Market Direction Mid Week Update©

Market Direction: BEARISH alert issued 10/11/2018

Market movers as this year comes to an end...

It’s been a decent year for U.S. stocks. At current levels, the S & P 500 is up almost 8 percent even after digesting the nasty volatility experienced in January and February. The most prominent theme has been a positive earnings picture against the backdrop of a solid economic expansion. These gains have been particularly impressive in that they have been in the face of a long overdue increase in interest rates.

This rally has room to run. I don’t, however, believe that the rest of the year will be without speed bumps. There are a few dates that should be circled on the calendar as potential triggers for increased volatility.  So, without further delay and in order of importance here we go.

FOMC meeting on December 19. The single biggest threat to the stock market is an over-aggressive Fed. I’m becoming concerned that the previous seven rate hikes have made the Fed confident in the market’s ability to adjust to the new rate world.  If that confidence morphs into overconfidence the door could be open to over-aggressive policy mistakes. Pay close attention to the dot plot projections for signals that they are accelerating plans for restrictive policy.

Earnings on October 25 and November 1. In the last few months FAANG stocks have been reduced to AGA as Facebook has fallen out of favor and Netflix has taken some significant punches. The stalwarts that remain are Amazon, Google and Apple. The first two report on October 25 followed by Apple on November 1.  If any of these three names report disastrous earnings it could easily cause greater market stress.  Of course, this news on its own shouldn’t start a correction but once a market is nudged lower market position and complacency can easily exaggerate the move.

The election on November 6. I don’t believe it’s a political opinion to suggest that the market has grown fond of tax cuts and deregulation. My guess is that the market wants more of the same or at least reasonable assurance that the progress made so far won’t be walked back.  Oddly, I think the surprise on this one is that the market favors the election outcome and there is a resultant rally.

Of course, there is one more shadow lurking that, unfortunately, can’t be tied to a date and that’s an escalation of the trade dispute. To this point, any tariff-related saber rattling has ended, oddly, in a continuation of the equity rally. I’m not sure that the past positive reactions can continue for much longer. Despite these risks, my belief is that the rally forges ahead and that S&P futures close the year north of 3000.

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The all-time lows since our initial recommendation to go SHORT this market. Here is how the markets have performed:

Stock Market Direction Recommendation (10/11/2018)
Dow	down 52.00 points a 0.21% gain	10/12/18
Nasdaq	up 39.27 points a 0.54% gain	10/12/18
S&P 500	up 1.09 points a 0.04% gain	10/12/18

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