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Bad news is good: Stocks up Thursday. Weak ISM data = Fed rate cut?

Written By | Oct 3, 2019

WASHINGTON –As I noted earlier this week, September’s disappointing ISM manufacturing numbers kicked off this week’s carnage in US stock markets. ZeroHedge agrees, noting “Since ISM manufacturing disappointed, The Dow has plummeted 1300 points to its lowest since August.” Which ZH calls a “Catacl-ISM.” Yet Thursday morning, a few cautious bulls entered the trading ring again. On more bad news. Namely, weak data in the US services sector. And health issues with Bernie Sanders. But, wait! That could mean that we might get another Fed rate cut in October. Maybe bad news is good news!

Okay, this kind of logic seems of a kind with the latest House impeachment fantasy implosion. But, unlike the Fools on the Hill, Mr Market’s logic, while weird, actually makes more sense.

But first, let’s look at the bad news horror show that marked Wednesday’s awful market close.

First, the bad news

ZeroHedge gives us a nasty-looking e-mini futures chart. It pointed toward this morning’s poor opening trade.




bad news

Some pretty ugly e-mini futures trades. Chart via ZeroHedge.

The right side of this chart, as outlined, pictures how Mr Market behaved through Wednesday’s close. Yikes! ZH comments that

Just as ominous if not more so is this Wednesday McClellan Oscillator portrait, via our friends at Stockcharts.com, a service to which we subscribe. (Charts here are from the site’s public pages.)

bad news, Fed rate cut

McClellan Oscillator, COB 10/02/19. Courtesy Stockcharts.com.

That sure seems to confirm what we just saw in that ZH e-mini futures contract which follows and tries to predict where the S&P 500 will go next. Yesterday’s McClellan Oscillator showed that indicator nearing the very bottom of its 2019 bear peak, which we’ll address in a moment.

And even more bad news from the VIX

Finally, if you need any more confirmation that this week’s trading action truly and sincerely sucked, check out Wednesday’s COB VIX chart, which illustrates stock market volatility. A higher number usually indicates things are getting ever more bearish. And Wednesday’s chart, below, is starting to give us a nasty volatility portrait.

bad news

VIX, COB 10/02/19. Chart courtesy Stockcharts.com.

But maybe bad news is good

But maybe after that unpleasant ISM services sector number this morning, which confirms the mighty US economic engine is sputtering, the Fed will wise up and get moving on more and bigger rate cuts. At least one more quarter-point drop this month, and maybe another quarter point this December. At least that’s what Mr Market and his pals, the Wall Street bulls, are hoping. Along with the Trump administration.

After a few gloomy, nay-saying reports this morning, CNBC online has apparently changed its tune on the market. For now. Their latest report highlights a modest comeback in tech stocks which, given their high natural volatility, have been leading the stock market down. But today:

“Tech stocks led the way higher. Facebook rose 2.4% as fellow “FANG” stock such as Alphabet and Amazon gained 0.9% and 0.2%, respectively. Apple traded 0.8% higher.

“Stocks tumbled after the Institute for Supply Management said its reading on the U.S. services sector fell last month to its lowest level since August 2016. The ISM nonmanufacturing index came in at 52.6 for September. Economists polled by Dow Jones expected a print of 55.3.

“‘We are concerned that the manufacturing slowdown is bleeding into services, but while the number was weak this morning, it was still in positive territory,’ said Janet Johnston, portfolio manager at TrimTabs Asset Management. ‘In this environment where one day you have good data and the other you have weak data, we think the best way to play it is with high-quality companies with free cash flow growth, strong balance sheets and other moats.’”

But here’s CNBC’s money graf

“The probability of a rate cut by the Fed this month increased following the ISM’s report release. Expectations for an October rate cut jumped to 93.5% from 77% on Wednesday, according to the CME Group’s FedWatch tool.”



The China Syndrome…

Also a potential plus for the market: the fact that US-China trade talks are scheduled to resume next week. We’ve been down the positive-rumor path before on this one, and the Chinese have every reason to wait President Trump out on the tariff battle, given the constant encouragement of the perpetually sore-loser Democrats who continue their attempted re-do of Election 2016 by ousting Trump on trumped-up fake charges.

Nonetheless, Wall Street’s trade optimists will likely indulge in at least a couple of days of fun speculation here, at least until negotiations hit a dead end. Again. China is, after all, used to winning each and every time. On the other hand, there’s that small matter of trouble in Hong Kong that could be hampering the Chinese trade hardliners, so you never know.

… and the Bernie Factor

Another odd influence on the market could be that brief, 24-hour Bernie Sanders health scare. We’re referring to Wednesday’s reports that the Millennials’ absolute favorite Socialist (after AOC, who is ineligible to run, thank God) underwent arterial surgery yesterday to insert a pair of stents. This transpired after the Bernmeister suffered chest pains.

We’d call that a heart attack. But this is the Swamp. So the PR flaks in the Bernie Sanders campaign are calling it something else.

At any rate, citing CNBC, ZeroHedge reports that the ever-surprising Bernie claims he’s going to get out of the hospital and plans to be good-to-go for the next Democrat carnival sideshow debates.

“One day after Bernie Sanders put his campaign on hold as he recovers from an artery blockage procedure, his campaign said that the Vermont senator will be participating in the next Democratic presidential debate scheduled to take place on Oct. 15 in Ohio, the senator’s campaign told CNBC on Thursday.

“‘[Campaign] operations are continuing as usual and he will be at the debate,’ Sanders’ spokeswoman Sarah Ford wrote in an email to CNBC. She declined to comment further.”

I’d decline to comment further on Bernie Sanders and his health issues, too. Everything’s always coming up roses if you’re a Democrat. (Or a socialist running as one.)

But why is Bernie relevant?

One school of thought?t Bernie’s ticker trouble scared the crap out of Wall Streeters They grasped the one important plus in Bernie’s candidacy. Namely, he’s apparently the last remaining obstacle between crooked Joe Biden (the semi-official Deep State Candidate). And Fauxahontas Warren, the Indian Princess who wants to finish the American Destruction Derby Barry Obama started.

The Robber Barons are apparently terrified that Warren means what she says about capitalism, single-payer healthcare, confiscatory wealth taxes, you name it. And they should be afraid, since, like the Iranians, Commies, even academic ones, always mean exactly what they threaten.

Given that Bernie’s return could blunt Warren’s forward motion, Wall Streeters instinctively breathed a sigh of relief this morning when they discovered Bernie might be returning to the hustings soon. And helping to blunt Warren’s apparent forward motion against Biden. Who, in turn, may get ensnared (or already has been) by the latest impeachment trap set for America’s first Energizer Bunny President, Donald Trump.

Endless bafflegab has Mr Market befuddled

This is hard to follow, I know. But Wall Street has lately been running not on earnings and charts but on rumor and innuendo, spiced by an ample dose of headline risk. And weak ISM manufacturing and service sector numbers.

That’s no way to run a market. But no one seems to care.

At any rate, that’s the smorgasbord of confusion we’re facing mid-afternoon Thursday. Including maybe a Fed rate cut.

As we sign off today, all three major averages remain slightly above flat line, gaining 0.25-0.35 percent apiece. That could simply be a dead-cat bounce reaction to that extremely negative McClellan Oscillator reading illustrated above. When the Oscillator gets this negative, a bullish bounce, at the very least, is what you expect next. But maybe this measure needs to go a bit lower still before we see a real bounce.

Stay tuned.

— Headline image: The bull looks set to go after the bear at the stock exchange in Frankfurt, Germany. (Image via Wikipedia entry on market trends, GNU 1.2 license)

 

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17