S&P 500 Weekly Update: The 'Bull' Makes An Appearance As Equities Break Out Of The Trading Range

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Fear & Greed Trader
Summary

Recession talk is ramped up over the latest manufacturing report. Don't over react; we've seen this before.

A tale of two economies - Manufacturing negative, and services positive.

Global economic data shows stabilization with a lean to slight improvement.

Interest rates and geopolitical headlines continue to rule the price action.

"The single greatest challenge you face as an investor is handling the truth about yourself." - Jason Zweig

Is the market going to go up or down? What about the economy? What’s the Fed going to do in the remainder of 2019? Will the administration tone down the rhetoric against China or ramp things up? There is ALWAYS uncertainty when it comes to the market or the economy, but it’s hard to remember a time when uncertainty levels were this high.

Then again it may me more about how investors perceive the situation around them than actual reality. I continue to convey the message that “the worry” should be that we simply talk ourselves into a dire situation. Sound ridiculous?, I think not.

Ever since early August, investors are being whipped around by a series of contradictory tweets, headlines, and "reports". One day the trade war with China is at the point of no return. The next day the two sides are talking. It was only a couple of days ago that a peaceful solution to the protests in Hong Kong was almost out of the question. By Mid week, everything was copacetic as Hong Kong CEO Carrie Lam withdrew the extradition bill that caused all the protests in the first place. On some days, Consumer Confidence, Retail Sales, Jobless Claims, etc suggest that a recession is out of the question, but then the next, reports like the ISM Manufacturing sector fall into negative territory.

Considering the wild volatility in August, the major stock indexes don’t look all that bad. Since Memorial Day, the S&P 500 has rallied over 7% and is on pace to record its fourth consecutive year of positive summer returns, the longest streak over the last 20 years. Yet the "feeling” among investors is the complete opposite of those results.

Market participants are having a difficult time ignoring the many concerns, but I have to wonder how much of that has already been priced in. Market leadership continues to focus on the defensive, as high-beta stocks vs. low beta traded to fresh relative lows early this week and the Dow utility average hit a record high and is stretch to a level that is rarely seen. Since global leading economic indicators peaked in January 2018, the S&P is up 4%, with high beta down 14%, low beta up 14% and the S&P dividend yield higher than the 30-year Treasury bond for the first time since 2009.

The S&P, Dow and Nasdaq are trading above their 200 day moving averages. Those intermediate term trends still look favorable and normal for a bull-market cycle. However, the Russell 2000 and the Dow transports have been trading below their moving averages, denoting a contrast in the marketplace. From a technical perspective we are right back to a glass half full, glass half empty view.

If you were looking for the markets to rip out of the starting gate the first trading day of September, you didn't get it. Market participants had a 3 day weekend to ponder the “issues”, and there was little to get them in a positive frame of mind. Not only were factors like Brexit, trade, and the sluggish global economy weighing on investors on Tuesday morning, but Americans on the entire East Coast were distracted as they were closely monitoring the path of Hurricane Dorian.

So it was back to risk off mode to start the week, the sluggish economic data that was released later in the day served to ramp up the talk of recession. Due to the Labor Day holiday, turnaround Tuesday arrived on Wednesday as the more positive news out of Hong Kong ushered in a sigh of relief, and all was well with traders. The fact that the 2/10 treasury yield curve was no longer inverted also helped with short term sentiment.

The whims in the equity trading world never ceases to amaze. One day the notions to put hedges in place look like the work of a genius, the next, not so much. A headline indicating trade talks between the U.S. and China were on for October sent the indexes higher, once again leaving the skeptics to question their positioning. This stock market is an equal opportunity antagonist. While one tweet can send stocks plummeting, a positive tweet or the 2/10 treasury spread steepening takes the hedging crowd to the cleaners in a matter of hours.

Not many were prepared or positioned for what came next. The sideways trading pattern that kept the market in check during August was been broken to the upside. When the BEARS were unable to take the index below the early August lows, the BULLS came back. For the moment, they seized control of the situation.

The S&P gained 1.8% during the short trading week. The index is holding on to an 18+% gain for the year, and is now less than 2% off the all time highs. The Nasdaq Composite and the Russell 2000 are 2.5% and 6.5% off their respective highs. Given that backdrop the negative outlook surrounding the financial markets remains in place, as some theories are calling for a bear market as the next move in the stock market.

