This Week Was A Doozy

Written by Dennis Slothower
Posted June 1, 2018 at 8:00PM

This week was a doozy for trying to get some sense of where investors are leaning. Volatility is the only clear winner, as the markets have moved strongly in either direction on bad news and/or good news.

On Thursday, the blame for another strong sell-off went to steel and aluminum tariffs that will be applied to Mexico, Canada, and the Eurozone, much as the administration did earlier this year as a “national security measure” and to support the U.S. steel and aluminum manufacturers.

Commerce Secretary Wilbur Ross told reporters the tariffs of 25% on steel imports and 10% on aluminum imports went into effect at midnight Thursday night.

These tariffs are merely the latest in a series of protectionist moves by the Trump administration, and have drawn threats of retaliation by some of the major U.S. allies.

There's nothing like having new conflicts with allies as we make new peace overtures with old enemies.

On Thursday, the Dow fell over 250 points and the NYSE dropped below critical trading levels for the second time this week. That was promptly reversed Friday morning:

Another rally kicked off after the jobs report came in stronger than expected. Of course, that will all but guarantee another rate hike by the Fed, which is bound to drive the markets lower down the road.

This is crazy. Bulls are doing their darndest to burn short interest, create one-day rallies, and get prices above these two critical levels. The bears are jumping on any excuse to drive prices below these levels.

This standstill is provoking serious volatility heading into June.

But we don’t think this back-and-forth trading at these levels will last much longer.

We believe it will eventually resolve to the downside this summer, mostly due to the strong commitment from the Federal Reserve to sustain quantitative tightening over the next few years.

Clearly, smart investors are continuing to cash out of this stock market, not bailing in, as demonstrated by Bloomberg’s chart of the Smart Money Flow Index against the DOW:

The National Association of Realtors' home sales index unexpectedly showed a sharp decrease in pending home sales for April, tumbling 1.3% after rising 0.6% in March.

Expectations by economists predicted an increase in this index by 0.4%. They were off by almost 2% in what is normally a strong house-selling season.

The jobs report released this week may overshadow separate reports on manufacturing activity in May and construction spending in April — important barometers of housing — which look to be entering a new and difficult period.

More bad news that was ignored by traders on Wednesday came in the form of U.S. GDP, where the Commerce Department reported that the revised Q1 GDP fell to 2.2%. This is down from expectations of 2.3% (the pace initially reported) and significantly down from Q4 2017 at 2.9%.

What dragged the GDP down? Consumer spending!

The theory is that last year’s hurricanes created excessive consumer spending for repairs and replacement in Q3 and Q4 of 2017, and that 2018’s decline in GDP is to be expected.

The problem with this explanation is that the expected contribution to GDP from the tax reform/tax cut package recently passed is not as great as was sold to voters. It could be that consumers have been pinched for a long time and any extra income in their pockets from a tax cut merely disappears in current debt payments rather than additional spending.

As we get closer to the mid-term elections, the GDP will become much clearer.

Will we see the bump that the tax reform/tax cut package promised? Or will the aggressive tightening from the Federal Reserve dampen any such growth potential?

The Atlanta Fed is currently projecting 4% GDP for Q2, even as revised Q1 GDP steadily drops. Who is fooling who?

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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