Market Direction Mid Week Update©

Market Direction: BULLISH alert issued 2/15/2018

The current bullish ALERT is 29 week and counting, even with a sell-off of the Nasdaq today...

U.S. stocks closed mostly lower Wednesday with the technology sector logging its worst single-day decline since late July, triggering an outsize drop in the Nasdaq.

The weakness in tech stocks came as Facebook Inc. and Twitter Inc. executives testified on Capitol Hill about online misinformation.

Trade-related concerns also weighed on the market, with the U.S. and Canada set to restart high-stakes efforts to resolve differences as they work toward recasting the North American Free Trade Agreement.

How did major benchmarks fare?

The S&P 500 index SPX, -0.28%  lost 8.12 points, or 0.3%, to 2,888.60, with the tech sector slumping 1.5%, its biggest daily drop since July 30. The Nasdaq Composite Index COMP, -1.19% fell 96.07 points, or 1.2%, to 7,995.17, finishing below the key 8,000 mark. The Dow Jones Industrial Average DJIA, +0.09% however, bucked the trend to edge up 22.51 points to 25,974.99.

What drove the market?

Bilateral trade discussions have been tense at times, with President Donald Trump threatening over the Labor Day weekend to move forward without Canada if terms can’t be agreed upon. On Tuesday, Canadian Prime Minister Justin Trudeau reiterated the country’s view that “no Nafta is better than a bad Nafta deal for Canadians, and that’s what we are going to stay with.”

The uncertainty around trade has rattled investors, overshadowing U.S. economic data that have been healthy. The issue has undercut some confidence in stocks against the backdrop of a robust economy that suggests more upside for the market.

Read: Stock market has room to rally more than 10% by year-end, says famed bull

Investors are also monitoring a steady unraveling of emerging economies as the U.S. dollar, perceived as a source of safety in times of uncertainty, has strengthened amid the protracted trade spats. At the forefront of those worries are declines in the Turkish lira USDTRY, -0.0303% , Argentina’s peso USDARS, -0.0047% and the South African rand USDZAR, -0.0674% The Vanguard FTSE Emerging Markets ETF VWO, -1.07%  fell 1.2%.

See: 4 reasons why big-name strategists are wrong about investing in emerging markets

What data were in focus?

The trade deficit jumped almost 10% in July, hitting the highest level in five months and keeping the U.S. on pace to record the largest annual gap in a decade.

Separately, a pair of Federal Reserve speakers are on deck. Minneapolis Fed President Neel Kashkari is slated to speak at 4 p.m. at a town hall forum in Bozeman, Mont., while Atlanta Fed President Raphael Bostic is scheduled to speak at a fireside chat at the Chicago Council on Global Affairs at 6:30 p.m.

What were analysts saying?

“I don’t see any specific catalyst pushing tech lower, and it’s pretty quiet from the perspective of news about these stocks, which makes me think this is a classic sector rotation,” said Douglas DePietro, managing director for trading at Evercore ISI. “These groups have been outperforming, and this could be an example of investors taking profits, particularly since September is a historically turbulent month and a lot of big banks and brokerage houses have been encouraging their clients to lighten up on their tech exposure.”

“We still see further upside in stocks, but we’ve had a nice run and it isn’t uncommon to see a drawdown ahead of the midterm elections. Emerging-market contagion is a risk that’s spilling into global equities, and while we still have a favorable view on the U.S., you need to be selective,” said Matt Miskin, market strategist at John Hancock Financial Services.

“The trade deficit widened from $46.3 billion to $50.1 billion in July, it was the largest increase in the deficit in three years. The goods-trade gap with China widened to a record level and this suggests the tit-for-tat tariff spat is likely to continue as President Trump would like to see the trade deficit narrow especially with China,” said David Madden, market analyst at CMC Markets UK, in a note. “There is talk Mr. Trump will announce $200 billion worth of tariffs on Chinese imports, and today’s trade figures add creditability to Trump’s protectionist policies.”

What did other markets do?

Chinese stocks resumed their decline after snapping a weeklong losing streak Tuesday. The Shanghai Composite SHCOMP, -1.68% traded down 1.7% and the Shenzhen Composite 399106, -1.61% fell 1.6%. Japan’s Nikkei NIK, -0.58% finished down 0.5%.

The ICE U.S. Dollar Index DXY, -0.10% , a measure of the buck against six rivals, reversed direction to drop 0.3%.

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The all-time highs since our initial recommendation to go LONG this market. Here is how the markets have performed:

Stock Market Direction Recommendation (2/15/2018)
Dow	up 967.57 points a 3.84% gain	8/29/18
Nasdaq	up 876.87 points a 12.08% gain	8/30/18
S&P 500	up 185.30 points a 6.78% gain	8/29/18

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