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Capital Wave Forecast: What We Need This Week for a Market Turnaround to Last

0 | By Shah Gilani

Money flows into stocks last week were muted across the board, with retail investors in equity mutual funds and ETFs decidedly on the sidelines ahead of the meeting Saturday between President Xi and President Trump.

The same wasn’t true for institutional money. Speculative bets on the long side increased towards the end of the week as big traders positioned themselves for good news.

Those bets look like they’re paying off already.

After a two-month layoff on trade talks, Xi and Trump agreed to get back to the table.

Pre-open today, Monday, July 1, 2019, futures across the board are all more than 1% higher.

That’s on the heels of a 2.2% gain overnight for the Shanghai Composite and a strong opening and early trading across European bourses.

The big gains likely today should start to bring a lot of the stockpiled money on the sidelines back into equities. Almost $40 billion came out of equity mutual funds and equity ETFs in the first quarter and the second quarter, with full data available soon, looked like more of the same.

Barring any out-of-left-field negative news, equities should see money pouring back in this week, definitely institutional flows, and a turnaround in retail inflows as sidelined investors see clearer sailing ahead.

If major benchmarks all, or almost all, make new all-time highs this week, capital will flow back into to stocks on FOMO flows – that is, “fear of missing out.”

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To get to new highs, the Dow must rise 1.3%, futures are up 1% pre-open.

To get to new highs, the Nasdaq Composite must rise 2.12%, futures are up 1.7% this morning.

To get to new highs, the S&P 500, which hit new highs last week, must rise .07%, futures are up 1.1%.

And the Russell 2000, the seriously lagging benchmark of smaller mid-caps, needs to jump 11.2% to make new highs, futures there are up 17 points, or 1.08%.

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What will continue driving capital into stocks is heavy betting that interest rates will remain muted, and could turn even lower if the Fed cuts, or even if there’s merely stronger speculation the Fed will cut.

We might see reasons to expect cuts ahead if we get a bad ISM PMI number this morning at 10 am.

May’s Purchasing Manufacturers Index clocked in at 52.1, the lowest reading since October 2016.

Economists expect a 51.3 reading for June. Don’t forget, 50 is the line in the sand, below which signals contraction. If we see PMI approaching there, a cut will be in the cards.

We also get the Labor Department’s June numbers on Friday. Last month payrolls increased 75,000 for the month. That was one of the lowest monthly numbers of jobs added since the end of 2009.

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With FOMO and bets that we’ll see rate cuts ahead, I’m expecting strong capital flows into equities this week and probably for the rest of the summer. So, expect a good summer rally and probably a good second half of the year.

That is…providing stocks make new highs and the Russell catches up. Otherwise, we could see skepticism rise if we don’t start hearing on regular news channels that stock markets are soaring.

When you see what’s lurking under the surface of our economy, you can see why I say this coming crisis could make the Great Recession of 2008 look like a day at the beach.

But with the right tools, you can weather this storm in peace and security. Full story

Sincerely,


Shah

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