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Market Lab Report - Premarket Pulse 10/22/18

Global Markets In Downtrends

In the meeting minutes released Wednesday, the Federal Reserve stuck to its playbook. The majority of  Fed officials believe that they will have to raise interest rates until the economy slows. The U.S. leads the way economically with Trump's policies firmly in place, but this begs the question about the rest of the world who are mired in crippling socialist policies that hamstring governments. This could be why the S&P 500 continues to lead the way over these past many years, it being the tallest standing midget when compared to the rest of the world's markets.

While China has been in a nasty bear market all year due to the trade issue, all global markets such as UK stock market ETF ticker EWU and Japanese market ETF ticker EWJ have also been in downtrends all year. For example, the UK market has fallen as much as -16% this year while Spain has dropped as much as -23% this year. Over in Japan, their market has been off as much as -14%. In South America, the Brazilian stock market ETF ticker EWZ has fallen as much as -36% which is faring far better than some of the other South American stock markets. Down under, the Australian market was off as much as -16%. Indeed, the world's stock markets as a whole have been in downtrends all year, with some in full blown bear markets.

In an update to its World Economic Outlook, the International Monetary Fund (IMF) said it was now predicting 3.7% global growth in both 2018 and 2019, down from its July forecast of 3.9% growth for both years.

The downgrade was due to the introduction of import tariffs between the United States and China, uncertainties surrounding the new NAFTA agreement and Brexit, as well as rising interest rates. Rising rates puts pressure on emerging markets with capital outflows such as Argentina, Brazil, Turkey, and South Africa.

The IMF predicts the impact of U.S.-China tariffs will be felt next year, so cut its 2019 U.S. growth forecast to 2.5% down from 2.7%, while it cut China's 2019 growth forecast to 6.2% down from 6.4%.

Can The U.S. Lead The World?

Nevertheless, the question remains as to whether the U.S. can lead the rest of the world out of its economic morass when pro-business policies are a far cry from most other government agendas that tend to be steeped in socialist, Keynesian ideology as they hike taxes as much as possible.

A friend of mine, Tom Basso, who was interviewed in the Jack Schwager Market Wizard series mentioned a recent Forbes article https://www.forbes.com/sites/ryanellis/2018/03/09/democrats-release-tax-hike-plan/#5869edcc7b9e on how the democrats want to hike taxes. Last week, Congressional Democrats released a detailed tax hike plan that they promised to implement if given majority control of the House and Senate after the 2018 midterm elections. The plan targets individuals as well as small and mid-sized businesses.

Up until Trump's policies were passed into law early this year, the United States had the highest corporate income tax rate in the developed world. As a result, jobs and capital were fleeing the U.S. for lower tax jurisdictions. It had been agreed with bipartisan consensus that the U.S. corporate tax rate was a deterrent to new jobs and investment. Trump's pro-business policies cut the rate all the way from 35 to 21 percent.

Tom Basso remarked, "Okay, this is economic suicide. The only single way out of the financial morass the US is in would be to grow the heck out of the economy and start cutting government expenditures, creating a surplus, and pay down debt slowly with cheaper dollars. Keep these Dems as far away from the treasury as possible!"

Like Trump or not, Trump has been enforcing policies that are designed to do this, so it certainly sounds as if it's a call for a Reaganesque system of government that jump started the U.S. economy which had been mired in inflation.

U.S. Stocks - Finding The Ones That Buck Downtrends

Over in stocks, markets are trying to bounce after their drubbing though Thursday's sharp sell off on higher volume placed the NASDAQ Composite below its 200-day line and the S&P 500 at its 200-day line. The risk-on Russell 2000 has of course been trading well below its 200-day line. Friday's triple witching resulted in higher volume on the S&P 500 which closed again just about at its 200-day line. 

Earnings season, once again, is showing strength with QE-induced stock buybacks continuing to prop earnings. Leading tech stocks have taken a hit with AAPL holding up the best as it trades around its 50dma compared to many others which traded down to or below their 200dmas.

It is always good practice to look for any stocks bucking major market downtrends. A few names have held up relatively well in the recent sell off, such as ones we have mentioned recently, so could be put on your watch list for possible actionable buy points in the coming days or weeks in the form of pocket pivots, Wyckoff undercut and rallies, and volume dry up price action.

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