Tuesday , 23 July 2019

Dark Clouds Are Looming Over U.S. Financial Markets BUT Even the Darkest of Clouds Have Silver Linings

“There is no question a dark cloud is looming over U.S. financial markets [and] that cloud just got a little darker over the past two days as key support levels in all of the crucial equity indices were violated. This sends a loud and clear signal to pay attention. [That being said,] even the darkest of clouds has a silver lining [so] my goal here is to highlight some contrarian points of view on an otherwise gloomy market perspective…”

Prepared by Lorimer Wilson, editor of munKNEE.com – Your KEY To Making Money! 

[Editor’s Note: This version* of the original article by Ryan Puplava has been edited ([ ]), restructured and abridged (…) by 37% for a FASTER – and easier – read. Please note: This complete paragraph must be included in any re-posting to avoid copyright infringement.]

“First the Looming Clouds

Before moving on to key areas of the market that have improved, let’s first focus on where the damage is and what needs to improve if a rally takes hold.

  • Energy and Financials are crucial.
    • Oil has been in a freefall from $77 to $47 finally breaking below $50 today. That isn’t helping growth concerns as oil is a barometer on the economy.
    • The S&P 500 energy sector index surpassed the bullish 2016-2018 trend and is currently breaking through a key demand zone. If a rally doesn’t take the index back into the demand zone, it puts the 2016 lows in view.
    • The announced OPEC cut to production failed to encourage any stabilization as growth concerns and excess supply carry the day after last week’s disappointing Chinese economic announcements as well as disheartening flash Purchasing Managers’ Index data for Europe and the U.S.
  • The financial sector of the S&P 500 also continues to suffer.
    • The yield curve has been flat and the spread between the 2-year Treasury and the 10-year Treasury continues to narrow. That doesn’t help financial institutions who borrow on the short end of the curve to lend out on the long end of the curve.  A narrow spread equates to lower profitability and can eventually cut off financial institution’s ability to lend.

News of the 2, 3, and 5-year inversion a couple weeks ago sent the financials reeling. While the relative strength of the financial sector versus the S&P 500 improved in November on news Powell considered rates just below neutral, that event has whipsawed on the inversion news and the financials continue to be a source of pain for the bulls.

The Silver Lining

The semiconductor industry is the brains of modern electronics and represents America’s fourth largest export to the world…[and] is the number one contributor to labor productivity. From an intermarket analysis perspective, the industry often leads the market at tops and bottoms.

  • While a top has been in place since October, and the trend is down, the underperformance of the sector started back in June. That has recently reversed and is a warning that semiconductors are outperforming the market through the recent weakness.

This is an industry group that tends to lead risk appetites and it will need to be monitored closely in the days and weeks ahead.

…Below you can see another silver lining in an otherwise gloomy market. The chart below shows:

  • the Index has been holding above the October low despite weakness in the U.S. equity markets. Relative strength shows this clearly in a new uptrend.
  • The long-term trend is still down and will take more time to develop a bottom on the chart.

This is just a silver lining that will need to be monitored closely in the days and weeks ahead. The index has 30 percent exposure to China – its largest area of concentration geographically. If trade developments continue to be positive with the U.S., the Emerging Market Index could become more bullish.

Summary

There are key areas where the damage is currently, as well as key areas that foretold of this correction, and they are only now showing signs of relative strength, [but] relative strength (the comparison of one market to another) is not enough to be bullish on these areas. There needs  to be continued improvement in price and time for a bottom to develop…”

(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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