This Morning’s Log Entry: Not Alone In Our Cautious ‘Near-Term’ Assessment

Huge week this week in terms of earnings announcements (AAPL, GOOG, and tons more), the Fed and data!

As for the Fed, this month’s policy meeting wrap-up will be under intense focus on Wednesday. I’m amazed that fed funds futures are currently discounting a 23% chance of a rate cut in June, 48% in September and 65% in December (climbing proportionately for the meetings in between)! That is utterly out of the question, given the present state of the economy, and not to mention if the Fed hopes to sustain its credibility as a non-political institution, which, as of this moment, I believe it still is. That said, if the U.S. flubs a China trade deal (leaves tariffs intact) and goes hard after Europe (as it threatens), the economy will begin to buckle and, at that point, I suspect the Fed will step in with rate cuts in an attempt to avert recession. Kudlow’s uncharacteristic (before he became part of the Admin) call for the Fed to cut now is clearly his attempt to shore up sentiment, and the markets, to buffer against potentially less than ideal trade conditions going forward.

As for earnings, hiccups here are likely to spark somewhat sharp downsized moves in the stocks of the companies that disappoint (as the latest action suggests), and potentially in the market overall, depending on the size (systemic importance) of a given company in question. Upside moves on earnings beats are likely to remain muted as geopolitical uncertainty remains high.

The short-term internals (breadth, volume trends, sector performance, etc.), while not hugely bearish, have deteriorated a bit of late. Positioning in terms of short interest and vix futures, relatively high optimism among investment advisors and low pessimism (moderately less [than of late] bullish read [that’s good], high neutral read, and [however] an increasingly low bearish read) among individual investors, support the notion that a sharp downside move (as folks hit the exits) is a legitimate potentiality in the very near-term, should, let’s say, we get a hawkish tone from the Fed, disappointing data (jobs number this Friday) or a rash of earnings misses.

Ironically, last week, U.S. equity ETFs saw major net outflows. SPY (tracks the S&P 500) saw -$2.8 billion all by itself (-$993 mill on Friday alone). Apparently we’re not alone in our cautious near-term assessment…


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