Stock Market Outlook entering the Week of August 25th = Downtrend
- ADX Directional Indicators: Downtrend
- Price & Volume Action: Downtrend
- Objective Elliott Wave Analysis: Downtrend
Anything interesting impact the markets last week? Anyone?
In summary, the game of one-upmanship continued. The Chinese government decided to increase tariffs on U.S. goods, in retaliation for the increase of U.S. tariffs on Chinese goods. The U.S. retaliated by raising the existing tariffs on Chinese goods even higher. More tweets to come, I’m sure.
No change in the market outlook; the downtrend continues. The ADX, price/volume, and OEW indicators are all bearish.
The S&P500 ($SPX) continues to trade below its 50-day moving average. The trendline for the downtrend flattened a bit, now crossing through Thursdays close. The floor of support near 2,825 remains intact. The next stop would be ~2,725.
The weekly view shows a fairly steep downtrend, similar to May’s decline. This time around, we’ve had “higher” lows each week. Year-to-date (3rd week in August), the S&P has basically gone nowhere; the index netted a loss of 0.9%. Prices rose as much as 5%, and fell as much as 18%, which reflects the volatility we’ve experienced over the past 12 months.
The U.S. Fed meeting in Jackson Hole, which was supposed to provide the fireworks last week, became a sidenote thanks to the tariff talk. Fed chief Powell commented on the tariffs, more evidence of a global slowdown, and troubling economic “fundamentals” like low inflation. He also mentioned that the Fed is looking into the “monetary policy tools we have used both in calm times and in crisis, and we are asking whether we should expand our toolkit.” Some people feel this is a reference to Modern Monetary Theory (MMT), or more accurately known as the Magic Money Tree.
The Magic Money Tree is an economic theory that a monetarily independent country (i.e. one that can “print” its own money, such as the U.S.) can continuously “borrow” money in its own currency until it creates inflation. Here are some of the assumptions that go along with the theory:
- As an issuer of currency, a government cannot go bankrupt because it can just keep creating and printing money
- Governments can spend without restraint
- Large deficits and debt don’t matter when an economy is not at full capacity
- Assumes that public programs are created to stimulate economic activity
- All public programs can be financed by debt or creating money
- Politicians have latched on to this one with an iron fist!
- Financial and political activities are coordinated
- So long independent Fed
- Taxes can be used to control inflation
- Assumes that a government can actually do this correctly
- Assumes that the public will act rationally to higher taxes
Sadly, whether or not the theory is true or can even be successful in a democratic country is irrelevant. When we have another recession, cutting interest rates will not be enough, and the government will be called upon to do something (anything). Politicians will look at the potential benefits and say the ends justify the means.
I, for one, am hopeful that cooler heads prevail and we don’t see anything like MMT. But I’m also getting prepared, in case we do.
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Charts provided courtesy of stockcharts.com.
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Once a year, I review the market outlook signals as if they were a mechanical trading system, while pointing out issues and making adjustments. The goal is to give you to give you an example of how to analyze and continuously improve your own systems.
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