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Wow are "THEY" trying hard to sell you this rally.  

The official close on the S&P 500 on Wednesday was 2,995.82 but they pushed and pushed once the volume went down at the close and hit 3,000 after hours but it all began to unwind at 3pm – as soon as the European Markets opened and the volume picked up.  That's a pretty strong indication that a lot of this "rally" is "fake, Fake, FAKE" but we can reserve judgment until 8:30, when we see the Non-Farm Payroll Report and the market's reaction to that.

As I noted on Tuesday, we're at the top (probably) of a 400-point run from 2,600 and, according to our fabulous 5% Rule™, we can expect a 20% pullback of this 15% move higher (2,990 actually) soi 400 points x 20% is 80 points back and since it's really 2,900 and since we like to round, we can say we expect to see 2,900 for a weak retrace of the run and somewhere between 2,800 and 2,840 (the real strong retrace from 3,000) should be a healthy pullback from here so that's the tendency we expect and now we'll see what the data says.

8:30 Update:  Up 226,000 jobs!  That just blows away expectations of 160,000 and May was revised even lower, to 72,000 but this makes that look like an aberration and not a trend.  Unfortunately, Average Hourly Earnings are only up 0.2% so people have jobs but they aren't making any money.  You would think the markets would pop on that many jobs but no, too many jobs means the Fed is less likely to hike and their next meeting is July 31st, before the next jobs report – so this is what they'll be looking at and it would seem foolish for them to cut with these kinds of jobs numbers – where a HIKE is usually mandated.

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"Fortunately" the jobs gains are mitigated by low wages so the Fed doesn't have pressure to raise rates but they would really have to twist themselves into knots in order to give Trump the cuts he wants and, of course, strong payrolls mean a strong demand for the Dollar and that's sending the Dollar up 0.5% which gets a pretty much equal and opposite reaction from the Dollar, sending S&P (/ES) Futures down 15 points (0.5%) – boy the math is easy from 3,000, isn't it?

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See how easy it was for us to project a $750 rejection in the /ES Futures from 3,000?  We made that prediction on Tuesday and you had until 3am this morning to place your bets, so don't say we didn't tell you so.  Since the move is based on a Dollar pop against POSITIVE Payroll Data – we take our quick profits and run and we'll set new lines for the next leg lower – if there is one.  We have plenty of long-term option hedges so we don't need to press our luck with Futures plays.

When we're expecting a rejection at a key technical level, we look for chances to short, not to go long.  If the 3,000 line is taken and held for a few days, THEN we can get bullish and use 3,000 as a stop but the main opportunities are short at the moment.  California got hit by a pretty strong earthquake yesterday – a 6.4 out of Bakersfield, just 100 miles from LA and that's the strongest quake since Northridge during the 1994 World Series, which caused Billions in damage at the time!  Before we call it a close call and close the books – we should give things a couple of days to settle down.  

China is still demanding Trump remove all tariffs (so we're back to where we were when things broke down) and now Japan has unexpectedly announced that it was considering imposing stricter export controls on more items bound for South Korea, in an apparent effort to raise pressure on Seoul to help resolve a bilateral dispute over compensation for wartime labor. The envisaged plan comes in response to what Tokyo views as Seoul’s failure to address the months-long dispute properly and prevent it from hurting mutual trust between the two neighbors. 

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Expanding the list of items, possibly to include electronic parts and related materials that can be diverted to military use, will likely exacerbate bilateral tensions,according to the Japan Times, and some within the government remain cautious about taking further steps, even though Japan has already announced that effective today, it will require manufacturers to file applications when they export to South Korea three materials used in the production of semiconductors and displays for smartphones and TVs.

This, along with the continuing threat of Rare Earth restriction from China, is a danger to the entire Global Semiconductor industry.  Japan's Abe is a mini-Trump and has been emboldened by the President's actions to try his own hand at applying economic pressure to achieve political goals.  

“We cannot give the preferential treatment that has been afforded until now, as the other country has not kept its promise,” Abe said during a nationally televised debate with leaders of other political parties,a day before official campaigning begins for the July 21 Upper House election*. “This does not go against WTO agreements at all.”*

South Korea controls 70% of the Global Chip Market and generally keeps about a 1-month supply of parts and materials while Japan's "review process" will take about 3 months so we're 45 days away (end of Aug) from a Worldwide Chip shortage that will grind the entire economy to a halt if this thing isn't resolved!  The case will indeed go before the WTO – but they have not been known for their speed in resolving matters.  

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On the other hand, if you go by Samsung's Q2 earnings expectations, we may not need chips anymore as demand was so weak in Q2 that profits fell 56.3% from the same quarter last year  as sluggish demand for memory chips was exacerbated by the nagging US/China trade dispute.  Analysts were already expecting terrible numbers and this is merely a confirmation of the worst-case scenario but the Japan issue could make things much worse in Q3.

Fortunately, we're already using the Nasdaq as our primary hedge so this works well for our Member Portfolios (andsee yesterdays' Mid-Year Portfolio Reviewfor all of our recent adjustments).  As we expected, there's certainly nothing this morning that makes me want to cover our aggressive hedges into the weekend and it would be much healthier if we pull back to at least 2,900 next week – but this rally hasn't been "healthy" for a long time – which is why we're cautious in the first place.

Have a great weekend,

  • Phil