-- This Week In The Money --

Analysis, Perspective, Trading Strategy

Are we there yet?

By Joe Duarte on October 27, 2018

I am very concerned that if this market continues in its current path it will have a spillover effect on the U.S. economy. And if that happens, all bets are off.

As the handful of flesh and blood traders left in the insane asylum known as Wall Street fully folded their tents last week, the shop was left in the hands of the algos and the selling has been relentless with 100 plus point swings in the Dow Jones Industrial Average developing within minutes of one another and volatility running amok. And while during previous similar episodes, the Federal Reserve has stepped in and lowered interest rates and the market finally stabilized, I’m not expecting that to happen anytime soon.

That’s because this time is different. The Fed is trying to make a point and is forgetting the old tenet – do you want to be right or do you want to make money? By choosing to be “right” in its fight against inflation, the Fed is likely to continue to raise interest rates until whenever their models, based on theoretical data tell them not to do so anymore.

In fact, if you really think about it, the Fed is in many ways like the algos that are wrecking the stock market with their unbridled selling because the program says to SELL. At the Fed, if the models says jump, they jump, and the best economy in a decade – lumps and all- has to be slowed, or inflation will overwhelm us. News for the Fed; go to the grocery store and see what you get for $40 compared to last year. Inflation is already structurally imbedded into the system and only market forces could reverse its present course without wrecking the economy.

There is no Room to Breathe or for Error

What the Fed fails to note is that due to decades of manufacturing bottlenecks, the recent trade disputes, a massive and ongoing generational shift, historical distortions in income, and just in time supply chains, inflation is the new normal at the same time that the economy has rebounded because of low interest rates. Here is the raw truth: the Fed’s choice is between structural inflation with jobs and some type of positive economy or a severe and dangerous economic slow down if interest rates rise beyond the point at which the economy will be choked, which could be where we are now or at the next rate hike.

Unfortunately, unless there is a miraculous reversal of Fed policy and market action in the next few days to weeks, this bear could be every bit as nasty in the real world as it is on Wall Street. And because the Fed is flying on instruments – they seem to forget the big elephant in the room; markets and the real economies are now linked due to the repeal of the Glass-Steagall Act.

Moreover as we found out after the 2008 subprime market debacle, Main Street will, sooner, rather than later start to feel this decline in the market if it is not reversed. First, it will be through their 401-k statements due out mid week. But after that, if this thing doesn’t stop, it will be in the form of pink slips as firms start to pare back their employment rolls.

This brings me to those prophetic words uttered by Jim Cramer on CNBC when Lehman was imploding and the Fed was looking at computer models instead of acting: “They know nothing…nothing.”

Now it gets Interesting

The comments above are clearly bearish. But maybe they are premature given what may be developing in the market’s internals. I certainly hope so.

The New York Stock Exchange Advance Decline line (NYAD), the most accurate indicator of the stock market’s trend, which, as I noted here on 9/23/18 was forecasting a potential market decline, is now showing signs that a bounce of sort is in the cards. And there are two specific signs worth noting:

1) NYAD has broken below the 200-day moving average. A break below this line usually brings about at least one reversal as short sellers cover at this point and bottom fishers try their luck.

2) Both the RSI and ROC indicators have made shallower bottoms on the second decline of NYAD. This is usually a sign that the second and more vicious decline was the panic washout.

Of course, charts can show signs and the market can ignore them, which is why it’s not a great idea to jump back into this market right away, as this messy sell off could still take weeks to sort out. However, if NYAD remains as accurate as it has been since November 2016, this could be the first positive sign we’ve seen in this market over the last month.

Are We There Yet?

I hope I’m wrong and NYAD is right, but we seem to be getting close to the end game in this market, and in this economy.

Regarding the market, we may have a week or two left before any bull left disappears, which would be an epochal development since the bots would have no one’s money to take except each others’. And while that’s frightening, in the real economy, if the pink slips start flying, there will be other responses, and much unpleasantness.

So it seems prophetic that here we are again.

Way back in the 1990s when the Maestro, Mr. Greenspan, and then President Clinton decided to repeal the wall between Wall Street and Main Street (the Glass-Steagall Act), few thought that Wall Street ‘s troubles could ever leak fully onto Main Street.

Never mind that Glass-Steagall was put in place after the Great Depression and that until its repeal it did its job, as the recessions that occurred were never as destructive as what we saw in the 1920s and in 2008. Sadly, after the subprime mortgage crisis, the act was never reinstated and the Federal Reserve is still fighting in the pre-2016 world where there were no trade barriers in the presence of an economy fully fueled by debt and zero interest rates.

I only have one thing to say at this point: cash is king – until it’s not.

Joe Duarte has been an active trader and widely recognized stock market analyst since 1987. He is author of Trading Options for Dummies, rated a TOP Options Book for 2018 by Benzinga.com - now in its third edition, The Everything Investing in your 20s and 30s and six other trading books. To receive Joe’s exclusive stock, option, and ETF recommendations, in your mailbox every week visit https://joeduarteinthemoneyoptions.com/secure/order_email.asp.



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