In essence persistent bulls at this point are not only fighting the Fed but I believe they are embodied with some sort of complacent arrogance opposed to acknowledging prospects for a broader correction, writes Gene Inger Thursday night. A rolling bear awaits?

Trade-war concerns tend to be dismissed by this market but there is a difference between the cynical presumptions of the moment and the reality of what’s behind threats to increase tariffs.

And it does relate to the global central banks but not simply their perceived infinite ability to print money.  

chart 1 

Reuters: S&P, Dow advance Friday as investors shrug off trade jitters.

That heavy currency collapse in China which Washington legitimately views as manipulative retaliation to the U.S. efforts to counter decades of Chinese trade behavior is behind some current US dollar (USD) strength. That likely has triggered the response by the U.S. threatening higher tariffs.  

chart 2 

There is also rapid capital flight from China and Iran too as they threaten physical punishment to citizens buying U.S. dollars. These for the most part are more desperate tactics to stop the trend away from those foreign currencies. (USD/CNY)

We’ll not argue whether American companies for now will absorb or can pass-on to consumers these higher costs. If tariff fights don’t come to a satisfactory resolution, it matters.

You could get a 1% inflation bump with ease. And combined with what now is what I term QT from the Fed instead if QE, the complacent assumptions are that equity markets can withstand all that. They will likely go out the window.  

chart 3   

Technically the S&P 500 (SPX) actually broke the Standard Deviation Mean as I’ve termed it. I was looking for it to bounce (as it did previously), fail come down to that area, maybe do yet another bounce, and then falter.  

I still expect that, but what happened Thursday was more dramatic.

Since the S&P went ahead and penetrated that level (quickly into the 2700s), it surely triggered a lot of selling and shorting (you know my warnings about not shorting weakness) which stimulated a couple responses:

1) Money managers knew they had to use margin to save the day lest yet again they get caught in a vise.  

2) By saving the day they also caught anyone who sold or shorted and had thus fuel to sustain the move higher that would be triggered by their effort just to bounce it after penetrating the mean.

3) And, the entire afternoon was a lateral market because everyone was caught in a sort of suspended animation with the shorts smeared and the money manager longs had saved the day with everything else still inconclusive.

Conclusion: Let me go so far as to say that our approach of lightening-up every time the S&P now goes to the high-end of the envelope is reasonable.

And that it avoids competing with smug optimists who only get jitters when the trap door is sprung and think they are left with only a keyhole exit to cash-out.

In a bull market the bulls are right. But this has been a rolling bear of a correction market since January's parabolic rise. That remains generally the case despite being masked by the FANGs.  

In essence persistent bulls at this point are not only fighting the Fed but I believe they are embodied with some sort of complacent arrogance opposed to acknowledging prospects for a broader correction.

Maybe they are right. I doubt it. I think all we have seen is yet another save by the crowd who in their hearts know an accident is a possibility especially if we don’t get some progress on trade.

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