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Market Lab Report - Premarket Pulse 3/18/19 - The Wall of Worry

The market often climbs that proverbial wall of worry. With steadfast tenacity, despite the US government shutdown, the trade battle with China, growing economic gloom with Italy in recession and Germany on the brink, Brexit incompetence that has paralyzed Parliament and potentially could increase civil unrest and even a revolt against British Prime Minister Theresa May leading to her resignation, despite all these issues, the US and UK stock markets have been in a strong uptrend since markets tipped into bear market territory around Christmas. 

The majors at first were wrestling with their 200-dmas which comes as no surprise since we did suggest prior to the pullback that markets may have to digest the sharp gains made since December. And what better time to do so than around major resistance known as the 200-dma. Nevertheless, they managed to bounce back up through their 200-dmas, after successfully retesting an undercut of the line.

Meanwhile, global central banks continue to print. For example, the Bank of England has no choice and possibly may have to resort to raising current levels due to the impending Brexit. Thus markets have been discounting accelerating levels of QE as the global economy teeters on recession. 

Since QE began, the Fed's balance sheet soared from about $800 billion to over $4.5 trillion which bailed out the banks by propping stocks, bonds, and real estate which helped generate artificially inflated profits for banks. Also at issue is the yield curve which is getting close to inverting as shown in the chart below:

But just because a yield curve inversion signaled the last 3 recessions does not mean it remains a reliable indicator in this age of debt monetization. This applies to other indicators as well that may have worked well in the past. 

Some have suggested QE creates an endless debt spiral as interest payments continue to increase the larger the national debt grows. But if this were true, the world would never have been able to overcome the even higher levels of debt after World War II ended. 

Certainly, exponential technologies, which continue to be underestimated ironically by virtue of being exponential, can help nations grow. Further, pro-business policies and lower taxes as well as it being a pre-election year all help to push markets higher, or may at least postpone a nasty bear market for yet another year.

Stocks have been tricky as markets first stalled at the 200-dma, rolling over with a nice undercut, then bouncing back up through their respective lines. Nevertheless, our list of names continues to grow. But as we have mentioned, it is far better to be opportunistic in this market environment, thus names that were mentioned earlier in the bounce and bought on constructive patterns have done well overall. As a general rule, shorting into strength for a trade and buying on constructive weakness has helped to minimize risk as QE wrestles against the slowing global economy. 

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