The stock market fell sharply again on Thursday, unable to mount a sustainable rally when a combination of bearish news fell upon the market. Friday trading couldn't make up for the downward trend.
The Federal Reserve's FOMC minutes were released, which left no doubt that the Fed is preparing for another rate hike and that it won't be swayed by criticism from President Trump, who has said the Fed is moving "too fast" in its tightening policy, threatening the health of the economy. If anything, the Fed appears increasingly hawkish as we get closer to the midterm elections, and institutions are taking action, becoming increasingly more defensive.
Notice what is happening to the new low vs. new high ratio of the NYSE.
New lows are swamping new highs under very bearish conditions. This indicates that technical damage is severe. As long as this ratio favors new lows over new highs, the bears are in control of market conditions.
The Fed minutes had a very negative impact on the global markets as well, with China falling to a new four-year low - which pushed the U.S. dollar higher but also knocked down U.S. government bonds, driving yields higher, something stocks hate to see right now.
As more companies report earnings, it is clear that peak growth and peak earnings are now behind us.
Notice that peak earnings occurred about the same time as oil prices maxed out in late June. But growth is certainly slowing from peak growth in the second quarter.
I don't see this getting better with higher interest rates and higher tariffs on the way, so this is why institutions are unloading now.
The stock market may still try and rally next week, but its technical underpinnings are breaking down, making each rally attempt an opportunity for further selling.
Wednesday's global news was an eye opener coming out of Europe when it was reported that European car sales plunged 23%.
Europe's biggest auto companies came to Brussels on Wednesday to issue a blunt warning against a no-deal Brexit, just as EU leaders were to meet to break an impasse in divorce talks with Britain.
Companies like Volkswagen, BMW, Renault, and PSA are dependent on highly integrated production lines, where millions of car parts and components arrive on time to factories across the EU, but they now face a series of blockages, including hold-ups at new checkpoints, if there is a "no-deal" Brexit and Great Britain wants out of the EU.
This is why Italy's financial problems are such a threat to the EU, which puts an even greater strain on the stronger nations within the EU. The EU announced on Wednesday that it would not accept Italy's proposed budget!
In the meantime, President Trump is still threatening the EU with tariffs on European cars if the EU doesn't abandon its tariffs on imported U.S. cars. This might force the EU to drop its tariffs on U.S.-made cars.
The EU Stoxx 600 Autos has been getting smashed all this year.
However, it isn't just the European autos getting hurt. The U.S. auto sector has tumbled to its lowest level in six years as interest rates continue to rise. The key point is that the two largest expenditures people have are on automobiles and rents/mortgages.
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We also learned on Wednesday that housing starts declined 5.3% in September, with the key takeaway being that the supply of low-cost homes isn't picking up fast enough to meet the demand for "affordable" housing, and this puts pressure on rents.
Housing is a monthly payment process, so when you go from 3% to 5% mortgage rates, it puts tremendous stress on the housing market and will in time induce a strong downturn in housing. Refinancing is down -34% YTD 2018! No one wants to refinance at a higher interest rate... and this is the ticking time bomb for corporations, whose corporate debt is coming due at higher interest rates.
Naturally, the president wants to keep interest rates low, but it's not up to him. The president said the Fed is doing what it thinks is necessary, but he doesn't like what they are doing, being so tight!
The president knew before he was elected what the Fed was about to do with interest rates (he knows the history of the Fed with Republican presidents), and it is getting close to crunch time - so the president is starting to blame the Fed. We've just ended the longest period of easy money in U.S. history. Now the Fed wants to induce an economic slowdown!
In other news on Wednesday, President Trump announced plans to withdraw from a 144-year-old postal treaty that has allowed Chinese companies to ship small packages to the United States at a steeply discounted rate, undercutting American competitors and flooding the market with cheap consumer goods.
Keep in mind, we are in an economic war that stems from both Russia and China moving away from the petrodollar, and the president is going to make buying Chinese goods expensive over buying American goods. It is all about economic competition and not strengthening China, who is looking to displace the U.S. as the world's largest economic power.
The third quarter will post a GDP of 2.75% to 3.50%, but this is a slower pace than the second quarter. Then look for a sharply reduced GDP in the fourth quarter, perhaps down to 1%. This is why institutions are bailing out of the market now.
The stock market wants to get the bulls going again, but without the institutions participating, a bearish formation will develop.
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.