For those that continue to jump to conclusions, obsess over this or that “issue”, this reminder says it all.

“There is a lot to be said for monitor, assess, then reassess.”

Economy

A recent Wall Street Journal Survey of economists reveals the highest recession probability reading ever in the history of the survey

Source: The Wall Street Journal

Other than what has been written here, when was the last time we heard anyone say they don't see a recession on the horizon?

ONE reason recessions come, companies need money and don't have access to it. That clearly is not the case today. Bloomberg reports that a record number of companies borrowed in the U.S. investment-grade bond market this week.

Atlanta Fed's GDPNowcast was trimmed to a 1.46% Q3 growth rate versus the 1.68% from Tuesday. It was over 2% at the end of last week. The revision was the result of the trade data. The nowcast of Q3 real personal consumption expenditures growth and Q3 real nonresidential equipment investment growth decreased from 3.0% and -1.7%, respectively, to 2.8 percent and -2.4 percent, respectively. The nowcast of the contribution of net exports to Q3 real GDP growth decreased from -0.26% to -0.33%. Meanwhile, analysts trimmed our Q3 GDP growth estimate to 2.4% from 2.5%, after the 2.0% Q2 pace (which analysts expect will be revised up to 2.1%).

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index posted 50.3 in August, up from the flash reading of 49.9 but still down slightly from 50.4 in July. As such, the latest reading signaled the least marked improvement in the health of the U.S manufacturing sector since the depths of the financial crisis in September 2009.

Chris Williamson, Chief Business Economist at IHS Markit;

"The August PMI indicates that US manufacturers are enduring a torrid summer, with the main survey gauge down to its lowest since the depths of the financial crisis in 2009. Output and order book indices are both among the lowest seen for a decade, indicating that manufacturing is likely to have again acted as a significant drag on the economy in the third quarter, dampening GDP growth."

“At current levels, the survey indicates that manufacturing production is falling at an annualized rate of approximately 3%. Deteriorating exports are the key to the downturn, with new orders from foreign markets dropping at the fastest rate since 2009. Many companies blame slower global economic growth for weakened order books, but also point the finger at rising trade war tensions and tariffs."

“Hiring has stalled as companies worry about the outlook: optimism about the year ahead is at its lowest since comparable data were first available in 2012. Similarly, price pressures are close to a three year low, as crumbling demand has removed firms’ pricing power."

ISM Manufacturing index dropped 2.1 points to 49.1 in August, weaker than expected, but not a surprise, after slipping 0.5 ticks to 51.2 in July. This is the first time in contraction territory since August 2016, and is the lowest since January 2016. The index was at 60.8 last August, a 14-year high. Every component but supplier delivers is now below the 50 expansion, contraction line.

We saw a similar ISM contraction in November ‘15, January ‘16 and August ‘16, and the economy did not fall into recession. I would advise against completely dismissing the sub-50 reading in the ISM Manufacturing Index for August, but I believe additional perspective argues that it isn't as bad as the market feared at first blush. Were the ISM Manufacturing Index to keep declining or stay below 50 for an extended period of time, that would be one thing, but a single print just modestly below 50 is not a major worry at this point. So let’s keep an open mind and continue to watch the price action of the stock market as our guide.

The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 50.7 in August, down from 53.0 in July and slightly lower than the earlier 'flash' figure of 50.9. Although still signalling a marginal expansion in business activity, the rate of increase was the slowest in the current sequence of growth (beginning in early-2016) and well below the long-run series trend. A number of panelists suggested that a slower rise in new orders held back business activity growth.

Chris Williamson, Chief Business Economist at IHS Markit;

“U.S. businesses reported one of the toughest months since the global financial crisis in August, with growth of output, order books and hiring all slowing amid steep falls in both export and business confidence. Only on two occasions since the global financial crisis have the US PMI surveys recorded a weaker monthly expansion, and these were months in which business was hit by the government shutdown and bad weather in 2013 and 2016 respectively. This time, trade wars and falling exports appear to be the main drivers of weakness, exacerbating fears of a broader economic slowdown both at home and globally."

“At current levels, the August PMI's are indicating annualized GDP growth of 1.0%, putting the economy on course for growth of just below 1.5% in the third quarter. Such weak readings hint at downside risks to current third quarter growth projections, which generally point to an expansion of just over 2%."

