Who doesn’t remember the Pied Piper story from childhood? According to the legend, in 1284 the town of Hamelin was suffering a rat infestation. The piper, dressed in multi-colored clothing appeared (that’s why he’s called “Pied”) and claimed to be a rat catcher. To solve the rat crisis, the Pied Piper offered his services to the mayor. He would play his pipe to lure the rats into the Weser River where they would drown. The mayor agreed to pay him for his services and so he did as he promised, luring all the rats away.

The mayor, however, was a cheapskate and decided he would not fulfill his contractual obligations and refused to pay the Pied Piper. Understandably, the Pied Piper was enraged and vowed revenge. One peaceful Sunday, the Pied Piper showed up to the town playing his pipe—only this time not for the rats. This time the tune he played attracted all the town’s children. While all the adults were busy in church, the Pied Piper led them out of town and down into a cave where they were never seen again

“I don’t see a recession in 2019.” –Jerome Powell, Federal Reserve Chairperson

Let me introduce the new Pied Piper: Jerome Powell. After a dozen or so speeches and public appearances, Powell has lulled investors back into risk-taking and returns-chasing with melodic promises of “patience” and “data-dependence.”

But this is a false reality.                                                       

Literally nothing has changed in the global economic scene since last month. The same risks that were present a month ago still exist:

  1. The Fed is still on a tightening path despite their rhetoric
  2. No significant progress with China despite misleading headlines
  3. Longest government shut-down in history
  4. Brexit
  5. Downward earnings and forecast revisions
  6. The Mueller probe
  7. Global economic slowdown

The only thing that has changed is rhetoric. The same panic-selling that led the markets down has now given way to panic-buying, putting the markets in now “over-bought” territory. We are now witnessing an incredible manifestation of FOMO: Fear Of Missing Out.

The only thing of significance that occurred was a massive liquidity injection the Chinese government made into its stock market. That may have helped propel the markets higher. But what does a massive liquidity injection mean? Think about the deeper significance. Why did the Chinese government feel this was necessary? Why did Mnuchin call all the heads of the major US banks last month and ask them about liquidity?  The truth is: risks remain.

The market has entered a dangerous phase of complacency where we no longer care about risk and are in full “risk-on” mode. Year-to-date the S&P 500 is up 6.54%. This feels eerily like January 2018, where the market soared in January, only to plummet 10% from its highs. So don’t get comfortable yet.

This rally has yet to be tested. And it’s our premise that it will soon be tested. First let’s remember where we still are despite this vicious rally: below the 200-day moving average. We are still in the danger zone. Sudden drops below the 200MA are often met with feverish counter-rallies, which are then followed by a re-test of the prior lows.

Currently, our long term and intermediate view of the US market is negative. Our short term view of the market is positive, but we believe the market is entering over-bought territory. Therefore at this time our overall view of the markets is “neutral.” We believe investors are best to exercise caution.

Tired of trying to figure it all out on your own? Give me a call! 859-291-9879.