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Market Lab Report - Premarket Pulse 3/11/19 - Where is the market headed? Global Economy vs. QE

First, a quick crypto update. The report sent on March 1 contained prices at the time the report was sent. Three of the four coins are up appreciably if you check prices on major sites such as https://coinmarketcap.com/. For those who have written me on other platforms on when to take profits, it all depends on your risk tolerance. Also, know that bitcoin may continue higher for the time being or even sideways in which case these names may also continue higher as they were selected based on their unique fundamentals and sound technical action. But at some point based on my metrics, bitcoin has a high probability of retesting lows, at which point, it will be a major headwind toward most all cryptocurrencies since there has been a high degree of correlation between the direction of bitcoin and the direction of most all cryptocurrencies. The cryptospace remains mostly retail-based thus the charts remain as clean as the way stocks traded in the 1980s and 1990s. 

Straight up from lows then correction

With markets having bounced straight up from the lows of late December, we suggested a pullback to digest gains could come at any time, thus taking profits when you have them might not be a bad course of action since this has been a market of 3 steps forward, 2 steps back. Indeed, a number of names gave it up this week. In a fashion that has been typical of the last few years, a couple weeks of gains are reversed in a couple days, especially off the top in this QE market. WDAY, CYBR, MIME are a few examples. Then the cloud stocks which were outpacing everything sold off as well: TWLO, TEAM, SPLK, and others. 

The Chinese stocks we had suggested one swing trade, or in other words, take profits when you have them since, despite trade resolutions on the horizon, the sector remains highly news driven. HUYA ,which we sent out a report on Feb 19 when it was trading at 19 and change, had a strong earnings report on Tuesday so had a strong rally. Seemingly extended, taking profits would not have been a bad course of action. Other Chinese names such as BZUN, which neared its 200-dma on a gap higher after a strong earnings report then reversed course just as we have seen other names do in this market, could have been sold using the MACD 6/20 on a 5-minute bar chart. This can keep one on the right side of the how a stock trades especially on days with elevated volatility, such as when a company reports earnings. QTT is another Chinese name that moved higher, then gapped lower on Wednesday at the open, at which point it should have been sold. 

Global Economy Slowing

On Wednesday, the OECD (Organization for Economic Co-Operation & Development) cut forecasts again for the global economy. It sees the world’s GDP growing at 3.3% in 2019 and 3.4% in 2020, down from 3.5% in each of both years. On the same day, Germany disappointed markets with gloomy manufacturing data. 

Then on Thursday, the ECB president said they don’t expect to begin lifting interest rates which remain historically low until early 2020 at the soonest. Originally, Draghi had said the earliest would be the summer of this year. Draghi then cut forecasts all the way down to 1.1% from 1.7% for 2019. He also launched the ECB’s third iteration of cheap loans to eurozone banks as an ongoing way to provide further stimulus. 

On Friday, China said exports fell more than 20% last month suggesting there is a broader global slowdown at hand, and that any trade deal between the U.S. and China will not compensate for such a slowdown. 

The jobs report came in weakest in 17 months with just 20,000 new jobs well under the 172,000 estimated though unemployment fell to 3.8% while wage growth climbed to 3.4% from 3.2%, the biggest gain since the end of the last recession in 2009. The low number could be a sign of a tight labor market. 

Either way, central banks stay at the ready with their QE money printing machines. They have no choice given their mandates. Thus while easy money remains in play, a market that takes 3 steps forward and 2 steps back seems in the offing as the slowing global economy pushes markets lower while quantitative easing in all its forms puts floors under markets while pushing them higher on a string. Thus Dalio’s and Druckenmiller’s prediction of a U.S. stock market that gains only a few percent each year for the next few years seems plausible. 

On a shorter term basis, the pullback we are seeing comes as no surprise. Singularly, the market appears to be in a risk-off mode after having made sharp gains off late December lows together with the recent reports of global economic weakness. Shorting into extended strength has worked well in this environment as has buying on constructive weakness. 

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