July 30, 2016, Weekly Summary; Bad News is Good News

Bad News is Good News in Our Upside-Down World

GDP growth was forecast-ed to be 2.6% year-over-year in the second quarter, instead it came in at 1.2% and Q1 was revised down to 0.8%. That is a terrible economy in action, but of course the stock market made a new high. Bad news is good news in the glass towers of Wall Street, since bad news will keep the FED from raising rates anytime soon and THAT is all that matters to the financial industry. Corporate earnings are down year-over-year for the last four quarters…but who cares?

Caterpillar (CAT) reported a 16% year-over-year decline in second quarter sales and revenue, along with a 22% decline in profit per share; CAT shares increased 5%.

Apple (AAPL) had a 14.5% year-over-year decline in revenue and a 23.2% year-over-year decline in earnings per share; AAPL shares increased 6.5%.

In 2007, just before the great-unwind, GAAP earnings for the S&P 500, where $84.92. Today, the earnings are $86.44 which is only 1.5% higher, while the S&P 500 is 38% higher (see chart below).

jully 29 gaap

The stock market is completely disconnected from the real economy, but this has happened many times in the past, most recently 1997, and 2007, and the bubble took years to pop. Pop it will, but the timing of the pop is impossible to pin-down. We are quite confident in the FED’s ability to provide the pin-prick that will cause a sudden and massive collapse of the bubble, but the odds of that happening before the election are not high; the CME FED Tool gives only a 12% chance of a hike Nov. 2/16. Once disconnected from reality, the market can bubble for an indeterminate length of time.

The Patterns We Are Following

The divergent pattern between the Rydex Bull funds and the SPX is still in effect, but is weakening.

july 29 rydex vs spx

The bull sentiment versus the SPX pattern is still firmly in place.

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The put to call ratio spiked down, a couple of weeks ago, indicating a local maximum may be forming.

july 29 put to call ratio

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Bull sentiment tends to peak one to six weeks before a local top in the S&P 500, and bear sentiment spikes down (pink vertical lines) at the same time. The top comes with the bull sentiment dropping (pink ovals), and the bear sentiment rising (blue ovals). This pattern is still in effect (chart below).

july 29 bull bear topping

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Gold

Gold rallied as the dollar dropped after the FED meeting on Wednesday. This, along with the rally in stocks, was essentially the market’s way of laughing at the FED’s statement that; ‘rates-could-rise-maybe-if-the-economy-would-improve-even-though-we-have-failed-over-the-last-nine-years-perhaps- in-the-next-few-months-something-will-happen-that-allows-us-to-raise-rates”. The market found the FED’s words hilarious.

july 29 dollar gold

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The commitments of traders data this week do not include the post-Fed trading for Wednesday through Friday. By Tuesday, the large speculators had reduced their long positions, and the commercial traders had reduced their short positions, but this likely changed by the end of the week. We won’t know how the traders reacted to the FED until next Friday, but it is probable that the commercials raised their short positions and the speculators likely raised their long positions.

july 29 gold
july 29 commitments