Hard Brexit, China’s looming Hong Kong violence have Mr Market scared
WASHINGTON. US stocks look weak before Monday’s opening bell. Buffetted last week by mostly bad political news both here and in China – and everywhere else for that matter – stocks’ favorite direction was down, down, down. Most of the worrying continues to focus on the US-China non-trade non-deal. But coming up fast from the rear of the field: the likelihood of a Hard Brexit. And worse – news reports that claim China is massing a chunk of its armed forces near the border of Hong Kong.
China, Hong Kong have gun control. Let’s watch
And in Socialist and Communist countries, we should all know what that means by now. Too bad there’s not a Second Amendment in China, eh? China may give us something to think about regarding this issue here, which reached a fever pitch again last week with a pair of senseless massacres in both El Paso, Texas and Dayton, Ohio. What the exasperated Chi-com government does in unruly – and still relatively democratic Hong Kong – could head the gun control narrative in a different direction.
Hard Brexit becoming more likely
Meanwhile, the Hard Brexit and trade war issues in particular are clearly both economic as well as political. And in the British media’s over-the-top criticism of newly-minted PM Boris Johnson, we see that the UK version of #NeverTrumpism is already under full sail. Don’t these populist twits rallying around Boris realize that their elitist betters already know what’s best for them? Ditto the clueless Eurocrats. So why persist in this Hard Brexit folly? As with Tsar Nicholas II, the corrupt classes have been in power too long and have grown far distant from the constituencies they now disdain. And we know how the Russian monarchy ended. Hey, I’m just sayin’. But what do they say about those who don’t learn from history?
On the other hand, indirectly related issues like the left’s obsession with “gun control” and the increasingly vicious attacks on political donors and normal citizens by the Soros-paid brownshirts and provocateurs on the left are fast-creating the kind of environment that engenders even normal people to start taking things into their own hands. You can only push even the fence-sitters so far.
Do stocks fear a full “Fourth Turning” scenario?
Between the trade and affiliation issues on one hand, and the gun control freakology and growing leftist thug-ocracy on the other, traders and investors are becoming understandably nervous as well. So, while Q2 numbers continue to be overwhelmingly encouraging, people with money to invest are steadily heading for the hills, either by transforming current wins and losses, once transacted, into mattress money. Or by chasing the dwindling returns offered in a bond market badly battered by a serious case of bond rate inversion.
It’s an ugly situation out there to be sure.
Now, take a Hard Brexit and a Hong Kong massacre. Then add the high likelihood of an increasingly violent and dangerous Election 2020 season. And we can see that the whole package isn’t helping optimists and market bulls.
This itself is made worse by the hard-left turn of a faltering Democrat party that would have fallen completely off the radar by now if it hadn’t developed a knack for coming up with enough illegal, illicit and completely fake voters to make up for the tens of thousands of voters they lose every day. If this comes to a head in 2020, and if the rest of Flyover Country finally throws in with the Deplorables and rebels… well, this, too is what investors are looking at. And they may conclude that putting their hard-earned money down on anything could turn out to be a very, very bad bet indeed.
This is all classic Fourth Turning stuff, and it’s scaring investors away in droves. Hard Brexit and Hong Kong worries just add to the growing economic and political paranoia. And that’s why we have ridiculous market chaos like we saw last week. And will likely see again, if Monday morning’s lousy-looking futures offer any clue.
Let’s add some technical data to help confirm the socio-political thesis
To bolster this view, let’s throw in the view of Carl Swenlin, the technical analyst we’ve probably followed the longest, dating from the 1990s when he was a lone voice of financial sanity on the site of onetime Internet King, AOL.
“It appeared to me that markets became momentarily disconnected and unstable early this week. There was a different feel, as if panic had set in, but that soon passed once the selling dried up on Wednesday. As for what might happen next, I’m using May as a road map, meaning I’ll be looking for another leg down to a low below this week’s low.
“Next week is options expiration week, so I will be looking for low volatility toward the end of the week.”
Like any good advisor, Carl – now ably assisted by daughter Erin, both of whom have moved their work to Stockcharts.com – Carl never guarantees his chart-based technical outlooks. But his indicators generally give a strong picture of what is likely to happen in markets in the near-term, intermediate term and farther out into the future.
Add Carl’s viewpoint to the $VIX and $NYMOT charts I posted last week – both illustrating strong selling and powerful downward momentum – and it looks like we have strong confirmation that a hard double-bottom, à laMay 2019 may be close at hand. That’s why we dumped a bunch of positions we’d rather have held last week, some for losses, others for gains.
What to do? If things start out ugly this week, the answer is: Hide.
If you think the market is going to tank hard on you, best to get out of stocks that really might get killed first, and then take profits on others lest Mr Market rob you of them before the waterfall declines slow and stop. That’s the point at which we all can buy back in again to perfectly good stocks we decided to dump last week, including Pepsi (trading symbol: PEP), Microsoft (MSFT) and Amazon.com (AMZN).
Otherwise, if today looks like I think it looks – very bad – I’ll continue to raise cash by dumping even more stuff. But I plan to retain most if not all positions in perfectly good preferred stocks. After all, you buy these puppies for the yield, not capital gains. (Although we’ll take capital gains here if we can!) So there’s no point dumping them unless their parent companies are marginal. The yield will sustain the portfolios until the sun comes back out.
Anything could cause the sun to burst forth on Wall Street at any time, of course. But the current gloom is like a classic, pea-soup London fog. You can cut it with a knife. In such times, we think it’s a poor idea to stay fully invested. So we won’t.
– Headline image: Boris Johnson and President Trump meeting at the UN in 2017. They share a lot of enemies.
(Public domain photo by White House staffer. Via Wikipedia entry on Boris Johnson)