Uncategorized, Weekly Update

The Safety Trade Unwinds – for One Day at Least


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Published September 6, 2019

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For the past month stocks have chopped within a fairly wide range as the circled area on the chart below shows. Hemmed in by on-again, off-again trade tariff talks, stocks have made no progress over the past year.

For the past month stocks have chopped within a fairly wide range

Displaying the elevated concern in the markets has been the rise in the VIX volatility index (below). The squared area showing the elevated level of this “fear index” since the beginning of August when the Trump Administration surprised investors with reports of new tariffs.

Rise in the VIX volatility index

But a market driven by headlines one way can just as easily flip the other way when the script changes. This week’s announcement that trade talks were back on unwound the safety trade that had been in place over the past few weeks. The QQQ leapt above the $190 mark that had capped it for the prior five weeks. Money came pouring out of its hiding places in U.S. Treasury bonds and gold, sending Treasury yields upward and gold tumbling (the circled areas in all the charts below).

The QQQ leapt above the $190 mark that had capped it for the prior five weeks

Money came pouring out of its hiding places in U.S. Treasury bond

Money came pouring out of its hiding places in gold

The above safety trade in the market had become overcrowded with too many market participants fretting. That made markets ripe for a jump the other direction on even the slightest favorable news. And so it happened this week.

Of course, in the excitement that stocks have broken higher we are reminded – these are talks mind you, not any agreement. Thus, markets remain vulnerable to sharp swings on rumors and innuendos of talks, notes, and phone calls. Hopefully a more productive period is ahead.


Market Update

Investors returned from the Labor Day holiday to a couple of weak notes. The imposition of new trade tariffs on China, already announced, combined with the first report of manufacturing contraction in the U.S. since early 2015. Those two reports pushed stocks down about -1% Tuesday. However, markets completely recovered those losses in Wednesday’s session. A surprise withdrawal of the repatriation bill that sparked months-long protests in Hong Kong cheered investors. Wednesday’s Brexit drama in the UK also gave investors some optimism that the divorce between Europe and the UK might be delayed, thus helping shares. Stocks pushed higher again Thursday as China announced new trade talks with the U.S. Encouraged investors broke stocks out of the month-long trading range in a session sporting +1.3% gains. Friday’s monthly employment report proved lackluster, offering little new reason for investors to shift positions and leaving stocks flat heading into the weekend.

Stocks added a second consecutive winning week to their rebound, this time rising +1.91% to close back near record highs. The Nasdaq 100 (QQQ) rose +2.20%. Small-cap stocks (IWM) rose a relatively meager +0.71% to remain capped by their 200-day moving average, a contrast to the near record closes of the large-cap indexes.

Warm wishes and until next week.