“A major factor behind the deterioration was the spreading of the manufacturing downturn to the service sector, via weakened household and business confidence. Jobs growth is also increasingly being affected by worries regarding the outlook. Overall jobs growth in August was the weakest since early 2012, commensurate with non-farm payrolls rising at a monthly rate of under 100,000.”

U.S. construction spending rebounded 0.1% in July following the 0.7% decline in June (revised from -1.3%).

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Non farm labor report revealed a payroll undershoot, but with firm internals that support forecasts of solid growth in the August data. Payrolls rose just 130k after -20k in revisions that clearly under-performed, especially given a 25k boost from Census hiring. Analysts saw a lean 96k private payroll rise after revisions of -35k, and a 34k government job rise after revisions of 15k. Yet, both hours-worked and hourly earnings rose by a sturdy 0.4%, with a rise in the workweek to 34.4. Hours worked in the goods sector rose by 0.6% alongside a largely expected 12k rise for goods sector jobs. Hourly earnings rose 3.2% y/y after hikes in the prior two months that left a 3.3% July rise.

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Global Economy

At 49.5 in August, up slightly from July’s 81 month low of 49.3, the J.P.Morgan Global Manufacturing PMI, a composite index produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM, remained below the neutral 50.0 mark for the fourth month running, its longest sequence in contraction territory since 2012.

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The IHS Markit Eurozone Manufacturing PMI improved on July’s six-and-a-half year low during August, but nonetheless remained well inside contraction territory. Rising from 46.5 in July to a level of 47.0, the index registered its second-lowest reading since April 2013 to indicate another notable deterioration in operating conditions. The PMI has now recorded below the 50.0 no-change mark for seven successive months.

The IHS Markit Eurozone PMI Composite Output Index signaled the continued expansion of the euro area private sector during August. Growth nonetheless remained modest, despite improving slightly since July. After accounting for seasonal factors, the index posted 51.9, compared to 51.5 in the previous month.

Chris Williamson, Chief Business Economist at IHS Markit;

“The eurozone remained mired in a fragile state of weak and unbalanced growth in August. Although up on July, the latest reading indicates that GDP will rise by just 0.2% in the third quarter, assuming no substantial change in September. Official data available so far for the quarter suggest growth could be even weaker. The picture remains very mixed both by sector and country, highlighting how downside risks persist. A fierce manufacturing downturn, fueled by deteriorating exports and most intensely felt in Germany, continues to be offset by resilient growth in the service sector, in turn propped up to a large extent by solid consumer spending in domestic markets."

“The big question is how long this divergence can persist before the weakness of the manufacturing sector spreads to services and households. With jobs growth waning to the slowest since early 2016 a deteriorating labor market looks set to be a key transmission mechanism by which the trade-led downturn infects the wider economy. A sharp drop in business optimism about the coming year in the service sector, down to the joint-lowest for six years, suggests that companies are already braced for tougher times ahead. We therefore expect to see renewed stimulus from the ECB in September as the central bank seeks to revive demand and stem the spreading malaise.”

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China's State Council announced more measures to support its economy, saying it attached "great importance" to the development of sectors such as infrastructure, high-tech, and the transformation of traditional industries.

The headline seasonally adjusted Caixin China Purchasing Managers’ Index, a composite indicator designed to provide a single-figure snapshot of operating conditions in the manufacturing economy, rose from 49.9 in July to 50.4 in August, signalling a renewed improvement in the overall health of the sector. Though only marginal, it was the strongest improvement recorded since March.

The Caixin China Composite PMI data (which covers both manufacturing and services) showed that overall Chinese business activity rose further during August. Though modest, the rate of growth was the quickest recorded since April, with the Composite Output Index rising from 50.9 in July to 51.6.

Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group;

“The Caixin China General Services Business Activity Index rose to 52.1 in August from 51.6 in the previous month, indicating a slight improvement in the services sector. The gauge for new business stayed in expansionary territory and edged up, while the one for new export business dropped, although it remained in positive territory, suggesting that domestic demand was stronger than foreign demand. The employment measure jumped notably, pointing to the sector’s strengthening capability to absorb workers."

“Both gauges for input costs and prices charged by service providers moved further into expansionary territory, implying an enhanced upward trend in prices. The measure for business expectations also stayed in positive territory and moved up, reflecting companies’ increasing confidence in their prospects. The Caixin China Composite Output Index rose to 51.6 in August from 50.9 in the month before, pointing to a slight recovery in China’s economy.

