Things you need to know
- Trade tension remains elevated
- Asian mkts follow suit and end lower
- European mkts trying to hold on
- Watch trendline support on the S&P – a failure here could set the algo’s ablaze
What a difference a day makes….24 little hours – except this time unlike the song made famous by Dinah Washington in 1959 – the day did not bring sun and flowers, it was not all a bed of roses by any stretch….Stocks took it on the chin, they got slammed, clobbered and walloped…..suddenly – the news that Donny tweeted on Sunday about raising tariffs on the Chinese while threatening new ones as well – started to sink in…..I mean, unlike Monday – when the day began weak but rallied once it was confirmed that Vice Premier Liu He would still come to Washington on Wednesday to continue the discussion (seemingly sending the message that it was all good) became a very different story yesterday for sure…..First Trade Representative Bobby (Liighthizer) reiterated the Trump message – tariffs would be going up on Friday – no matter what, period. And if the Chinese did not come back to the table and negotiate in good faith – then the add’l tariffs would be imposed as well. Trump drew the line in the sand, Lighthizer affirmed it– so now it’s time to see what happens.
Now yesterday – word leaked out that the Chinese had postponed Liu He’s trip and pushed it to Thursday – which was enough to create some new uncertainty and when the Dow broke trendline support – a level I made clear in yesterday’s note – then the algo’s kicked into high gear…..
“A break of Monday’s lows will set up to test the more formal moving avg trendlines….and those levels will the ones to watch over the next couple of days as we muddle thru this latest mess. A breach of the trendline will cause the ‘smart logic’ algo’s to raise cash and all that means is that the ‘passive’ investor will become a seller creating opportunity for the nimble active portfolio manager/investor.”
So the breach of the Monday lows happened early on…the S&P was the first to crack at 9:50 am, – which initiated the second wave of sell orders – (the first was the weaker opening), and that caused the Nasdaq at 10:50 to be the next soldier to fall, followed by the Dow at 11 and then the Russell 2000 at 11:05…..as each one of these indexes tested and breached the Monday lows – the selling became more intense….and what needs to be noted here as well is that the Dow – not only breached the Monday lows but it also pierced its 50 dma trendline – another point I made in the note – which is not a positive signal by any stretch…..as the day wore on – the S&P traded down to but did not breach its 50 dma which was probably a good thing yesterday – as that breach would have sent the algo’s into more of a tizzy…..
Wasting no time at all – DoubleLine’s Jeffrey Gundlach took to the podium to say that ‘stocks are in a bear mkt and that he sees a 50% chance of new tariffs’….Is it me? Stocks are not in a bear mkt at all, last time I checked the indexes were up high double digits and breaking new highs, not down high double digits and the idea that he sees a 50% chance of new tariffs? What’s up with that? Trump already said get ready – for an increase in existing tariffs and that he was considering the new ones as well…So Jeff –stands up and says what? “I see a 50% chance of new tariffs!” 50%! It can go either way, he is smack in the middle – he can’t lose….…..that’s like saying – there’s a 50% chance that it’s sunny out tomorrow…..…..so it leaves you to wonder – Is he talking his own book? Or is he 50% long and 50% short?
Now by the end of the day – all of the indexes closed just off their lows…with he Dow losing 473 pts or 1.8%, the S&P lost 48 pts or 1.65%, the Nasdaq gave back 160 pts or 1.9% and the Russell fell by 32 pts or 2.02%. So, now you have to ask – What happens if the trade deal falls apart? – Well – what do you think happens? The mkt isn’t going to rally on that news at all, since a trade deal was already priced in – so a failure will cause a re-pricing of assets (thing sell off) based on a new outlook…..so until we now get some clarifying headlines about the state of the discussions – expect increased volatility and angst and the VIX (Fear Index) speaks directly at this. In the past 2 sessions we have seen the VIX spike higher – surging by 35% in just two days….as investors deal with the latest headlines. A surge in this index indicates nervousness and angst – so if this keeps shooting higher – then expect to see more pressure on stocks.
And if China keeps pushing back on US demands about laws and regulations that need to be revised in order to be compliant – then expect the mkts to come under more pressure. Look, neither side wants the talks to breakdown at all….they would be difficult to resume, it will create damage to the global economy and it is certainly not in anyone’s best interest.
Overnight Asian mkts continue the sell off – with mkts in that region down over 1%…..Chinese trade data revealed that both imports and exports missed the expectations and that trade surplus was $13.8 bil vs the $35 bill that strategists had expected. No matter what the issue continues to be all about trade.
In Europe – mkts there are trying to stabilize – amid the escalating trade tension building around the world. In other news….more political uncertainty in the UK as both sides continue to fight about how to exit the Union, and France is jumping in on the fight with Iran – suggesting that international sanctions could be re-imposed if Iran breaks their end of the nuclear deal reached under the Obama administration. This on top of the angst created over the weekend in Israel as rockets and missiles lit up the night skies in the Gaza strip.
Oil continues to trade in line here at $61.90 a barrel – word today is that US sanctions on Iran and Venezuela are creating a ‘tight oil mkt’ and with demand from China increasing prices are expected to begin to move higher again and make up the lost ground suffered last week. But it still does not change the fact that there is plenty of oil in the ground and that the US is now the worlds largest producer. We remain in the $60.75/$66 range.
US futs are up this morning as they try to hold the line….Dow futs point higher by 25 pts, S&P’s are up 5, the Nasdaq is higher by 18 and the Russell is ahead by 3 pts. This is just more thrashing around as the mkts attempt to figure out what ‘s next. And while we will get plenty of macro data tomorrow and Friday – it is the trade talks that will continue to drive the mkts. Friday is D-Day….will Trump follow thru and raise the tariffs or will the Chinese come to the table and compromise? Look for the S&P, Nasdaq and Russell to try and hold onto their trendline support, while the Dow works to rally back. A failure of the Dow to move higher will set the tone for the broader mkt – and if that happens, then watch 2856 on the S&P – this is trendline support, it breaks then expect the pressure to increase, if she holds then expect that the sellers will back off just a bit to see what the next headline is. A failure of 2856 on the S&P sets us up for a test of intermediate support at 2775.
Take good care.
Pollo Agrodolce ( Italian Style Sweet and Sour Chicken)
This is not a difficult dish to make and once you simmer it – treat yourself to a bubble bath then come down and set the table, break open the wine, turn on some dinner music and enjoy the night.
You need: Chicken pieces – legs, thighs and breasts, olive oil, s&p, diced onion, chopped carrots, chopped celery, plenty of sliced garlic cloves – 6+, ¼ c sugar, 1 c Chianti, ½ c red wine vinegar, ½ c orange juice with pulp, *sliced almonds – optional.
Season the chicken pieces with s&p – set aside. In a heavy frying pan – heat up some olive oil, – now brown the chicken on all sides. Remove and place on a platter.
Now add the garlic, carrots, celery, and onion – sauté for 10 mins on med heat….Now add the sugar, wine, vinegar, orange juice, and almonds….bring to a boil – add back the chicken – skin side up. Place a lid off center and turn heat to simmer. Cook for about 30 mins.
Now remove chicken and place on a platter, – turn heat up to high and stir until it is nice and thick…not long…maybe like 4 mins max…..taste – adjust seasoning with s&p. Spoon the sauce over the chicken pieces and serve.
This dish works well with a green veggie – like French cut green beans or broccoli. Make a large mixed green salad with tomatoes, red onion and cucumbers. Dress in a balsamic Vinegar and Olive oil dressing. Keep it simple – as the chicken and marinade carry the dish.