Market Direction Mid Week Update©

Market Direction: BEARISH alert issued 11/23/2018

China trade wars and volatility are the stock market theme.

U.S. stocks came off session highs but still closed higher Wednesday after a series of developments boosted expectations that a U.S.-China trade deal could be reached in the coming months.

How did the benchmarks fare?

The Dow Jones Industrial Average DJIA, +0.64% rose 157.03 points, or 0.6%, to end at 24,527.27, while the S&P 500 index SPX, +0.54%  advanced 14.29 points, or 0.5%, to 2,651.07. The Nasdaq Composite Index COMP, +0.95% climbed 66.48 points, or 1%, to 7,098.31. The Dow was up more than 450 points at its session high.

Read: S&P 500 lows? We ain’t seen nothing yet, says Gundlach

What drove the market?

Both Chinese officials and the Trump administration have made a concerted effort to convince market participants that negotiations will soon bear fruit.

President Donald Trump, in an interview with Reuters, said he would intervene in the arrest of Huawei’s chief financial officer Meng Wanzhou if it would help ensure a trade deal with China. The executive was granted bail by a Canadian judge on Tuesday after more than a week in detention, but will be subject to close monitoring. She was arrested Dec. 1 at the behest of U.S. authorities and awaits possible extradition to the U.S. where she faces charges related to allegations she lied to banks about the company’s ties to a firm that did business in Iran, in violation of U.S. sanctions.

Those developments helped spur some relief buying as investors have been carefully watching the arrest, which has angered China, for signs that it could scuttle a trade cease-fire brokered last month.

Meanwhile, investors also digested a report Wednesday morning that China is prepared to make significant changes to its industrial policy, allowing foreign corporations greater access to the Chinese market. At the same time, it plans to drop numerical targets for domestic sourcing of inputs for high-tech products that had been part of the country’s controversial China 2025 economic development plan.

There is also a trend shift under way in the market. For the past three months, investors have largely been signaling fear over the longevity of the current expansion by rotating into the safety of utilities and consumer staples—the two only two sectors gaining value during that time.

This week has told a different story, with the tech stocks, as measured by the Technology Select Sector SPDR Fund XLK, +0.78% outperforming every other S&P 500 sector, giving hope to bulls who argue that the U.S. economic expansion has enough strength and stamina left to keep these firms growing rapidly for the foreseeable future.

What data were in focus?

The consumer-price index, a key measure of inflation, showed no price growth between October and November, the Labor Department announced Wednesday morning, in line with economists expectations, per a MarketWatch poll.

Core prices, which eliminate volatile food and energy costs, rose 0.2% month-over-month, also in line with expectations.

What were strategists saying?

“Volatility of late can be blamed on tariffs and trade talks,” Tatyana Bunich, president of Financial 1 Wealth Management Group told MarketWatch. The fundamental health of the U.S. economy helps justify a day like Wednesday, she said, when stocks are bid up on rumors of progress on the U.S.-China trade front, rather than concrete steps to bring down barriers.

The market is in “a good mood, with the Huawei CFO released on bail, and strong overnight action in Asia on constructive trade [headlines],” Dave Lutz head of ETFs at JonesTrading wrote in a note.

How are other markets trading?

Asia markets saw hefty gains on the Huawei developments, while the Stoxx Europe 600 index SXXP, +0.17%  also ended higher.

West Texas Intermediate crude futures CLF9, -0.20%  reversed direction to end slightly lower after data from the Energy Information Administration showed a smaller-than-expected drop in U.S. oil inventories. Gold GCG9, +0.07%  settled slightly higher and the dollar DXY, -0.05%  slipped.

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

Stock Market Direction Recommendation (11/23/2018)
Dow	down 404.58 points a 1.67% gain	12/10/18
Nasdaq	down 59.99 points a 0.86% gain	12/10/18
S&P 500	up 17.41 points a 1.87% gain	12/10/18

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