Tuesday, October 23, 2018

Market Alert - Pre-Market

Futures vs FV: SP -43.93; DJ -448.41; NADSAQ -131.96

Tuesday is showing the day we wanted Monday to show, i.e. a continued selloff without any upside. Monday we noted it was not the best scenario, and it has led to today with a dive on the open. Perhaps this will set that October bottom. Perhaps. It all depends how it comes out in the wash, as in wash out.

VIX is going to surge, just as it pattern suggested. The VIX is working as it should in terms of market moves. The early year high was near 50, 25 points higher than the recent highs. It looks as if VIX will finally be moving where it needs to move.

Earnings are not bad but some big industrials are talking rising costs, e.g. CAT. That is being blamed for the monkey hammer taken to stocks.

Beats: MCD; CAT (but lower guidance on increased costs); UTX; HOG; VZ; PHM; AMTD; ZION; LMT (Increased guidance)

Misses: MMM (TL, BL)

CAT, MMM = -150 DJ30 points. CAT, MMM, BA, AAPL, GS = -250 DJ30 points

MCD, VZ: these are some of the few that are higher. These are considered 'recession' stocks as some call them.

Other economics evidence being reported: Z says rents have declined the past 6 months.

Auto dealers are reporting notable declines in sales.

This on top of rising costs associated with taking on China, just as when Reagan took on the USSR. A cost of doing what has to be done.

So . . . what do you say now Mr. Powell? THIS is where his Phillips Curve fails. He will think that in slowing the economy he will avoid inflation, but it is the VERY slowing of the production/supply side that will CAUSE the inflation. They will make less, and there is a lag between demand slowing following supply slowing -- that is called recession, i.e. when demand realizes things are bad and consumers start fearing for their jobs, etc. THEN they slow consumption, but that is after inflation kicks in.

The Phillips Curve does not make that correlation to the real world history and contemporaneous data, and thus the Fed keeps on hiking into recession. That is its way of beating inflation: smashing everything with a sledgehammer instead of realizing the correlations and acting to counteract its caveman like, hit it with a club and see what happens Fed style.

It DOES matter, and the Fed just does not use the right tools and gauges to see the picture.

Bonds: 3.143% vs 3.20%

EUR/USD: 1.1469 VS 1.1454

USD/JPY: 112.17 vs 112.80

Oil: 68.8, -1.18

Gold: 1240.70, +16.10

Thus, stocks have these massive hiccups when the unwind of the Fed's meddling takes place. Sure some are now saying this, THIS is the great unwind of the policies from 2008, 2000+, 1990's -- all the Fed-aided debt financing. Doubt it. This is an October drop with overlays of trade, Fed, elections. If it is elections, it is not over. Will the market correctly predict the outcome? It is falling right now because 1) it cannot at this point predict, and 2) what it does see it does not like because it would mean losing the House and thus any chance of more tax and other reform.

Accordingly, the sharp drop. The indices will be testing the prior lows and more -- some are already there. Thus the rally attempt the past two weeks will be wiped out and starting over -- at some point. That is not bad. Many stocks have already sold and they could use the selling to work on bases. We simply have to see how they react to the sharp selling pressure and which ones hold up.

Gold is jumping and we will try to get some more of the gold positions we are looking at. Telecom looks as if it can rise as well (VZ earnings helping).

Jon Johnson, Chief Market Strategist

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