2019’s market uptrend is officially shattered, hollers financial site NorthmanTrader.

Can it be glued back together? Or is it wrecked beyond hope?

These are the questions that ride and torture us today…

The Dow Jones plunged 473 uptrend-shattering points yesterday. It was sunk over 600 at one point.

Percentage wise, both S&P and Nasdaq endured similar lacings.

Meantime, Wall Street “fear gauge” VIX raced past 21 yesterday… to a five-month high.

The reason scarcely rates repeating:

Renewed trade war tremors have shaken markets violently.

Twenty-five percent tariffs on $200 billion of Chinese wares enter force Friday — barring a final hour armistice.

Is one likely?

The Great Negotiator at Work

Yards and yards of speculation have come rolling from the financial press… and expert opinion divides in two.

Yes, some insist — Trump will have his deal. You are simply seeing the Great Negotiator at his tricks.

In this hopeful camp we find, for example, Neil Wilson, chief market analyst for

One cannot but sense that Mr. Trump is playing us a little. He may well be making a deal seem further away in order to make the achievement seem all the more impressive when it comes.

Perhaps this fellow has the president’s measure. It is true…

Mr. Trump knows how to blow his own bugle, to thump his own drum, to stage a show grand and glittering.

Others say no.

Unbridgeable distances separate the warring parties.

In this doomy camp we find the folks of Phoenix Capital:

… The fact is that the U.S.’ and China’s economic interests are completely at odds… Any trade deal that would actually address the structural issues between the two economies (IP theft by China, tech theft by China, opening China markets to U.S. interests) would collapse China’s economy in short order. 

Incidentally, the Chinese Commerce Ministry announced today that it will launch “necessary” countermeasures if the tariffs go up.

Besides, neither Trump nor China wish to yield publicly to the other.

“Irresistible Force” Meets “Immovable Object” 

And so you have an “irresistible force meeting an immovable object,” claims “bond king” Jeffrey Gundlach:

Both the premier of China and the president of the United States want to come across that they prevailed and didn’t give in… I think you’ve got an irresistible force meeting an immovable object.

The bond monarch places the odds of a deal beneath 50%.

We will have our final answer Friday morning. Or will we?

Is the irresistible force so irresistible? Is the immovable object so immovable?

The president confirmed this morning that a Chinese delegation is coming to Washington “to make a deal.”

The numbers team at Standard Chartered Bank has sweated through the various probabilities.

50% Chance of an Extension

The odds of a finalized hand-shook deal they place at 25%.

What are the chances that negotiations rupture, that tariffs enter effect Friday?

Even lower — 15%.

But perhaps they will agree to kick the soda can down the road once more…

“We are so close, we simply require a slight delay to iron the details,” they may claim.

What are the chances of an extension?

These odds they fix at 50%.

Markets Wait and Watch

Markets — leery markets — sat with their arms crossed this morning, fingers tapping on forearms, chin in the air.

“Show me more,” they said.

Back and forth stocks went all morning, red switching to green, green switching to red.

By 11 a.m. the boards finally turned solid green. But late day doubts returned

The Dow Jones scratched out a slender two-point gain on the day. The S&P closed five points lower; the Nasdaq 20 points lower.

But to return to our original question:

Is the 2019 uptrend hopelessly shattered?

We have it on some authority that volatility is plotting a comeback…

Watch the “Real” Fed Funds Rate

Jitesh Kumar is a derivatives strategist at Société Générale.

This fellow’s research reveals that the greatest telltale of long-term S&P volatility — for 50 years running — is the “real” fed funds rate.

That is, the inflation-adjusted fed funds rate.


The key takeaway from our work over the past few years analyzing the impact of macro factors on equity volatility is that it is the real central bank policy rate that drives the (subsequent) volatility in equities.

The nominal fed funds rate is the interest rate the Federal Reserve jiggers at will.

Janet Yellen raised them from zero in December 2015. Yet only in December 2016 did the Federal Reserve began hiking rates with abandon.

And so real rates began to surge.

It is now roughly 2.5 years later.

“Beware the Sting in the Tail”

As low as negative 3% in 2016, the real rate presently ranges into positive ground — near 1%.

Who cares and so what?

Beware the sting in the tail…

Kumar’s research indicates trouble forms in the stock market 2.5 years after the real fed funds rate starts to bubble… as it did in Dec. 2016.

MarketWatch, in summary:

Changes in the inflation-adjusted fed-funds rate foreshadowed changes in the S&P 500’s realized volatility 2.5 years later. In other words, investors have to wait for around 30 months before the real fed funds rate’s rise starts to lead to turbulence in equities, said Kumar… Equity volatility may start to ramp up from here, given that the central bank had started to steadily increase its key lending rate starting from December 2016, around 30 months [ago].

Volatility itself does not translate directly to a crashing market.

But the way ahead may meander, twist, turn, rise and fall… enough to raise the hair and chill the blood.

And yes, it may even lead to a cliff…

“Who Will Be Left to Buy?”

We are informed that investors are fleeing the market as fast as legs will take them — even during last week’s rally.

Reports Bank of America:

“Institutional clients, hedge funds and private clients sold the highs in equities last week.”

Yet the S&P turned in a new record high last week.

To what occult force, to what strange hocus pocus can we ascribe this unlikely outcome?

Stock buybacks:

Buying was led by corporate buybacks, as all other groups (hedge funds, institutional and retail clients) were net sellers of equities for the second consecutive week. 

But companies cannot buy back their own stock in perpetuity. Eventually the track bag empties.

Many insist 2018 represented “peak buyback.”

When the wizardry ends… who will be left to buy?

Answers Goldman:

“Without company buybacks, demand for shares would fall dramatically.”

And so would the stock market… with no net beneath it.


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning