Hey everyone, we are now into the first full week in June and we have kicked off the month in complete opposite fashion in how we kicked off the Month of May! After suffering consecutive down weeks for all major indexes we quickly reversed course this week, mostly on news the FEDs are now “considering” rate cuts near term and on the rumor (which is now a fact according to a Trump Tweet Friday after markets closed) of a done deal with Mexico; –there will be no 5% tariffs after an agreement has been reached around ways to control the US-Mexican Border. This is like candy to the markets and price action and as we saw, all indexes ripped higher this past week.
Weekly Sound Bites:
• First it was the twist, then bee bop quickly morphing into the electric slide which fast became break dancing and hip hop on towards twerking and now the current financial markets gives us a newer modern version I call the Algo Dance! The markets extreme anxiety to Rumors, Headline News (mostly more rumors) and Tweets is sweet music to the Algo Dance…with each new note, the Algo Dance performs its magic moving markets intraday up or down the price spectrum leveraging any bit of edge necessary to capture first mover advantage; or, perhaps just as important, to act as a hedge against larger more stable positions…and of course the day trader or what I commonly call the Rat Brain Trader (most retail traders) sees their profits disappear in the time it takes to finish an order of Big Mac and Fries…and as we move closer to the 2020 election we will see even more movement across sectors and various asset classes depending upon the odds of Trump staying in office or a Democrat take over…so we can expect surprising Volatility events to always be just around the corner for the foreseeable future…
• From an economic data perspective, we did see some good news on Household Income; –the net worth rose 4.5% to a record in Q1 this year…and now the richest 10% now controls about 70% of US Wealth; -up from 60% at the turn of the Century…On the other side of the ledger we’re seeing a slowdown in manufacturing but still expansionary, very strong labor markets and employment levels at 50 year lows…all of this under the very low inflationary targets of 2% and interest rates at lows not seen since 2017….
• I have told our User Group members we can expect a very interesting month of June…I had mentioned before the month kicked off it could be the June Boom or the June Swoon…now that we have the Mexican Tariffs called off and behind us, the only other key event will be the meeting between Trump and Xi the end of this month at the G20 summit in Osaka, Japan. Should both these leaders agree to move forward in a more constructive tone, we’ll expect price action to move up and beyond current all-time highs…
• And about interest rates and the FEDs…they currently find themselves in a pickle…cut rates as the markets current forecast (over 90% for at least one cut but over 50% for two rate cuts) or stand down and “remain patient”….keep in mind the markets have essentially already priced in at least one rate cut and partially a second one before the end of this year. Markets will be looking for more clarity from the FEDs at this upcoming FED meeting for June in a few weeks…should the FEDs keep the “remain patient” language markets may sell off a bit more…we’ll see
• And finally, as I have told our members for years now, the markets and price action is all about math…Price is a function of Corporate Earnings and Interest Rates…currently the S&P is expected to report earnings of about $168.01 in 2019 which is up 3.1% from 2018…And the consensus estimate for 2020 is about $186.52…And if we simply divide the latest price by these Earnings Estimates we get a forward PE Ratio of 15.4…Trying to figure out forward earnings estimates with a Chinese Trade War on the horizon makes this a rather difficult exercise which is why markets have been so keen to do the Algo Dance on Rumors, Tweets and Headline News…also note that should interest rates stay where they are, or, go even lower this also has the effect of expanding PE multiples which then suggests price action still has room to run higher over thru 2020….but a good deal of the Earnings Estimates depends upon what Trump and Xi will or will not agree to; –all in all, expect sudden Volatility shocks to the system.
Enjoy this Weekly Round-Up Video;
Don’t Be A Rat Brain Trader – Be the Red Striped Zebra !!
Trade Smart !!