“While the gauge for overall new orders inched up, the one for new export business dipped into contraction territory. The decline in overseas demand reflected the adverse shock of the Sino-U.S. trade conflict. The employment gauge returned to expansionary territory, hitting the highest since January 2015, suggesting an improvement in labor market conditions. Both gauges for input costs and output charges dipped, reflecting a downward trend in overall prices. The measure for future output edged down, despite staying in positive territory, suggesting that business confidence remained subdued."

“China’s economy showed clear signs of a recovery in August, especially in the employment sector. Counter cyclical policies took effect gradually. However, the Sino-U.S. trade conflict remained a drag, and business confidence remained depressed. Still, there’s no need to be too pessimistic about China’s economy, with the launch of a series of policies to promote high-quality growth.”

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The headline Jibun Bank Japan Manufacturing Purchasing Managers’ Index, a composite single-figure indicator of manufacturing performance, was little-changed from July, recording 49.3 (49.4 previously). This was consistent with a contraction in the manufacturing economy and was among the strongest declines seen across the past three years.

The seasonally adjusted Japan Business Activity Index rose to a near two-year high of 53.3 in August. This was up from 51.8 in July, signalling an upward shift in growth momentum in Japan's service sector. By historical standards, the rate of expansion was sharp and a notable improvement from the average seen in the year-to-date.

Commenting on the latest survey results, Joe Hayes, Economist at IHS Markit;

"Japan's service sector shifted up a gear in August, with activity growing at the sharpest rate in nearly two years. At face value, this can be taken as a positive signal ahead of the consumption tax hike staged for October, suggesting that the resilience the domestic market has exhibited in 2019 so far has been sustained into Q3."

"Nevertheless, there were signs to suggest caution, particularly in the forward-looking indicators. The New Order Index fell for a third straight month and pointed to only marginal growth in sales, while optimism towards the future held steady at the subdued level seen in July. "Latest data pointed to a sharper rise in backlogs of work, which will fuel the current activity growth trend, but the New Orders Index has little room left to the downside until outright contraction is signaled."

The AESEAN headline IHS Markit Purchasing Managers’ Index fell further below the 50.0 neutral mark, slipping from 49.5 in July to 48.9 in August and signalling a further deterioration in the health of the ASEAN manufacturing sector, the quickest since late 2015.

Lewis Cooper, Economist at IHS Markit;

"The ASEAN manufacturing sector continued to signal contraction in August, according to the latest PMI survey data. The rate of deterioration quickened to the fastest since November 2015, as falls in new orders and output weighed on the headline figure."

"Notably, there was stark variation between the monitored countries, as Singapore posted the joint-strongest deterioration since this index began in 2012, whilst by comparison, Myanmar signaled a modest improvement in operating conditions. Despite rocky business conditions, manufactures remain broadly optimistic in regard to future output growth, with hopes of improvements in client demand driving positive expectations."

The IHS Markit India Services Business Activity Index declined from 53.8 in July to 52.4 in August, pointing to a slower rate of increase in output. The upturn was modest and below its long-run average. Companies that signaled growth commented on favorable government policies, improved technology and new business gains.

Pollyanna de Lima, Principal Economist at IHS Markit;

"The weaker PMI readings for India's service sector match the trend noted in the manufacturing industry, bringing unwelcome news of a cooling economy halfway through the second quarter of fiscal year 2019/20. Although the two surveys combined point to another round of job gains, a retreat in the rate of employment expansion highlight a wait-and-see approach among businesses who are longing for a meaningful and sustained pick-up in demand growth."

"An important development, however, is evident in a rebound in business sentiment. Both manufacturers and service providers believe that supportive public policies can help shift growth momentum into a higher gear in the coming 12 months."

Falling from 49.8 in July to 49.0 in August, the seasonally adjusted IHS Markit Mexico Manufacturing PMI pointed to an accelerated deterioration in operating conditions that was nevertheless modest. However, the latest PMI reading was the lowest recorded in the near eight-and-a-half-year survey history.

Pollyanna De Lima, Principal Economist at IHS Markit;

"Survey data for August showed that the Mexican manufacturing industry continued to suffer from weakening domestic demand and relatively subdued business sentiment. The latest PMI figure highlighted the fastest deterioration in the health of the sector since data collection started in April 2011, a worrying sign after the official flash GDP print indicated the economy narrowly avoided entering a technical recession in the second quarter."

