The NEW Daily Decision for 8.13.18 - Fresh Worries, But No Crisis

The State of the Markets:

A new worry about contagion, rising inflation, political risks, geopolitical issues, concerns about peak growth (especially in semiconductor-land) and, of course, the trade war all combined to create a weak ending to what had been, up to that point, a pretty good week. But given the overbought state of the market, the low volatility levels, and the propensity for the major indices to stair-step higher between intermittent bouts of selling lately, we shouldn't have been too surprised that the bears wound up having at least one day in the sun on Friday.

Although there is a laundry list of reasons for our furry friends to come out of hibernation every once in a while, the situation in Turkey appears to be center stage at the moment. Here's the deal in a nutshell. The Turkish lira is diving (the currency fell 14% alone on Friday and hit a record low against the U.S. dollar) for a variety of reasons, including spiking inflation, a political spat with the U.S. (which includes tough talk and a ramp up in sanctions) and the fact that Turkey's central bank has done nothing to support the country's currency.

Why do we care, you ask? After all, the currency situation in Turkey isn't new and Apple (AAPL), Microsoft (MSFT), Facebook (FB) and Google (GOOGL) probably don't derive much of their revenues from selling stuff to Turkey.

We care (well, to the tune of a couple hundred Dow points, anyway) because, in short, the weakness in Turkey's currency is fueling rampant inflation and making it more expensive for the country to repay its debts. Debts which, it shouldn't surprise you to learn, are (a) owed to foreign institutions, (b) denominated in foreign currencies, and (c) massive.

One of the unintended consequences of the QE-To-Infinity Era is the fact that a decade of uber-low interest rates made it very easy for countries like Turkey to borrow money from anybody and everybody at very low rates. But when you have to repay those debts in dollars, euros, etc., and your currency is diving, those debts become a problem.

So, raise your hand if you've seen this plot line before. The country in question gets into some trouble and suddenly, everybody starts to fret that the debts owed to the big banks of the world are going to go south. Next comes the talk of contagion, bailouts, and fallout. And before you know it, a "risk off" trade is running through the high-speed trading machines.

To be sure, what we saw on Friday doesn't qualify as a full-fledged panic. Outside of the semis and banks, no major indices fell by even 1%. Yes, rates fell a bit and the dollar rose on a very modest flight-to-quality trade. But from my seat, Friday's pullback could have occurred for almost any reason (or even no reason at all).

My point is that so far at least, the latest worry doesn't appear to be life threatening to the current bull move. And unless the S&P 500 breaks below 2790 to any meaningful degree, the uptrend that has been in place since the beginning of April will remain intact.

This is not to say there aren't things to be concerned about here. For example, I've been yammering on about the "state" of some of my favorite big-picture market models for at least a couple months now. And with seasonal weakness coming at us pretty quickly and a very important line in the technical sand at S&P 2872.87, I would not at all be surprised to see the bears attempt to make a stand at some point - maybe even soon.

It is for this reason that I will conclude this week's macro overview with the thought that this is not a low-risk market environment. And as such, I think having some dry powder makes some sense from a risk/reward standpoint.

To be clear, no, I am not saying the current bull market is over. I am simply saying that risk factors remain high and that this is perhaps not the time to have your foot to the floor in your portfolio.

What will change my mind, you ask? In short, I'd feel a whole lot better if my Primary Cycle indicator board sported a bit more green.

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Now let's move on to the weekly review of my favorite indicators and market models...

The State of the Big-Picture Market Models

I like to start each week with a review of the state of my favorite big-picture market models, which are designed to help me determine which team is in control of the primary cycle.

View My Favorite Market Models Online

The Bottom Line:

  • There is good news and bad news from the Primary Cycle board this week. The bad news is the Risk/Reward model slipped back into the negative zone last week. The good news is the Leading Indicators model moved back up into its positive mode.

The State of the Trend

Once I've reviewed the big picture, I then turn to the "state of the trend." These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.

View Trend Indicator Board Online

The Bottom Line:

  • The Trend Board remains largely positive. However, it is worth noting that the Cycle Composite will soon turn down into mid-October.

The State of Internal Momentum

Next up are the momentum indicators, which are designed to tell us whether there is any "oomph" behind the current trend.

View Momentum Indicator Board Online

The Bottom Line:

  • The red has disappeared from the Momentum board this week and while two of the "thrust" indicators are rated neutral, the historic returns in the neutral zone are well above average. So, the market's "mo" suggests giving the bulls the benefit of any doubt in the near-term.

The State of the "Trade"

We also focus each week on the "early warning" board, which is designed to indicate when traders might start to "go the other way" -- for a trade.

View Early Warning Indicator Board Online

The Bottom Line:

  • It's official, the "Early Warning" board is now acting like the enthusiastic student in the back of the class waving his hand because he knows the answer. The bottom line is the board suggests the chances for a reversal of the current trend are now high.

The State of the Macro Picture

Now let's move on to the market's "external factors" - the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.

View External Factors Indicator Board Online

The Bottom Line:

  • The components of the External Factors board remain problematic for the bulls. To review, inflation is now higher than the Fed's target, valuations remain elevated by historical standards, monetary indicators are neutral at best, our economic model (a model designed to call the stock market) is not great, while earnings remain strong. All in, the historical return for the models in their current state isn't great.

Publishing Note:I am traveling this week (my wife and I are heading to California for 38th wedding anniversary trip), so my next market update will be published Monday morning.

Thought For The Day:

Simplicity is the ultimate sophistication. - Leonardo da Vinci

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Today's Portfolio Review:

2018 YTD Performance Update:
Daily Decision Portfolio: +8.1%
S&P 500: +5.97%

Current Rating Explained
This is our rating for the day. The Current Rating tells you what action we would take if we did not currently hold the position. A "Buy" rating means we would be willing to purchase the position at current prices. A "Strong Buy" suggests this would be our first choice to buy. A "Hold" rating indicates we would not make new purchases at current levels. And a "Sell" rating indicates we will likely exit the position in the near-term.

Positions Can Change
Positions often change during the trading session. Remember that we will send a Trade Alert via SMS Text Message and/or Email BEFORE we ever make a move in the models.

At the time of publication, the editors hold long positions in the following securities mentioned: SPY, IJR, QQQ, XLK, XLY, XLV, XLE, AAPL, MSFT, GOOGL, FB, AMZN, NFLX, CNC, ICUI, TRU, VFC - Note that positions may change at any time.

Wishing You All The Best in Your Investing Endeavors!

The Front Range Trading Team

NOT INVESTMENT ADVICE. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. Investors should always consult an investment professional before making any investment.

Posted to Daily Decisions Service on Aug 13, 2018 — 9:08 AM
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