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Market Lab Report - Premarket Pulse 3/19/18

Futures are lower with NASDAQ futures lower by more than a percent at the time of this writing as Facebook earnings disappoints. Also weighing on futures overall are concerns of Trump's aggressive stance toward trade policies with China, and the Federal Reserve rate hike when their two-day meeting concludes this Wednesday.

That said, major market averages had achieved or approaching new highs as global central banks continue to print at near record levels while offering no signs of meaningful tapering. Over in bonds, ETF TLT which tracks the price of 20-year bonds bounces. QE finds its way into both stocks and bonds.

This seems contrary to the Fed's aggressive stance on rate hikes. At this week's Federal Reserve’s monetary policy meeting, the fed-fund futures market is betting there is a 91.6% chance of a hike. While 4 rates hikes may occur for the remainder of this year, the Fed may find it difficult to do so should global economic weakness persist such that central banks are unable to reduce QE money flow. This disconnect between the US and global economies cannot persist as the US is tied to the global economy more so than ever.

Further, any global trade war  between the U.S. and China would be bearish as all trade wars slow economic growth, or in more serious situations such as Smoot-Hawley tariff passed into law in the early 1930s, it can be devastating.

But despite such headwinds, QE remains the main factor to US stocks continuing higher. FAANG stocks are all trading above their 50-days with AAPL, AMZN, GOOGL, and NFLX all at or near new highs while a number of other leading stocks remain in uptrends. Semiconductors also continue to outperform.

While QE continues to flow,  note that any correction beyond 15% between 2009-2014 occurred due to the end of QE programs in the US. Each time, this prompted the Fed to launch a new QE program thus we had QE 1, 2, and 3 as well as Operation Twist. The steep corrections we had in 2015 and 2016 after QE ended in the US were due to economic troubles in China. Any future steep corrections beyond 15% could be due to a trade war, political instability, stagflation, global central banks withdrawing QE too quickly, or general global economic stagnation preventing further tapering or forcing more QE from central banks. That said, it could be argued that additional QE could further prop markets. But how far can the can be kicked down the road? Regardless of what happens, keep your stops tight since, as we have seen, even minor market corrections of a few percent can yank down leaders by 10% or more.
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