"The drop in the PMI reflected near survey low readings for factory orders, production, stocks of purchases and employment. In fact, only three of the 14 measures increased from July. One of these was the Input Costs Index, which pointed to the sharpest rate of inflation for seven months. There were two areas of strength, an improvement in trade and an uptick in business sentiment. However, goods producers noted only a marginal rise in exports, while the increase in confidence represented a limited recovery from a substantial dip in optimism during July."

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The more closely one watches the Brexit fiasco unfold, the more confused they become.

First, the UK Parliament voted to have a vote. Then a Tory MP had switched parties, ending the Conservatives’ working majority in Parliament. The vote was to determine whether Parliament would get a vote on a bill preventing the government from undertaking a no deal Brexit. The bid was successful for the opposition, with more than twenty Conservative MP's abandoning PM Boris Johnson. They risked their political careers to do so, as the party had committed to expel any member that didn’t side with whips on the vote.

The anti-no deal bill passed as expected. With PM Boris Johnson’s plans for both no deal Brexit and an election foiled over the last two days (Parliament also voted down an election request) the prospects of a very negative outcome for the UK economy have slid massively over the last couple of days

Stay tuned.

At 47.4 in August, down from 48.0 in July, the U.K. headline seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index fell to its lowest level since July 2012. The downward movement in the headline index was centered on an accelerated contraction in new work, which decreased to the greatest extent in 85 months. Survey data were collected between August 12-27.

Rob Dobson, Director at IHS Markit;

“High levels of economic and political uncertainty alongside ongoing global trade tensions stifled the performance of UK manufacturers in August. Business conditions deteriorated to the greatest extent in seven years, as companies scaled back production in response to the steepest drop in new order intakes since mid 2012. Based on its historical relationship against official ONS data, the latest PMI Output Index is consistent with a quarterly pace of contraction close to 2%. The outlook also weakened as the multiple headwinds buffeting the sector saw business optimism slump to a series-record low.”

“Demand from domestic and export markets both weakened in August, with new export business suffering the sharpest fall in seven years. The global economic slowdown was the main factor weighing on new work received from Europe, the USA and Asia. There was also a further impact from some EU-based clients routing supply chains away from the UK due to Brexit."

“The further downturn in export orders occurred despite a weakening in the sterling exchange at the start of the month. This was felt on the costs front though, with 80% of companies providing a reason for higher purchase prices making at least some reference to the exchange rate. The current high degree of market uncertainty, both at home and abroad, and currency volatility will need to reduce significantly if UK manufacturing is to make any positive strides towards recovery in the coming months.”

IHS Markit/CIPS UK Services PMI Business Activity Index registered 50.6 in August, down from 51.4 in July and signalling only a marginal expansion of service sector output. The index has posted above the 50.0 no change value for five consecutive months, but the latest reading was the lowest since June and well below the long run average (54.9).

Chris Williamson, Chief Business Economist at IHS Markit;

"Business activity in the service sector almost stalled in August as Brexit-related worries escalated, curbing spending by both businesses and consumers. So far this year the services economy has reported its worst performance since 2008, with worrying weakness seen across sectors such as transport, financial services, hotels and restaurants, and business-to-business services."

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IHS Markit Canada Manufacturing Purchasing Managers’ Index fell to 49.1 in August, from 50.2 in July. The latest PMI reading was the lowest for three months and signaled a modest downturn in overall manufacturing performance.

Tim Moore, Economics Associate Director at IHS Markit;

"Canadian manufacturers reported a setback for business conditions in August, following the slight improvement seen during the previous month. New orders declined at the fastest pace for more than three-and-a-half years amid lower export sales, weakness in the automotive sector and reports citing softer demand from energy sector clients."

"August data also signaled a slide in growth projections across the manufacturing sector, with business optimism falling to its lowest level since early-2016. Concerns about the US-China trade war and rising global economic uncertainty were often cited by survey respondents."

Canada’s economy posted a job surge last month of 81,100 net new positions, the bulk of which were part time in the services sector.

Statistics Canada says that even with the increase, the August unemployment rate stayed at 5.7 per cent, near a four-decade low, as more people looked for work.

Earnings Observations

There have been plenty of reasons to fear a slump in profits lately; supply chain disruptions, export bans, rising labor costs, slower global growth, Brexit. Yet the US corporate sector appears to be weathering the storm reasonably well. Despite increased risks brought on by negative trade shocks, 1-year forward S&P earnings growth estimates have remained stable at about $170- $172.

