%, helping to take some of the recession fear out of the market for speculative traders.

It is nothing more than a short reprieve, though, and as long-term investors we should all show skepticism that this direction will somehow prevent recessionary conditions.

The Federal Reserve will ignore it completely as it races to its next interest rate hike and turns over more of its balance sheet Treasuries and mortgages to the public, sucking up huge liquidity from the stock market and the bond market.

The common cash flow direction in a coming recession is for money to flow from stocks into the safer Treasury bonds. But with this Federal Reserve committed to unloading Treasury bonds at unseen levels as it raises interest rates, the likely result will be a stock market and a bond market that crash simultaneously.

Don’t fall into the trap of thinking that a move from stocks to bonds will be a “safe haven” decision when the coming recession picks up steam. A lot more than the Fed balance sheet will be unwound with the inevitable quantitative tightening the Fed is being forced into.

Have you ever been too far in debt? Have you ever climbed out of severe debt without declaring bankruptcy? It wasn’t easy, was it?

Our government and even our public citizenry have utilized massive debt to hide our economic mistakes and failures over the last decade. The stock market has exposed this fake prosperity with unsustainable record highs in the last few years.

We have always known that at some point we will need to unwind all this foolish debt-driven gain and get back to some semblance of reality. The big question is will it be a graduated fall back to price discovery or will it be a giant crash? So far, the powers in control are keeping the markets in a controlled decline. Will it last, though?

In a global environment of liquidity tightening there may not be a safe haven to transfer wealth. We may all find that cash is the best safe haven in the future.

To your wealth,

Dennis Slothower Signature

Dennis Slothower
Editor, Stealth Stocks Daily Alert and Wall Street's Underground Profits

Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.

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