Market Direction: BULLISH alert issued 1/10/2019
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Market Direction Week Review: Elevated
trade and tariff tensions triggered the most sizable (albeit still modest)
pullback in global stocks so far this year. The U.S. raised tariffs to 25% from
10% on $200 billion in imports from China on Friday May 10, while President
Trump proposed increasing tariffs to 25% on another $350 billion in imports. In
turn, China vowed to retaliate. This is the most significant escalation in
rhetoric since before the tariff truce agreed upon on December 1, raising the
odds of a breakdown in negotiations. We continue to expect the U.S. and China
to reach a trade agreement at some point, since both sides have incentives to
want an agreement. While the fundamental foundation of economic expansion and
rising corporate profits is still very much intact, markets may be returning to
normal volatility following a calmer-than-usual start to the year.
In
an apparent attempt to speed up the negotiation process, the big news this week
was President Trump’s unexpected tweets on Sunday night (5/5) that he would be
increasing tariffs on $200B of Chinese imports from 10% to 25%, and add a new
25% tariff to another $325B not currently covered; both effective Friday
(5/10). As I mentioned last week, “President Trump has been pushing for the
discussions to conclude within the next 2 weeks, and has even stated that he
was prepared to walk away from the negotiations, rather than allow them to
perpetuate indefinitely.”
The
President has accused Chinese officials of backpedaling on previous verbal
trade commitments regarding technology transfer, though he insisted, as the
week progressed, that a deal was still possible. Despite ongoing discussions
with Chinese negotiators in Washington on Thursday and Friday, he made good on
the first half of that promise at 12:01 AM Friday morning. Without providing
specifics, the Chinese commerce ministry immediately vowed to retaliate.
France
doesn’t often get discussed in this section, but this week an initiative was
put forth to grant French regulators broad powers to investigate large social
media companies such as Facebook and levy fines on them if they fail to curtail
content considered dangerous or hateful; Silicon Valley companies continue to
feel global pressure to police their content. French President Emmanuel Macron
and Facebook CEO Mark Zuckerberg are scheduled to meet on Friday (5/10)
regarding this initiative. Facebook is also facing a fine of $5B in the US for
privacy violations.
North
Korean President Kim Jong Un, seemingly still disgruntled by the breakdown in
negotiations with President Trump back in February, is back to his old tricks.
While US officials and equity markets shrugged it off, President Kim oversaw
the launch of a short-range ballistic missile over the weekend, the first such
action in 18 months. Experts expect Kim to continue to provoke the US in the
coming months, in an effort to bring the US back to the negotiating table to
try to get economic sanctions lifted. Separately, on Thursday (5/9) U.S.
officials said they had seized a North Korean ship for alleged sanctions
violations
How
the market finished last week, the S&P 500 down 2.2%, the Nasdaq down 3.0%,
and the Dow down 2.1%.
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Market Direction This Week: We track the stock market with our Bullish and Bearish Alerts and for the last 17 weeks the stock market has been Bullish. The returns since the alert was made have been amazing and continue to be impressive (see Market Direction Mid Week Update: Trading Strategies).
With
450 companies (90%) of the S&P 500 reporting, earnings season is almost over.
I
have stated many times over the past several months that the big elephant in
the room is trade with China; and this week that elephant made his presence
known.
The
trade/tariffs will continue to dominate the market’s movements in the
near-term, and trading will likely be a challenging endeavor as a result.
Last
week we stated, “But after 10½ years of bullish markets, a late-spring and
possibly summertime pause seems likely. Markets just don’t go straight up
without a healthy downturn every now and then…this market seems ripe for
another downturn, and the indicators below tell us that many market
participants are preparing for one. It may not happen next week, but it is
probably on the near-term horizon. Those participants were rewarded this
week.
Last
week was a shock and a surprise with the negative turn in the China trade
talks. In any case, so much of what happens next is riding on whether or not a
new trade agreement is reached with China. I believe a new trade agreement
could result in a rally of +2% to +3%, back near record highs again, whereas if
the US and China both walk away from the negotiating table, another -5% to -7%
downside is very possible.
Economic
Calendar: Retail Sales (5/15), Industrial Production & Capacity Utilization
(5/15), Leading Economic Indicator (5/17)
Some of the major earnings announcements on deck: CSCO, BABA, BIDU, WMT, DE.
$tockMarketDirection proprietary model is currently BULLISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Building a community of investors one trade at a time. Share with a friend. Cha-ching!
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