Dow Jones futures were paralyzed in early trading Tuesday as major warning signs flashed across the broader stock market.
The market is in the bizarre position where all asset classes are firing on full power. The Dow and S&P 500 are at or near all-time highs. At the same time, defensive assets like gold, bonds, yen, and even bitcoin pound higher.
This isn’t a market in equilibrium and something has got to break.
Dow trades flat ahead of G20 meeting
Dow Jones Industrial Average futures traded flat on Tuesday morning, extending Monday’s sideways movement. At 7.08 am EST, DJIA futures were 25 points lower (0.09 percent), sitting just below its all-time high.
S&P 500 futures are holding near record highs at 26,737 while Nasdaq futures point to a lower open, falling 17 points (0.23 percent).
Stock market “warning signs are screaming”
In a heated CNBC panel, Dan Nathan of RiskReversal Advisors said traders are ignoring the warning signs. He said it’s impossible to sustain the bizarre market conditions where defensive assets rally alongside stocks.
“It’s really simple. The warning signs are screaming in silence. They’re right out there. If you’re just looking at the S&P 500 that just made a new all time high, you’re looking at the wrong thing.”
Nathan points to gold, dollar-yen, and the demand for defensive stocks for signs that all is not well in the broader economy. Traditional safe haven assets are rising, and that should ring alarm bells.
Rate cuts won’t save the Dow
Sitting across the panel, Brian Kelly agreed with Nathan’s assessment. Kelly thinks traders are hoping for the Fed to inject hopium into the market with a rate cut in July. But he says traders should brace for the opposite result.
“At some point in time, you hit the law of diminishing returns… I think there’s a very good chance that the Fed cuts rates in July and the market goes down.”
After ten years of stimulus from the Federal Reserve, further monetary easing may not have the desired effect.
Only a trade deal will spark new stock market highs
Kelly did have one caveat on the precarious market. If Trump makes meaningful progress with Xi Jinping at the G20 meeting on Friday, we could see strong market gains.
“If we get some movement, and it would have to be significant, at the G20 towards some kind of truce on this trade war, then you could actually see the market hit new highs.”
As CCN.com reported, Trump is likely to ink a trade deal if it means averting a stock market meltdown. With the campaign for re-election around the corner, Trump will do what it takes to maintain a strong market.
Click here for a real-time Dow Jones Industrial Average price chart.