This week we continued to see the global economy struggle with Italy headed into recession. Could this be what the Federal Reserve saw late in 2018? A global recession would have a negative effect here in the US. If a global recession is on the horizon then the tightening cycle from the Federal Reserve has ended and the next move may actually be to cut rates. If that is the case the stock market would suffer. Also suffering would be the US Dollar while the beneficiaries would be gold, emerging markets and exports from the US. As for the stock market, history shows us that when the Federal Reserve makes the first rate cut after a tightening cycle the stock market heads south. The market anticipates trouble as the Federal Reserve begins to try and soften the blow of a recession with lower rates.
The S&P 500 ran into resistance this week at its 200 DMA. Markets are overbought and there seems no stopping this market. A downside move early next week would give the bulls pause. The bears may be emboldened by the clear resistance areas we have reached. The bears tried to roll the market over last week to no avail. Let's see if they give it another go. If the bears fail and the bulls take the ball traders will be forced to cover sending the market to 2800.
At these clear resistance areas, we are looking at the underpinnings of the market for some clues. We see the yield on the 10-year continuing to fall which is a negative for the bulls. We also see market leader Amazon (NASDAQ:AMZN) struggle as Jeff Bezos' marriage hits the rocks. Probably even more disconcerting was the struggle last week for Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) and JPMorgan (NYSE:JPM). The leadership from Berkshire and JPMorgan is very important. We do not think that the market can rally without their participation. Keep an eye on those two and Amazon as well. We have taken some risk off of the table in stocks and have added duration in bonds over the last three weeks. We would love to see a move lower in stocks and a chance to make some purchases at discount prices. February 20th is a big day for the balance sheet of the Federal Reserve as about $30 billion is due to come out of the system. Mark your calendar.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.