The Phantom Zone

A choppy week in stock markets that ended on a positive note when JP Morgan rallied markets on Friday morning with a positive earnings beat. Bonds yields also moved higher (a good signal for stocks) leaving the market in a grey area of which direction will be the next “big” move.

The S&P 500 closed in the Phantom Zone between the January 2018 high and the all-time high from last September as you will see below. This zone should have stiff resistance as fundamentals have weakened since the last visit. You will also see that an “ending diagonal” appears to be forming that could terminate near the all-time highs. However, this pattern ends with a quick return to the origin or 2,700 in the chart so caution is warranted until this pattern is broken with a move above the upper trend-line.

SPX is the S&P 500 Index

Now, we wait. If the technicals are more bullish than the chart suggests, there will be a breakout into new all-time highs that could last several months. However, this scenario would likely push the market into a blow-off top scenario that could end the bull market. If the diagonal pattern proves correct then we will see a test of where the market will provide support that gives confidence that a longer-term low was formed in December.

Chart of the Week!

Where is China?

Economic & Central Banking Snippets 

  • The Fed released the minutes from their last meeting which sent a mixed message to the markets. On the hawkish side, the minutes said that most participants expected Q1 economic weakness to reverse later this year, and a few participants noted that the lower-for-longer rate environment could pose financial stability risks. A split decision if you ask me – the Fed is wrestling with what to do next. For now, it will be nothing.
  • European Central Bank President Mario Draghi struck a downbeat tone this week. “The risks surrounding the euro area growth outlook remain tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets,” Mr Draghi said on Wednesday, after the central bank had earlier kept its benchmark refinancing rate at zero. (FT)
  • German exports declined in February by 1.3% m/o/m, more than the estimate of a drop of .5%. A sign of weakness for this export country?
  • The global economy has slowed sharply since last summer and will rely on a “precarious” boost from a few emerging markets to reverse the loss of momentum, the IMF has predicted in its latest economic forecast. Cutting its outlook for 2019 and 2020, the fund judged that advanced economies would “continue to slow gradually” into next year.
  • The March CPI rose by 1.9% verses last year while the core rate is higher by 2% – the 13th straight month running 2% or higher.
  • The March PPI (Producer Price Index) jumped .6% m/o/m, double the estimate and which brought the y/o/y gain to 2.2%. This is noteworthy as an overheating PPI means margins may get squeezed if companies can’t pass through costs to customers. An almost 6% spike in energy prices was the main reason for the upside. This reading makes 20 months in a row of core PPI at 2% or higher.
  • Initial jobless claims came in at 196k which is the lowest reading since 1969. This ultra-low reading reflects a tight labor market.

Macro Snippets

  • The 4Q market turmoil should be viewed as a harbinger of the next downturn, warns JPMorgan CEO Jamie Dimon in his annual letter. Dimon says the swings in volatility and drop in liquidity was mostly an overreaction. But he warns it’ll keep happening–it’s a “new normal”–and it’ll be worse when there’s a real crisis. He has two points on liquidity: trading and lending. On trading, banks aren’t providing liquidity because of regulation and the high-frequency traders that are providing it seem to be exacerbating volatility during stresses. On lending, he says bank regulation may force banks more to sidelines instead of using the capital they are stocking for crises, pointing to dried-up bond and IPO offerings. (WSJ)
  • Wall Street firms are lowering their forecasts for U.S. government bond yields, the latest sign of investors’ mounting worries about slowing economic growth. HSBC now predicts the yield on the benchmark 10-year Treasury note will end the year at 2.1%, down from an earlier forecast of 2.5%. UBS lowered its forecast to 2.8% from 3.2%, Goldman Sachs to 2.8% from 3% and JPMorgan Chase to 2.75% from 2.9%. Tepid reports on the economy “have left investors relatively skeptical about the notion that growth will rebound later this year,” JPMorgan analysts wrote.  
TNX is the index of the 10YR Treasury Yield
  • Fiat Chrysler Automobiles NV plans to count Tesla electric cars as part of its fleet to avoid significant fines for violating stricter European Union emissions rules. The Italian-American car maker will pool its fleet with Tesla that would allow Fiat to offset its vehicles’ carbon-dioxide emissions to meet EU emissions targets. Separately, Fiat agreed to pay $110 million to settle a lawsuit alleging that the auto maker misled U.S. investors regarding safety concerns and excess diesel emissions, according to court documents. (WSJ)
  • House flipping returns to pre-crisis levels. Speculators flipping homes are making bigger and steadier profits—a sign that the risky business of buying and quickly re-selling houses is drawing more sophisticated traders. (WSJ)
  • China’s state planner has labeled Bitcoin mining as an “undesirable” industry in a draft proposal, recommending local governments eliminate the sector in the country. (Seeking Alpha)
  • Venezuela oil production collapsed in March, down 289kb/d to 732kb/d in March from 1,021kb/d. This has the potential to tighten supply and keep a bid under the price of oil.
  • Bloomberg is reporting that Amazon has thousands of workers around the world who listen to and review private Alexa conversations. The recordings are transcribed, annotated and then fed back into the software as part of an effort to eliminate gaps in Alexa’s understanding of human speech and help it better respond to commands. Amazon has never publicly disclosed the role of the group or that human interference is part of Alexa’s voice technology.
  • Tesla and Panasonic are suspending plans to expand the capacity of their $4.5B U.S. plant in the face of uncertain demand for electric vehicles, the Nikkei reports. The two had intended to raise capacity 50% by 2020 to the equivalent of 54 gigawatt-hours, but financial problems forced a re-think. Panasonic also intends to suspend planned investment in Tesla’s battery and EV plant in Shanghai, and instead provide technical support and a small number of batteries from the existing Gigafactory. (Seeking Alpha)
  • Opec’s supply cuts and involuntary declines from Venezuela and Iran have pushed the oil market into a deficit, the cartel said on Wednesday, with supply now running below the group’s estimated demand for its crude.

That is all for now until next week’s Market Update.

Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client. 

Regards,

Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.

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