We Remain On Egg Shells
The stock market is thoroughly overbought on both a short-term and intermediate-term basis and, on Thursday, that began to show as the tech sector and small-cap stocks corrected while investment bank stocks were still helping the Dow 30 to extend gains.
Notice, the oscillators on this chart are extended and at levels where the market tends to correct. Even with all the bullish narrative, the S&P 500 index is still about 4% off from its late January highs.
I think with just a couple trading days left before the next FOMC meeting and the next interest rate hike, traders are starting to take a more cautious approach to further monetary tightening by the Fed.
Still, the most recent advance has the bulls very much in charge of the primary trend, with the Fed/investment bankers making a rescue of the stock market in the May period, even pushing the Nasdaq Composite and Russell 2000 indexes to new highs.
Notice, the Nasdaq Composite short-term cycle is now beginning to roll over, suggesting the market is due for a more serious correction now that it has reached its old highs.
While the stock market is short-term overbought, the U.S. dollar is short-term oversold.
There are a couple of key points to note about this chart of the U.S. dollar. Notice, the 50-day moving average is about to cross over to the upside of its 200-day moving average into bull market territory and secondly, the oscillators are once again oversold, suggesting the U.S. dollar is setting up to surge once more.
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If the dollar rebounds and picks up strength again, it will pressure the crude oil market and further put into question the quality of corporate earnings for the second quarter. The direction of the U.S. dollar is crucial.
There is a great deal of pressure by the emerging markets and their central banks, whose markets are getting crushed relative to the strengthening dollar. There are always winners and losers every time the dollar goes up or down. U.S. central banks are draining their reserves, printing fewer dollars — so there is less liquidity for financing emerging markets. So, we are seeing a sharp jump in emerging market debt defaults.
We remain on egg shells, under a false illusion of economic strength and financial engineering while the Federal Reserve continues to tighten monetary policy until it breaks something.
As bond yields are about to invert and investment banks pump to con the public, smart money is exiting aggressively from the market in anticipation of more visible signs the real economy is not going to be as good as the Fed is forecasting.
Notice the plunge in the Smart Money Flow Index. Something is coming. The global economy is slowing rapidly in Europe, Asia, Latin America, and other emerging markets. Massive share buybacks, or financial engineering, work until the capital is gone.
While the media is beating the drum on an expanding U.S. economy, you wouldn’t know it by the plunge in consumer spending.
The combination of Obamacare driving up health insurance premiums, soaring gasoline prices in 2018, and the tax cut benefits which have disappeared in light of other rising costs have combined to reduce consumer spending even as they accrue more debt.
It is my job to make you aware of approaching risk. Notice how similar a pattern is being repeated with Deutsche Bank and Lehman Brothers.
The big banks are pumping their stocks now, hoping to get investors to buy bank stocks, but Deutsche Bank is Germany’s largest lender and the largest bank in Europe. Following the path of Lehman Brothers poses systematic risk to the entire worldwide banking system.
Here’s the thing: Deutsche Bank has massive derivative exposure. At the end of 2017, the bank’s notional derivative value was around €48.0 trillion.
That’s right. 48 trillion! Not billion.
Keep in mind, derivatives involve two parties. If all of a sudden, one party says we are not going to be in business anymore, what do you think will happen to those on the other side?
U.S. banks are very exposed to Deutsche Bank and represent the other side. This is why when Deutsche Bank got into trouble and was downgraded to junk status recently — they sent over Goldman Sachs for further damage control. Why would Goldman get involved with Deutsche Bank if U.S. banks weren’t seriously vulnerable here?
This is why investment banks are pumping bank stocks right before another rate hike. This is how it works. Get wise to this.
Goldman Sachs made $200 million in just one day in February in the market’s plunge after cash levels fell to record lows.
Like I said, the market is ridiculously overbought on both a short-term and an intermediate-term basis. This is not the time to chase momentum stocks in the most overvalued market in history.
To your wealth,
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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