Trade War Rhetoric and Light News Cycle Weighs On Market – Use This Stop

Posted by Pete Stolcers on June 25
www.oneoption.com

The market has been able to shoulder heated trade war rhetoric for the last month, but tension with our trading partners is high. Trump said that he would block Chinese takeovers if the domestic company had significant industrial technology. He also said that retaliatory tariffs will be met with new tariffs. A trade war is brewing. Trading volume has been light and it will continue to decline as a major holiday draws near.

Trump is spread thin and he needs to pick his fights. The deal with China would have paved the way for agreements with other trading partners. The summit with North Korea established goodwill with China since they were instrumental in getting Kim Jong-Un to the table. I thought this would help our trade negotiations. If the goal is to prove that the US has the upper hand, this could lead to a nasty market correction. It will take time to bear that out.

China is hankering down. Last week the PBOC injected $50B into the banking system and another round of $50B is slated for next week.

Last Thursday Dailmler lowered its forecast due to a proposed 20% tariff on imported cars and the market dropped on the news. If companies start guiding lower, it will cast a dark cloud over the market. The good news is that Daimler and other European automakers are pushing politicians for a zero tariff policy.

Traders are searching for a market “driver” in this light news environment. Heated trade war rhetoric is likely to spark profit-taking.

The macro backdrop is still bullish. Corporate profits are robust, guidance is strong and interest rates are low by historical standards. Valuations are reasonable given growth prospects.

Trading volume will gradually decline this week and it will be relatively low next week since the Fourth of July holiday bisects the week. When we get back from holiday Q2 earnings season will be upon us (JPM 7/13). Earnings season will keep a bid to the market and support at the 100-day MA should remain intact.

Bank stress tests will be released Thursday and that could help financial stocks.

We are likely see some weakness during the next two weeks as the rhetoric escalates. Swing traders are long IWM calls and you should use $166 as a stop on a closing basis. The Russell 2000 components are changing and the adjustments will be complete by the end of the week. This index is somewhat immune to tariffs and I expect to see relative strength. That does not mean that it will not decline. It will follow the market, but to a lesser extent.

Day traders should let the early action play out. Once the momentum is established, go with the flow. Industrials have been weak and energy has been strong. Use these two sectors as market surrogates when the direction has been established.