It is pretty clear - in spite of threats of tariffs with China, in spite of threats of U.S. missile attacks in Syria, in spite of a long list of worries - that the financial powers are supporting stock prices going into the corporate earnings announcements that began Friday, as we head into the April 15th Tax Day weekend.
Consequently, the major indexes are now challenging resistance levels again near the 50-day moving averages in this enormous series of volatile whipsaws between resistance and primary support levels.
The descending triangle is a bearish formation that forms during a downtrend (top in January) as a continuation pattern. Descending triangles indicate distribution. Historically, these descending triangles tend to last about one to three months and are then followed by another severe selling down leg.
With the Fed actively working to slow down the economy and a technical descending triangle for the major indexes, we retain our bearish bias.
What we learned from the Fed minutes Wednesday is that the Fed is planning on raising interest rates until we see a slowdown in the economy. In fact, the Fed is leaning towards faster rate hikes, as the trade war poses risks, according to Bloomberg!
With the investment bankers driving up oil prices, inflation is now running hot again. As reported yesterday, core inflation came in at 0.2%, but the year-over-year trend jumped to 2.1% from 1.8% in February and higher oil prices now are only going to fan more inflation.
According to the Federal Reserve Bank of New York, a full data set measure of inflation is at 3.14%! As structured and planned, this gives the Fed the perfect excuse to bring on the next recession. After the recent Fed minutes, there is a 92.7% probability of the next rate hike at the June 13th FOMC meeting.
In the meantime, the bond market is signaling real problems for the economy.
We've had six interest rate hikes in a row and more promised and that is beginning to take its toll on both the stock market and the bond market.
We learned in the last few days that the one-month U.S. overnight indexed swap (OIS) rate (that is traded in the forward market two years into the future) is above that seen in the three years from now.
This OIS inversion has happened only three times in 20 years and this is telling us, otherwise foreshadowing, the same for the 2- and 10-year note yields.
JP Morgan explained "An inversion at the front end of the U.S. curve is a significant market development, not least because it occurs rather rarely... It is also generally perceived as a bad omen for risky markets."
The yield spread between the 2-year Treasury note and the 10-year Treasury note continues to flatten.
The difference is about half a percent. This is not enough profit margin for banks to lend money on cars, for example.
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Since 1960, there have been 11 significant periods where passenger vehicle registration growth was less than zero, nine of which were leading indicators of an approaching recession.
A number of leading subprime lenders have not only quit lending on automobiles, they are going bankrupt as defaults soar. For example, Summit Financial Corp, Spring Tree Lending, and Pelican Auto Finance have either collapsed into bankruptcy or have shut down.
Bloomberg noted that as of the end of September, there were about $280 billion of subprime auto loans outstanding, according to the Federal Reserve Bank of New York, compared to around $1.3 trillion in subprime mortgage debt at the start of 2007.
I think the real focus will come next week when we see whether the stock market wants to rally and hold above the 50-day moving averages with the beginning of the earnings season or use this as another selling episode as the Fed drains $30 billion in liquidity from the markets.
When yields invert, banks no longer have a profit motive and quit lending. This is how the Fed takes the punch bowl away from the party!
We are being prepared for the next recession if not the next big depression!
In the meantime, global profits are being slashed. U.S. corporations are cutting dividends.
If profits are as healthy as forecasted, why are global profits plummeting and U.S. corporations cutting dividends, unless they are beginning to hunker down?
U.S. growth and profits seem to be peaking, while inflation is motivating further rate hikes, forming the basis for caution as the stock market remains in a bearish formation.
If we breach the 200-day moving averages on the downside, I think 21,000 on the Dow 30 index can't be ruled out, as stocks break down through primary support, and are followed by another major selling wave.
To your wealth,
Dennis SlothowerEditor, Stealth Stocks Daily Alert and Wall Street's Underground Profits
Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.