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A drop in crude oil prices…and anticipation of the Trump/Xi Summit…have the stock futures trading higher this morning.
Wil the market be able to hold up after the summit…with so many different developments taking place at the same time…which usually signal a top of at least some importance is just around the corner?
Bitcoin is seeing a technical breakout….So, unless it reverses lower quickly and meaningfully, this should be very bullish for the entire crypto asset class.
The stock market was able to bounce off their lows on Friday…with a particular surge over the last half hour of trading. However, since there was no new-news, it seemed to be more related to the “quadruple witch” expiration than anything else. That said, the futures are trading higher this morning…with a 2% drop in crude oil prices and a mild pullback in long-term Treasury yields.
We also have the summit between President Trump and China’s President Xi on Thursday. Given that there is very little in terms of either economic data or earnings reports, the focus will be on geopolitical issues this week. Since the Administration wants a successful summit, it’s a good bet that most of the news will be positive on this issue over the next few days…....The question then will be whether the summit produces any long-term positive deals…but until then, the rhetoric coming out of Washington should be positive on this front.
Our concern is that once we get past the summit, the focus will return to the issues which have kept the stock market from rallying any further over the past 3-4 months. That’s right, even though this past earnings season was an excellent one, the S&P 500 has barely risen at all since early June…and both the NDX Nasdaq 100 and the Russell 2000 have both actually declined slightly since then! So, although it may seem like the strong rally off the late-March lows has continued, that has not been the case.
The reason that we worry about what might take place as we move through the rest of September and into October is that so many things are coming together right now…that are usually a sign that a top of some importance is looming before too long. As we mentioned in our weekend piece, it’s one thing when just a couple of those developments are taking place…like high valuations and a narrow advance (which we have seen for a long time now). However, when a small number of those kinds of developments…turns into a situation where a half dozen or more of these issues taking place all at once…it becomes a much bigger concern.
Therefore, since we can now add to the list that long-term yields have risen in a significant way…and that oil prices have done the same…it boosts our level apprehension. (The stock frequently ignores a significant rise in yields and oil prices for many months, but they pretty much always respond in a negative way eventually to these developments…going back over the past 50 years.)
Then we have the divergence between the stock market…which has held up…and the chip stocks…which are more than 18% below their June lows……There is also a divergence between the S&P 500 and the HYG high yield market…which has been falling steadily this year (and has accelerated lower in September). These two divergences have been clear signs of a pending top of at least some importance many times in the past. Thus, there are developments which raise some warning flags in our minds……..When you throw on top of this…the substantial geopolitical uncertainties that exits today…from several different parts of the world (not just the Middle East and Ukraine)…it’s something that should raise more concerns than it has in recent months in our opinion.
This does not mean that the market is going to roll over in a meaningful way as soon as this week’s summit comes to an end. The stock market could hold up through the election…or even past the end of the year. Let’s face it, earnings season is only a few weeks away…and if earnings estimates continue to rise in the kind of parabolic way they have over the past few months…the market could be buoyed through the end of the year. However, given that so many different signals are popping up today, we think it will be tough to avoid a pullback of some significance…starting before the year is over.
Switching gears, we want to highlight that Bitcoin has broken above its key resistance level of $82,000 this morning. In fact, it is trading above $84k as we write!.....Needless to say, we’re going to have to see this cryptocurrency hold above this level for more than a day or two…and push a bit higher as well…to confirm that a breakout has taken place, but this morning’s move is definitely a bullish one!
Remember, after falling significantly (and steadily) from its Q4 highs of last year…into the early summer months…this crypto built a nice “base” over many weeks. Then, it late August, it broke above its 200-DMA (which had provided VERY tough resistance in May)…and that also took it above its trend-line from its all-time highs (in October of last year)……Bitcoin then became overbought in late-August…and spent a couple of weeks engaging in a “sideways correction.” However, now that the overbought condition has been worked off, the ensuing move has been very bullish.
Put another way, not only has Bitcoin broken above its May highs of $82k (giving it a key “higher-high”), but it has also seen a “golden cross” (with a rising 50-DMA…crossing above a rising 200-DMA)…….Bitcoin has seen a “golden cross” in each of the past three years…and it was followed by a significant further advance in each case. Therefore, this morning’s move should be seen as a very, very bullish development for Bitcoin…and the crypto asset class. (Chart below.)
Again, we do have to be careful. This breakout needs to avoid a quick reversal (a head fake). We always have to see a breakout sustain itself for a few days…and see some follow through as well…to give us the confirmation we need to become confident of the move. However, given the “set up” we’ve seen over the past few months, the odds are good that this breakout will indeed hold.
