Futures Market Insight w/ John Caruso - 10/15/2018

October 15, 2018 7:56AM CDT

Bull and Bear MarketIdentifying “Late Cycle” Market Behavior:

For those that have been trading off of my professional trade desk, know full well we’ve been making this call of “late cycle” economic behavior, and had warned repeatedly since late August/September that we felt a storm was brewing on Wall Street headed into the Q4 of 2018. With that in mind, we do expect an attempt at a rally in stocks this week, however I do not believe the correction phase is over by any stretch of the imagination. As many of our professional level traders know, markets are often forward looking mechanisms and have the tendency to “front run” market cycles (and even FOMC Policy) before any such data may be evident to support the trading environment. Remember, economic data that is being reported on a daily basis not only here in the US but around the World, is yesterday’s new. The data that the US is receiving now, is Q3 and even Q2 data! For example, the illustrious 4.2% GDP number that everybody has been beating there chest about for the past 2 months, happened back in Q2 ’18 or April thru June. Aka it’s old news. As aforementioned, markets are forward looking mechanisms, and the data you see released today, is likely already priced in. The model in which we track compares year over year data with real-time market data, and is able to determine percentage based probable outcomes on a forward looking basis about the direction of growth and inflation and whether its expected to rise or slow in the future on a q/q and more importantly y/y basis. What we’ve been able to determine is that much of what we’ve seen is very consistent with “late economic cycle” behavior. Here are some classic noteworthy indicators:

  1. Tight labor market conditions
    • -sub 4% unemployment for an extended period
    • -rising wages (almost always a late cycle indicator)
  2. Increase in inflation expectations 
    • -higher energy costs via Oil, Gasoline, Natural Gas
    • -usually coincides with rising wages for workers
  3. Consistent record breaking equity valuation
    • -not always a late cycle indicator of course, but coupled with the aforementioned bullet points, a case could certainly be made.
  4. Restrictive or Hawkish Fed Monetary Policy
    • -the FED has been hawkish for the better part of 3yrs now, but just recently they've removed "accommodative" from their most recent FOMC statement when describing policy relating to the economy. Furthermore, Jerome Powell made a very aggressive comment 2 weeks ago mentioning that the Fed may need to move past neutral interest rate.

***Throw in a few market crashes around the world, ex China -24%, select Eurozone economies ex Germany’ DAX -10% ytd, and several Emerging Market economies, and you’ve got a “perfect storm” – which is what we exhibited over the past 3 trading sessions.

Bonds and the Economic Cycle:

Every news journal I picked up over the weekend was primarily saying the same thing - the rapid rise in interest rates and the hawkish tilt by the Federal Reserve was largely to blame for the steep decline in equities. The rapid rise in the 30yr bond and benchmark 10yr note to levels not seen since 2011, is now a very widely held consensus view not only by the media, but also the record net short position held in the 10yr notes expressed in recent Commitment of Traders reports. The one thing we know about "heard mentality" in trading, is that they're rarely correct for an extended period of time. Furthermore, interest rates have been rising now for more than 3yrs, when the Fed began its tightening cycle in 2015, and I believe we're now closer to the end of their tightening cycle, than the beginning. I began to express this call in late Aug/early September on my trade desk that we could very well see a slowdown in US domestic growth and inflation as we move deeper into the year and into 2019. Yes, you heard me correctly….we’re beginning to favor the Bond trade over the Equity trade moving forward, a WIDELY unpopular held by all of your classic media sources.

A quick early look at noteworthy markets:

Equities: stable action early on in the US, fighting off some residual effects of a wicked bad Asian session. Japan traded -1.5%. We do expect an attempt at a rally this week. All on eyes on Q3 earnings reports this week, and expectations are quite lofty. We’ll keep you posted as earnings season begins to shape up.

Gold: pressing higher once again to 1235 oz on more safe haven buying. We’re liking the Gold trade once again, but from the right price! Which we don’t see at the moment. Our negative view on the USD on a fwd looking basis, helps to make this call easier.

Oil: US and Saudi tensions over the weekend over the disappearance of the WaPo reporter – gave a gap open lift to Oil prices overnight, but the upside was limited and short lived. We expect more near-term downside in oil this week, perhaps a test under $70 bbl for WTI. Be careful, the downside is likely limited in the near-term from here in the near-term – WE REMAIN BEARISH ON OIL ON INTERMEDIATE TO LONGER TERM OUTLOOK.

That’s all for now, comments and feedback are always welcome. Good luck today.

Feel free to reach out to John Caruso at jcaruso@rjofutures.com or 1-800-669-5354 if you’d like to get a 2 month free trial of our proprietary trade recommendations by email. 

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