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Weak jobs report triggers rally. Mexico tariff deal made

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The market celebrated a disappointing jobs number on Friday by rallying 1% or more across the board. The Dow gained 263-points capping the biggest week for stocks this year as it battles back from May's losses. After the bell on Friday it was announced that the US and Mexico have reached a deal to avoid the 5% tariff, which would have been implemented today.

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I have a lot of scattered thoughts in my head about all of this so I'll just throw it out there and hope it makes sense.

The jobs report: We speculated that this could be a weak report, and also that we could rally on a weak report because of increased probability of a rate cut sooner rather than later. We also said that we thought that any rally on a weak report could be short-lived, and while stocks did close off the morning highs of the day, they did hold up better than I would have expected into the close - particularly with the Mexican tariffs getting ready to be implemented on Monday (the news of the deal had not yet been known.) The market has now priced in three rates cuts in 2019, which seems a little optimistic. The Fed has not committed to any yet and are still only saying it is an option.

John P. Hussman, Ph.D., of Hussman Funds, shows us in this 90 year chart below, just how extreme stock price valuations are compared other extremes going back to the Depression, using a price to earnings ratio of the S&P 500 adjusted for margin. He adds...

"The problem is that if interest rates are low because growth is also low, lower interest rates don’t justify any increase in valuation multiples at all. Normal valuation multiples would already be enough to produce lower future equity returns, via the slower growth of future fundamentals. If investors instead bid valuation multiples up anyway, subsequent returns are penalized twice, and can be driven to negative levels for years to come. That’s what investors have done here."


Chart provided courtesy of www.hussmanfunds.com


So, stocks rocketing up on Friday is like an addict celebrating after they break their hand (bad jobs report) in order to get more pain killers (interest rate cuts) that they are hooked on.

Back to the Mexican tariffs. On May 31st the market opened for the first time after President Trump tweeted about the 5% Mexican tariffs. That day the S&P gapped lower and fell 1.3% on the news, but of course stocks were in a downtrend already so it didn't take much. The next day however, the S&P bottomed preceding last week's rally. So, the S&P closed at 2789 right before the Mexican tariff announcement. On Friday the S&P 500 closed at 2873 - before the tariff agreement. Now that the tariffs are a no go, how much can the market rally on the news, considering the S&P is already up 3% since the original 5% tariff announcement? Barring any other news over the weekend (I'm writing most of this on Saturday) there's a good chance it will rally at least initially on Monday because of the emotional aspect of the deal with Mexico, but can additional gains hold?




I'll go into more depth on the S&P 500 below. It may get painfully detailed so if you don't like the weeds, here your chance to run.

Over the next month we'll start getting some pre-announcements to second quarter earnings. The 25% tariffs on China, which started in the 2nd quarter, may start being used as an excuse to lower guidance for some companies. We'll see. Over the weekend Secretary Mnuchin said, Trump is ‘perfectly happy’ to hit China with new tariffs if Xi meeting doesn’t go well. So, we're back to that.




After the S&P 500 (C-fund) fell below 2800, we speculated on where any relief rallies might find resistance.

First was that 2800 area again. No problem so, check.

Next was the 50-day EMA. Check.

Then the top of that open gap near 2850. Check.

And other than new highs the last level we thought could be a rally stopper was just below 2900 where two prior rallies stalled. Friday's rally stalled just below those levels.




The longer-term view going back to the beginning of 2018 shows some prior pullbacks / corrections and what happened at the highs and lows - whether they were tested, held, or broke. The recent low actually was a successful test of the March low. Now we're looking to see if those mid-May highs will hold as resistance.




Here is a closer look at the early 2018 correction / relief rallies and tests...




And here is the fall of 2018 decline with support and resistance tests.




And here we are again today, showing the failure of the test of the May 13 low, and the successful test of the March low. Next comes the test of the May rally peaks.




This ten year chart of the yield on the 10-year Treasury is now down testing the lows from the fall of 2017. Will we see a rebound, or is a test of the mid-2016 lows next? You can see that yields peaked last year when the Fed was raising interest rates, and this may be telling them it's time to start cutting again.




The AGG (Bonds / F-fund) has rallied tremendously since the lows last November but it is now hitting the top of a rising trading channel.




Read more in today's TSP Talk Plus Report. We post more charts, indicators and analysis, plus discuss the allocations of the TSP and ETF Systems. For more information on how to gain access and a list of the benefits of being a subscriber, please go to: www.tsptalk.com/plus.php

Thanks for reading. We'll see you back here tomorrow.

Tom Crowley


Posted daily at www.tsptalk.com/comments.php

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