During the first two months of the third quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates of all the companies in the index for the third quarter) dropped by 3.0% (to $41.64 from $42.90) during this period. That is right in line with the past fifteen years, where the average decline in the bottom up EPS estimate during the first two months of a quarter has been 3.1%

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The Political Scene

As announced last weekend, the Trump administration imposed tariffs on roughly $110 billion in Chinese imports. The 15% duty hits consumer goods ranging from footwear and apparel to home textiles and certain technology products.

In retaliation, China imposed extra 5% and 10% tariffs on some American goods, including U.S. crude oil, marking the first time the commodity has been targeted since the trade skirmish started more than a year ago.

China's Ministry of Commerce says leaders of the U.S. and Chinese trade talks held a phone call and agreed to meet early next month in Washington, D.C., for another round of negotiations.

Liu He, China's top negotiator on trade, spoke with U.S. Trade Representative Lighthizer and Treasury Secretary Mnuchin, according to a statement from the Commerce Ministry.

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The Fed

Fed's Beige Book reiterated the economy expanded at a modest pace through August. The majority of businesses remained optimistic over the near term even as trade and tariff uncertainties continued. Reports on consumer spending were mixed, but auto sales generally grew modestly. Manufacturing was down slightly. Transportation activity softened, with some of it a function of slowing global demand and heightened trade tensions. Home sales remained constrained in the majority of Districts due to low inventories. Activity in the service sector was generally seen positive.

Employment grew modestly, on par with the prior report. Job growth varied by industry. Staffing agencies reported tightness across various labor market segments. There was strong upward pressure on pay for entry level and low skilled workers. There were modest increases in prices, on net, versus the prior report. Retailers and manufacturers in some Districts reported slight increases in input costs.

While there was some ability to pass on price increases, manufacturers said they had limited ability. Reports on the impacts of tariffs were mixed, with some Districts anticipating the effects would not be felt for a few months. There wasn't anything in the report (compiled by the Atlanta Fed with data on or before August 23) that would signal the need to cut rates again later this month. But then again, the FOMC isn't really conducting policy on what the U.S. data is saying about the economy.

The 3-month/10-year Treasury curve inverted on May 23rd, and other than a brief one-day change, that curve remains inverted. After a long wait, the 2/10 year U.S. Treasury Yield Curve inverted on August 27th, and remained in that condition for 3 days.

For some that means the countdown clock has started for a recession, and “the” cycle peak in the S&P 500. I am not in that camp for the reason stated last week.

"I’d be more concerned if the yield curve is inverted by about 25 to 50 basis points for the next 30-60 days."

Source: U.S. Dept. Of The Treasury

The 2-10 spread started the year at 16 basis points; it stands at 2 basis points today.

The irony of the interest rate scene in 2019 is astonishing. Late 2018 and early 2019, investors were contemplating and anguishing over three rate hikes. Now we are looking at the possibility of three rate cuts in the year. Another example of why its is best not to make premature portfolio changes based on what you think may develop. And why obsessing over every word the Fed utters is a fool's errand.

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Sentiment

Bullish investor sentiment as measured by AAII's sentiment survey rose 2.5 percentage points to 28.6% this week.

Source: AAII

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Crude Oil

The weekly inventory report showed that crude oil inventories decreased by 4.8 million barrels from the previous week. That brings the two week decline 10 14.8 million. At 423.0 million barrels, U.S. crude oil inventories are at the five year average for this time of year. Total motor gasoline inventories decreased by 2.4 million barrels last week and are about 3% above the five year average for this time of year

The debate rages on, we are going into a global recession, we aren't going into a global recession. WTI held steady and closed the week at $56.73, up $1.83.

The chart posted below is hinting that the price of WTI may be ready to break the downtrend that has been in place since April.

Source: Bespoke

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The Technical Picture

While the S&P has been range bound, not so for the Advance/Decline line. It has powered higher as the market consolidates and that is a very big positive that not many are talking about. The Cumulative Advance/Decline line continued to post all time highs this trading week as the market moved higher.

Since the start of August, the S&P 500 has seen a series of eleven different rallies ranging between 1% and 4%. In between each of those rallies, though, we have seen ten different declines in the range of between 1% and 4% as well. With all the ups and downs, the S&P 500 finds itself now trading just above the level that capped all of the prior rallies.

