Echoes In the Summer of 2019

To say this week is momentous is an understatement. If the pundits can be believed, the Fed is about to cut rates. The last time the Fed changed direction in rates was in 2007.

As was the case in 2007, the anticipated Fed cut comes with the market in the region of record highs.

On September 18th, 2007 with the SPX just below record highs, the Fed cut the fed funds rate by half of a percentage point to 4.75%..

Investors cheered. Stocks surged following the announcement. The DJIA finished the day up more than 330 points or 2.5%. The SPX exploded nearly 3% higher taking it to 1520 just below its July 19th closing high of 1553.08.

Last week we wrote about the significance of anniversary dates and anniversary prices.

Interestingly, the 1553.08 top on July 19th, 2007 high was virtually identical to the 1552.87 SPX major top on March 24th, 2000.

You can’t make this stuff up.

Mr. Market has a very fine-tuned memory.

The cut to the fed funds rate in September ’07 was the first since June 2003 and followed a surprise cut to the Fed’s discount rate of one half of a percent on August 17th.

Typifying sentiment at the time was this comment by a Wall Street strategist: “We’re having champagne and cookies; this is not a magical elixir that solves our subprime problems overnight, but it is a big step in the right direction to keep the economy growing. The Fed is sending a strong message that it won’t get behind the curve.”

Despite new market highs on October 11th, The Great Financial Crisis was just around the corner.

There is scant bearish sentiment at this week’s inflection point as shown in the Rydex ratio of Bull/Bear Funds below. The ratio is testing its early 2018 trough.

The sentiment this summer follows a 3 year arc of advancing prices in popular indexes.

This 3 year arc mirrors the pattern from late 1926 through the summer of 1929 as well as the 3 year ascending arc from 1984 to the summer of 1987.

Checking the pattern from 1929 below shows a 6 month consolidation before a last ditch run into a late summer top in 1929.

Market participants wanted out every time the DJIA hit the top of the consolidation level at about 320. Interestingly the first half of 1929 coincided with a period where the Fed warned of speculation…a speculation they had fomented.

When it finally broke through, many sold-out bulls were ‘forced’ back in.

Because the market had ignored the Fed’s warning’s they were ‘forced’ to tighten.

Apparently the preceding speculation, which had shrugged off their warnings, caused them to stay tighter, longer when the downturn started.

The rise into the 1929 top was so steep that there were no viable points in a trendline to time an exit.

By the time the DJIA pulled back to prior support the crash was in full bloom.

While price was applauding in the summer of 1929, cycles were choking.

There’s nothing like higher prices to get people bullish, but price is not truth, momentum and TIME is truth.

Although price is the final arbiter, it is often a liar.

There was also a 3 year arc into the summer of 1987 preceding a crash.

As in 1929 there was a multi-month consolidation (8 months) prior to a summer run for the roses.

The 1987 crash occurred well before any price points, price chartists could define as trouble.

As in 1929, there is a hidden factor in the market that you don’t see when you look at price alone that warned of structure that was quicksand.

As in ’29, the ’87 crash dropped to support before price could give a warning.

Let’s look at the SPX here in the summer of 2019.

Again the market has traced out a 3 year arc.

Wither it is on the verge of a multi-month blow-off or the rally from December is that blow-off.

Notice the 10-12 month consolidation/corrective action from late January 2018.

The rally off the December low was the most powerful rebound in history.

Is/was that a last ditch rally, a blow-off?

Or, is it theoretically possible the index is came out of the consolidation in June.

If so the indication is there is another month to go if the DNA adheres to the 3 month blow-offs in 1929 and 1987.

That would be very accommodating of Mr. Market, something he is not inclined to do—almost as accommodating as the Fed is advertising it intends.

I can’t help but wonder about the possibility of a mirror image foldback on the table.

The Fed was scared of speculation in 1929 and tightened and stayed tight.

The Fed tightened last fall and the market had a tantrum.

What is the Fed’s current advertised accommodation frightened of with the market at record highs and full employment?

Traditional technical analysts will see a pullback to support (currently at point A on the above 2019 SPX)

As an opportunity. I believe that any correction to ‘support’ will not be a buying opportunity, but that the entire 3 year structure from 2016 could blow up.

This is the message of the cycles as I see them through the veneer of price.

This is the message through the technical I look at.

“Support” adjusts in an ongoing basis according to its own ‘factors’ which we advise subscribers of.

Two weeks ago the SPX and the NAZ registered potential Buying Climax weeks.

Then on Thursday, both indices triggered Soup Nazi sell signals on stabbing back below the prior swing highs from July 15th.

But follow through is key when a sell signal shows up. There was none.

Instead the NAZ and SPX reversed up to close at record highs.

Now it’s a matter of seeing whether we get upside follow through or the 2nd mouse will get the cheese if we reverse back below last Wednesday’s lows in short order.

The usual growth glamour suspects looked like they were undergoing distribution, but many came out last week.

Some are names subscribers took swing positions in last week including, SPLK, GH, SPLK, AVLR and STNE.

We took profits in CYBR, DXCM and ZS.

The vast majority of leaders are stretched going into this weeks Fed meeting.

They don’t offer good risk to reward profiles for position trades, but they have offered tremendous swing opportunities and day trade opportunities.

It will be important to observe speculative sentiment in these leaders on a big earning’s week and Wednesday’s Fed decision.

Conclusion: Decades later, economists are still debating the reasons behind the 1929 and 1987 debacles.

If you need a catalyst—- There are only three PMI’s (Purchasing Manager’s Index) in the world that are above 50—India, Brazil and the US. All three are decelerating. A reading below 47 usually signals recession. All PMI’s are falling very fast currently. A global recession is just a few months away with the Federal Reserve light in the loafers as to ammo.

When was the last time we had a global recession with Advanced Economy sovereign debt/GDP at current levels?

Couple this with the impact of trend-following systematic strategies that have come to dominate the tape over the last decade and the reliance of price alone to alert market participants and traditional technical chartists to a ‘change in trend’ and it may ring the cow bell well after the cow is out of the coral.

It certainly was the case in 1929 and 1987.