The Market Outlook for the Week Ahead, or Here Comes Your Next Heart Attack
Sitting on a remote Alpine mountaintop this morning, this being Switzerland one with ample WIFI, I turned on my screen for the first time in four weeks and almost had a heart attack.
Risk markets everywhere have gone up almost every day since I left San Francisco in June, taking the major indexes up to new all time highs. They are doing this in the face of slowing global economies, falling earnings growth, and rising energy prices and inflation. Even the respected Atlanta Fed has a Q2 GDP growth forecast of a dismal 1.4%.
Did I mention that the US government is about to run out of money again in September, inviting another shut down?
In the old days the Federal Reserve used to be the sober chaperone at the party, making sure things didn’t get out of hand. Today, they are the devilish frat boy surreptitiously pouring 200 proof ethanol into the punch bowel, much as I used to do at Chemistry Department parties at UCLA during the early 1970s. The problem was that everyone else was doing the same thing, leading to some prodigious hangovers.
Another pint made it into the heady brew on Wednesday when Fed governor Jay Powell erred dovishly in his Humphrey Hawkins testimony in from of congress. It was enough to ignite the latest 500-point rally in the Dow (INDU).
The bullishness was confirmed by my own algorithmically driven Mad Hedge Market Timing Index, which reached a three-month high at 65. We have rallied an awesome 45 points from the 20 level in only six weeks and are now a mere 10 points away from solid “SELL” territory.
The end result of all this has been to bring forward my yearend target for the S&P 500 (SPY) of the low 3,000s to, like well, now. And if H1 has been one giant love best, how does that bode for H2?
A frightening convergence of events is setting up. Just when the Fed announces its interest rate decision on July 31, companies will be announcing earnings disappointments AND my Market Timing Index will be hitting the high seventies.
It all sets up what we traders call “an asymmetric risk/reward.” Good news will bring small incremental gain while even a small disappointment will serve up a horrendous sell off. Fed funds futures are now indicating a 100% of a 25-basis point rate cut on the 31st, and see overnight rates plunging to only 1.75% by yearend end. Hence the heart problems mentioned above.
So as much as you may despise, loathe, and hurl epitaphs at me, I am not going to tell you to buy the stock market today. Your last chance to do that was the final week of May.
The quality trade these days is clearly in other asset classes, like bonds (TLT), foreign exchange (FXA), gold (GLD), and energy (USO). My only exceptions will be “BUYS” in any bombed out high-quality single names I can find.
As I have been out of the market, my Global Trading Dispatch has been flat ling at up 15.38% year-to-date and has earned precisely 0% so far in July. My trailing one-year declined to +14.2%.
My ten-year profit fell back to +32.92%. With the markets now in the process of peaking out for the short term I am now 100% in cash with Global Trading Dispatch and 100% cash in the Mad Hedge Tech Letter.
The coming week will be a fairly sedentary one on the data front after last week’s fireworks.
On Monday, July 15 at 9:30 AM EST, New York’s Empire State Manufacturing Index is released.
On Tuesday, July 16 8:30 AM EST, the June US Retail Sales are out.
On Wednesday, July 17 at 8:30 AM EST, June Housing Starts are published.
On Thursday, July 18 at 8:30 AM EST, the Weekly Jobless Claims are printed. We also get the Philadelphia Fed Manufacturing Index.
On Friday, July 19 at 8:30 AM EST, we get the University of Michigan Consumer Sentiment Index. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I am how on my usual summer schedule. I’ll be getting up early every morning to climb an Alpine peak. Then I’ll be riveted to my screen by 3:30 PM when the US markets open, scouring the world for good Trade Alerts.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Market Timing Index
