The market represents the hive mind, the sum total of viewpoints, or the equivalent saying is none of us is as smart as all of us. This bodes well for predictive markets such as Augur which so far have shown a higher degree of accuracy than so-called expert opinions. And the larger the hive mind, the more accurate the prediction. Markets represent various hive minds. Thus this illustrates why interest rates began a solid downtrend in November as the hive mind predicted the Fed would have no choice but to slow or halt the pace of rate hikes in 2019. The yield on the 10-year note plunged from 3.2% down to 2.6% in about 2 months as shown below.
Meanwhile, the major indices started on their downtrend at the top of October.
But now we are bouncing sharply on friendly words from Federal Reserve Chairperson Powell who basically said the direction of interest rates will be supportive to the stock market, thus one could take this to mean future hikes may be postponed, kept at current levels, or even lowered. The market seemed to embrace his words as negative news last Tuesday was not enough to rattle markets which finished near the top of their trading ranges on higher volume. The Empire State PMI came in very weak, economic news out of China disappointed, trade talks stalled between the U.S. and China, and further clashes arose between the Democrats and President Trump. As many of you know, the news itself is not important as to how the market reacts to the news. This would suggest the market is acting well and a new uptrend has begun. The existing bubbles may grow larger yet as a consequence of this view of the Fed being able to kick the can down the road a bit longer.
On the other hand, many patterns including the major indices are sticking straight up and others are near resistance so may need time to consolidate. Further, with QE on the wane as the European Central Bank slows its bond buying program, there is less QE-fuel going forward thus uptrends may be even more tepid unless of course the Fed steps in and starts QE4 should the economy falter. But by this stage, the market may lose confidence in the Fed which may cause a serious bear market, blowing apart existing bubbles.
Ray Dalio of Bridgewater and Stanley Druckenmiller are both calling for lackluster markets over the next few years as interest rates attempt to normalize. Perhaps a slowing but non-recessionary economy despite the altered CPI which distorts GDP could help the Fed continue to hike rates. But even if they can hike another 2 times in 2019, this would only send rates to 2.75% to 3% which is still below historical norms.
While risk is somewhat elevated as many names are sticking straight up, we have highlighted the few names that are at low risk entry buy points. A number of other names we mentioned on Friday's webinar are approaching or are at their 50-dma or 200-dma resistance lines so have become or are soon to become short candidates.
Trump's pro-business policies even when taken together with exponential growth technologies may be insufficient to fend off a retest of prior lows. Since 1990, the market has always retested prior lows that exceeded -15% corrections within 3 months. But who is to say we retest then fail, and start into a deeper downtrend?
Watch price/volume action in the leading stocks as this will show how you should position your portfolio on a daily basis on the short, long, both short & long side, or simply in cash rather than having to try to guess. Besides our general views on the market which we discuss in our reports and webinars, our guidance on stocks in terms of the frequency of reports we publish is one barometer that many use to gauge the internal strength or weakness of the market.