Source: Bespoke

All of that changed this week as the S&P not only closed above 2930, but also above another important demarcation line, S&P 2950.

Chart courtesy of FreeStockCharts.com

As the DAILY chart of the S&P indicates, the index is now back above what many thought would be insurmountable resistance as bearish calls were ramped up. For now the make or break moment for stocks has been resolved in a positive fashion.

No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.

Short term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short term view. These views contain a lot of noise, and will lead an investor into whipsaw action that tends to detract from overall performance.

Over the last two months evidence has been presented to demonstrate how market participants are defensively positioned today. The trend has been to pile into treasuries, the defensive sectors of the stock market, gold, and silver. These trends have ALL taken on a parabolic look.

The message to my subscribers since late July has been a warning that it could be extremely dangerous to over allocate to the bond side of the equation. When speaking to portfolio changes, the message presented here has been very clear. It is ALWAYS best to proceed slowly when making major allocation shifts in your portfolio.

When these trades unwind they can and often will be very powerful. We may be seeing the start of that move now and investors may well be shocked when they start looking at the results.

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Market Skeptics

Ray Dalio is back with another warning for investors as he envisions an economic scene comparable to the 1930’s depression era.

Mr. Dalio has a penchant for these types of warnings, he saw trouble coming in 2013. He also saw a 1937 rate risk back in 2015. 2017 brought yet another warning missive from the hedge fund guru, when he compared that time period to one that occurred just before WWII.

This gentleman may be one of the smartest investors out there, but I’m sorry, following these eye opening observations are the height of absurdity.

Then again, maybe he will FINALLY be right THIS time. I'll let each decide for themselves.

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I heard a couple of interesting comments from "on air" analysts this past week. The first posed this question;

“Is this an environment where you want to own stocks?”

The second individual stated his theory that the recent market price action was the first step in a steeper correction, and he asked;

“With all of the issues, why would anyone want to be a hero now and own equities?”

That seems to fit with the general financial narrative lately. However, I do know one thing, I never heard any of that type of commentary at market tops.

In my view most news outlets these days are totally ignoring the positives. When everything is negative, perception and reality move further apart. Most readers would have to admit this obsession with negativity by the media isn’t a plus for the economy and the market.

The constant talk of recession by the mainstream financial media at some point may start to have some impact on the U.S. consumer. A self inflicted situation where we literally destroy the confidence that has been built up, and talk ourselves into a recession.

As mentioned last week;

“This psychological impact is the real threat.”

Therein lies the issue that could begin to challenge the Bull market thesis. The reality of the situation as shown by the ALL of the recent data does NOT suggest an imminent recession. The perception of what is about to befall the economy is a whole different story. If the economic data here in the U.S. continues it be resilient, at some point the light may go on, reality takes over, and the bull market rolls on. The market skeptics have an entirely different view of the situation. Their story continues to be;

“This has been a long bull market, trees don't grow to the sky, a recession is right around the corner.”

They believe their time has come. Last week I showed how more and more are joining the Bear market camp. Not many believe in the latest rally. Emotion rules now and logic takes a back seat.

I remind everyone to remember the lessons learned in 2015/ 2016, and again in 2018. Savvy investors took that lesson and learned not to overreact. Many in the financial community continue to make the same mistake over and over. The handwriting is on the wall, financial analysts, investors, and the media are radically over focused on the “issues“ at hand, and that type of obsessive thinking rarely produces positive results.

Instead the message here has been simple and crystal clear;

“When the LT trend is broken and folds, that is when this Bull market will be over.”

Citing the multitude of reasons why stocks can’t be trusted, why this isn't an environment to own stocks, why an investor HAS to be defensive, are all examples of emotionally charged thinking.

Monitor, assess, then reassess. Following that strategy has kept me “long” equities with no hedges in place. Those that have followed along are the only investors in the pilot's seat. Stay the course.

I would also like to take a moment and remind all of the readers of an important issue. In these types of forums readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.

Thank you #2.jpg to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to All !

Disclosure: I am/we are long I AM LONG EVERY STOCK/ETF IN ALL OF THE SAVVY PLAYBOOKS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.

This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me. Of course, it is not suited for everyone, as there are far too many variables. Hopefully it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control.

The opinions rendered here, are just that – opinions – and along with positions can change at any time.

As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.