Trump has egg on his face
Well, the Great Negotiator has egg all over his face. President Trump gave China something for nothing when he delayed his announced tariffs…and China paid him back by shoving it right up his butt. Instead of announcing the purchase of buying more agricultural products, China has stated that they have “no choice but to take necessary measures to retaliate” against any new tariffs from the U.S. (even if some/many of them are delayed). Of course, the President has decided to blame the Fed for everything, but that excuse is beginning to run thin.
Yes, China's trade policies need to change
Don’t get us wrong, we do believe that the President’s general policy towards China is the correct one. Something does need to be done about China’s cheating on trade. We can argue about which strategy would be the correct one to change China’s actions, but that’s a moot point right now…because the President chose the “tariff route” a long time ago. That’s what we have whether we like it or not. However, the President can’t have it both ways. He wants to impose tariffs that will hurt the global economy…and yet he also wants the stock market to rally. It doesn’t compute.
The "timing" of Trump's fiscal policies are hurting him
The President is the one who deserves a lot of the blame for the recent decline/slow-down (decline in the markets/slow-down in the economy). He is the one who decided to “front-end” his fiscal policy plans. So instead of having his fiscal stimulus kicking-in during the third & fourth year of his first administration (like every other president of our life-time has done), it kicked-in during the first two years…and the Administration is now caught with its pants down. This makes it easier for China to shove…..oops, we better now go there.
Maybe Trump is dumb like a fox
Anyway, we don’t want to criticize the President too much for his actions. Let’s face it, if the stock market falls 15% or more from the highs by October/November…and then rallies back strongly in 2020…President Trump will be bragging about the big rally in the stock market and everything will be hunky/dory. In other words, as stupid as the President looks right now, maybe he’s dumb like a fox…and what he’s doing is actually brilliant (at least for his own political future).
Breadth was quite extreme yesterday
Yesterday’s decline came on pretty high volume (well above the 2019 average)…and breadth as absolutely horrible. I was a whopping 167 to 1 negative on the S&P 500 (with only three S&P 500 stocks closing in the green)…20 to 1 negative on the NYSE Composite Index…14 to 1 negative for the Russell 2000….and 102 to 1 negative on the Nasdaq 100 Index. (It was “only” 6 to 1 negative on the Nasdaq Composite Index.)…….…These breadth readings are quite extreme, so it could be signaling a very-short-term low is coming soon.
Tariffs are not the only issue weighing on stocks right now
In fact, the futures are all over the place this morning. First they were strong…then they reversed lower on the retaliation threats from China…and now they’re bouncing-back again on some vague news that China is willing to meet the U.S. half way. However, with the situation in Hong Kong far from resolved…the 2yr/10yr spread flirting with inversion…and second half economic & earnings growth estimates moving lower…it’s hard to think that any near-term bounce will last very long. Let’s face it, no matter what happens on the trade-war front over the next few weeks, it is becoming more and more obvious that this issue is going to be hanging over the markets for many, many, many months to come.
Russell 2000 testing key support
We have shown quite a few charts on the S&P 500 this week…showing that the 200 DMA is the next key support level for the index (and the 50 DMA is the key resistance level). Therefore, we want to show a chart on the Russell 2000 index this morning. As we all know, the small-cap Russell 2000 is usually a key leading indicator for the rest of the stock market…and right now it is testing an important support level. Last night, the Russell closed RIGHT on its late May/early June lows…so any further decline will give the small-cap index an critical “lower-low”. This would be quite negative…especially since it made a “lower-high” at its July highs.
Again, the futures are bouncing nicely as we write, but we’ll be watching the Russell 2000 VERY, VERY closely over the coming days and weeks. Any meaningful break below those May/June lows as we move towards Labor Day will turn the yellow flag that exists on the stock market right now…to a red one.