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Market Lab Report - Premarket Pulse 5/14/18 - Undercut & Rally Remains Successful

The major headwind of higher rates has pushed the bull market into a choppy, sideways mess so far this year. Whether it can resume its uptrend that was quite clean from November 2016 to January 2018 remains to be seen. It will be a tug-o-war between the Federal Reserve further reducing its balance sheet vs. global QE which remains at or near record levels and has served to push the US stock bull market into its tenth year.

The material change in quantitative tightening correlates well with the struggles of the US stock market so far in 2018:

Meanwhile, bank loan growth stands at nearly 0% year over year as the flattening yield curve makes bank loans less profitable. This is concerning as we have not had such a situation since 2009. Further, given that bank loan growth was $200 billion in 2014, this is a huge negative hit to not just bank loans but also to money supply growth. This means the federal reserve has even less room to tighten and shrink its balance sheet.

If the Federal Reserve continues to tighten monetary policy with its planned rate hikes through the end of 2018, the money supply growth will contract to nearly 0% by the end of 2018. This will negatively impact GDP, pushing the US into a full blown recession. The last time such a steep drop in money supply occurred was in 2009 due to the financial collapse of 2008.

Money Supply Growth With Estimated Federal Reserve Tightening:

The stock market could therefore continue to sputter at best should the Federal Reserve continue its pace of rate hikes through the end of 2018.

Undercut & Rally Works Well in Sputtering Market

Wyckoff undercut & rally entry points have worked especially well this year as the up-and-down stock market has provided superior low risk entry points in a number of fundamentally strong names.

Undercut & rally patterns help keep risk to a minimum so your risk is just a couple percent or less should the market falter. In such cases, small profits can even be taken instead of waiting for the market to further reverse. Gains from the names that work more than outweigh any small losses.

Futures are higher on news President Donald Trump was working with Chinese President Xi Jinping to keep struggling Chinese telecom giant ZTE in business. This suggests an improvement in trade talks between the two nations.

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