Hopium

Authored by Sven Henrich via NorthmanTrader.com,

The first round in the Thunderdome goes to bulls as another hopium based rally emerged driven by relief headlines. First on the news that Hong Kong tensions appeared to defuse and then of course another trade optimism inspired ramp triggered by the news that a China US trade meeting is to take place in October.

Hope dies last, hence tops are processes. Whether this is a top in process remains to be seen.

Why are rallies driven on hopium? Because all rallies are driven by multiple expansion and based on hope.

• Hope that central banks can repeat a 2016 save by once again going on another intervention cycle, hence I’ve stated numerous times no bull market without central bank intervention.

• Hope that the ECB will bring out the bazooka next week and re-introduce QE and cut rates to further negative despite CEOs of European banks imploring the ECB not to do it as it will risk the financial system according to them.

• Hope that the Fed cuts more and more and stays beholden to markets and makes record loose financial conditions even looser.

• Hope that the US and China agree to a trade deal even though both sides remain far apart on core issues and high market levels and so far working stimulus in China being potentially prohibitive of either side feeling the need to capitulate.

• Hope that the global slowdown and emerging earnings recession prove temporary and can be fixed by central bank intervention.

Be clear: All rallies are based on multiple expansion only as growth and earnings keep slowing:

• Hope that the Fed’s recession model is sending a false signal, the very model that has predicted the last 5 recessions:

• Hope that Jay Powell’s words have meaning when he says, as he did again this Friday, that the Fed doesn’t forecast a recession. What else do you expect him to say?

This?

“We’re forecasting a recession” has said no Fed Chair ever.

— Sven Henrich (@NorthmanTrader) September 6, 2019

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Be serious. No Fed Chair will ever go out in public and forecast a recession. Yet this statement is to be taken at face value. It’s an exercise in shoring up confidence.

Besides slowing growth it’s the unemployment market that is sending warning signs.

Remember it’s the last shoe to drop if a recession is to unfold:

And hence low unemployment rates are to be viewed with caution:

Signs of a shift in the unemployment trend are key to watch at the end of a cycle and without doubt employment growth has slowed in 2019:

But it hasn’t turned yet and that keeps hope alive of course, but note the shift to a change in trend is precariously close:

Get a couple bad job reports and the trend shift may come a lot sooner than people expect. Certainly Friday’s disappointing jobs report sends a further warning signal on this front. The good news is that temporary hiring for the upcoming holiday season may push such a shift into 2020.

Getting an actual trade deal in place as opposed to “meetings” is critical for bulls, hence the violent reaction in stocks this week when hope was once again offered.

What has the rally accomplished? It has broken markets out of the consolidation range and could imply new highs to come as outlined in Measured Move.

But there’s also another possibility, and that is that the rally was simple a backtest of the recent broken 2019 trend:

Note the volatility pattern remains in place and has not been invalidated.

For the latest technical rundown and explanation of charts, please see this new video:

[youtube https://www.youtube.com/watch?v=HQiXdWkPYGE]

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