Market Lab Report - Premarket Pulse 7/2/18

Markets

Major averages reversed course to close roughly flat near their intraday lows. Volume was above average, and roughly even on the NASDAQ Composite while higher than the prior day on the S&P 500. Both would constitute distribution days.

The mounting trade wars have created selling pressure across the world's equity markets. Last week, Asian shares dropped to a 9-month low. Many major trading partners are potentially being affected by American protectionism. So while Trump recently backed away from cracking down on Chinese investment in the US, Trump could change his stance on a dime as he has been known to do.

All trade wars slow economic growth so let's hope Trump remembers how devastating was the Smoot Hawley tariff when it was passed into law in the early 1930s. Should the current trade issues that Trump has with the rest of the world turn into something even vaguely resembling the trade wars sparked by the Smoot-Hawley tariffs, markets could undergo steep corrections.

Futures are currently lower at the time of this writing as trade concerns continue to weigh on European bourses.

Another Tailwind for Bitcoin

Notwithstanding the loss of value in equities, bitcoin could be used to circumvent any trade restrictions put in place on a peer-to-peer basis. Bitcoin provides a non-political standard of value and an open settlement network where anyone, any company, and any country can participate. If the US gets into a full blown trade war with other countries, any entity, institution, or individual can settle with anyone in the US despite the countries being at war.

As the use of bitcoin and potentially other cryptocurrenices as a means to exchange value becomes common practice, many institutions will realize the steep benefits associated with this approach and may be less interested in returning to the use of fiat currencies. Thus any prolonged trade war could be yet another catalyst for a more significant and widespread adoption of bitcoin and other cryptocurrencies as mediums of exchange.

That said, my view of bitcoin testing a price level of 5000 as a major low remains in place (see my earlier crypto-corner pieces). Certain indicators I use continue to signal that the bitcoin bear market is not over yet. If 5000 does not hold, I believe an ultimate 'knee-jerk' low of just under 3000 could also occur as a major ultimate low in this current price cycle, though the numerous tailwinds at bitcoin's back suggest 5000 a more likely ultimate low for bitcoin.

Stocks

Over in stocks, Chinese names have naturally been on their back foot far more than other names due to the impending trade wars. FAANG stocks, meanwhile, have mostly managed to stay relatively fit as the NASDAQ has outpaced the S&P 500 and Dow Industrials. FB, AMZN, and NFLX remain near their 20-demas. While this suggests strength in leading names, it also means they have further to fall in the event the market correction worsens.

More troublesome is one of the long standing names on our Focus List, Nvidia (NVDA), has been trading below its 50-dma. If the stock continues to find resistance near the 50-dma, it could test its 200-dma. This would be the first time such a test occurred since NVDA began its stellar run in 2016. NVDA almost tested its 200-dma earlier this year due to interest rate headwinds which unsettled markets, but it has yet to hit its 200-dma since early 2016. Should such a test  of its 200-dma occur, it could be a bad omen since NVDA has been one of the premier market leaders. Such action on the part of leading stocks could be signalling a deteriorating trade situation and/or the deep issues that won't go away concerning global QE, the global economy, and the future direction of interest rates. QE's days are numbered, but the power of global central banks should never be underestimated.

Economy

By the end of this year, the ratio of federal debt to the United States' gross domestic product will reach 78 percent, according to the CBO, the highest ratio since 1950. Debt is projected to grow to 96 percent of GDP by 2028 before eventually surpassing the historical high of 106 percent it reached in 1946. Of course, major devaluations in fiat would most likely have occurred, cutting short the steepening trend of debt to GDP.

Meanwhile, the U.N. says 18.5 million Americans are in ‘extreme poverty’ while Trump’s team claims only 250,000 are at this dire level. Add to this recent reports that roughly two-thirds of Americans don't even have $1000 in savings, thus have to borrow from friends and family if an emergency hits. In the UK, 75% of British don't have £1000 in savings.  Other disheartening statistics: 1 in 6 American families are food challenged, and 1 in 6 children worry about their next meal. Further, the concentration of wealth into the top 1% due to quantitative easing has propelled hard assets such as real estate, collectables, and stocks higher since 2009. The top 1% of wealth in America now matches the bottom 90%, a record level disparity which is a seed of major social unrest.

Corporate Debt

The debt load for U.S. corporations has reached a record $6.3 trillion, according to S&P Global. “These borrowers have $8 of debt for every $1 of cash,” wrote Andrew Chang, primary credit analyst at S&P Global. “We note these borrowers, many sponsor-owned, borrowed significant amounts under extremely favourable terms in a benign credit market to finance their buyouts at an ever-increasing purchase multiple without effectively improving their liquidity profiles.” This would be a burden on corporations as interest rates rise, thus would be another headwind for the economy.

The Way Forward

As always, keep your stops tight and stay on the lookout for potential short plays in stocks. Don't let the summer doldrums lull you into laziness. The trade issues between the US and other countries is liable to worsen before agreements are reached. This could cause a continuation of the current correction which, at just a few percent, has so far been mild.