A solid turnaround after news hit tariffs were being delayed. Hopes of a US-China trade deal help lift stocks. Volume was up across the board as institutions rushed back into the market. The NASDAQ led the market higher gaining nearly 2% confirming a new market rally. Small Caps lagged the general market gaining only 1.09% on the session. We continue to see small caps lag and is not an ideal setup. The party may not last long as traders are waking up with the 2-year Treasury Note yielding more than the 10-year Treasury Note. An inverted yield curve is a strong indicator the economy is heading for a downturn. Futures are lower and pointing at sizeable losses. Any distribution day today would all but kill this confirmed rally. Not what the bulls want to see after a follow-through day. All we can do is what is in our control. Maintaining our sound risk management process along with following the market’s price action will allow us to outperform the general market.
Futures are indicating a lower open and there is potential today turns into a distribution day. Odds are almost 100% when a follow-through day is followed by a distribution day the confirmed rally will fail. Two days after a follow-through day the odds are roughly 70% the rally fails. These next two days will be a big tell where this market will head next. Our opinion of where this market will head really doesn’t matter all that much. Even when we guess right it is not what we would rely on to successfully navigate this market. Headwinds are hefty right now. An inverted yield curve will not help the situation. It will be interesting to see if the Federal Reserve Bank steps in and lowers rates prior to the next meeting. We are in the camp they are well-behind proverbial curve. All we can do is react to price and manage our risk properly.
It is not a surprise the Federal Reserve is reacting too slow. They were late in raising rates and now they raised too much. July’s rate cute came too late and certainly not enough. We are in a different world now post 2008 given how monetary policy has been used. Keeping rates at 0% for so long and pumping trillions of dollars into banks. Whether it was the right thing to do or not isn’t something we are smart enough to figure out but given the information in front of us the Fed is behind. Historically, the Fed has always been too late, and this time will not be any different.
We will continue to stress the need to maintain proper position sizing and exit strategy. There is no need to be a hero in this market. Remain disciplined in your approach. This market is not in a strong seasonal period and is now facing stronger headwinds. Wherever this market takes us we will follow.
