Market Direction: BULLISH alert issued 6/20/2019
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Market Direction Week Review: In a
holiday-shortened week stocks extended their recent gains, with the S&P 500
closing near its record high. Investors breathed a sigh of relief after the
U.S. and China agreed to suspend new tariffs and resume negotiations. Even
though this was the expected outcome, avoiding further escalation of trade
tensions and moving further away from the worst-case scenario was still
perceived as a positive. The rally in bonds was also extended last week, as
10-year government bond yields fell to their lowest levels in more than two
years amid signs of slower U.S. growth and expectations of further central bank
easing.
Last
week started off on a high note following the meeting between President Trump
and Chinese President Xi on Saturday (6/29) at the G20 summit in Osaka Japan,
in which the two leaders declared a trade truce. At that meeting, President
Trump agreed to hold current tariffs as is, hold off on any new tariffs that
had been proposed, and delay proposed restrictions on sales of U.S. technology
to Chinese tech company Huawei. All 3 of these items were demanded by China in
order for negotiations to restart. Back in May, President Trump increased
import tariffs on $200B worth of Chinese goods from 10% to 25% and threatened
to add tariffs on another $325B of consumer products. China immediately
retaliated with increased tariffs on $60B of US exports.
Following
the market’s positive reaction to the U.S./China trade truce, President Trump
reignited his trade/tariff battle with the European Union (EU). This is a
long-running dispute primarily concerning subsidies granted to Airbus which the
U.S. says gives it an unfair advantage over Boeing. Proposed action on the part
of the U.S. will be effected through about $4B in tariffs on EU products such
as cherries, meat, cheese, olives, pasta, whiskey and iron pipes. Unlike the
dispute with China, this issue is being managed through the World Trade Organization
(WTO), which has ruled that EU subsidies violate international trade rules and
does intend to allow the U.S. to assess countermeasures. Non-aircraft industry
groups caught in the crossfire, have generally opposed all tariffs on both
sides of the dispute.
Protests
in Hong Kong continued last week, and while they have seemingly succeeded in
reversing mainland China’s extradition bill, they also created backlash from
businesses that initially supported the effort. As protests turned from peaceful
to violent, businesses began to push back when daily business was disrupted.
Hong Kong Chief Executive, Carrie Lam said acts that cause physical harm or
destruction of property are unacceptable ways for protestors to express their
views, and may ultimately result in mainland leaders taking an even more
hardline approach. Chinese President Xi Jinping has capitalized on the violence
to support his perspective that Hong Kong needs less autonomy and can only
support economic growth when stability and order are controlled by the
mainland; ultimately the exact opposite of what the effort is trying to
accomplish.
How the market finished last week, the S&P 500 up
1.7%, the Nasdaq up 1.9%, and the Dow up 1.2%.
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Market Direction This Week: We track the stock
market based on our Bullish and Bearish Alerts a new Bullish Alert
recently started on 6/20/19 and we indicated to followers new positions could
be entertained at this time. We will continue to provide you the current stock
market conditions as they develop (see Market Direction Mid Week Update: Trading Strategies).
With
a trade truce in effect, earnings season not yet underway, 4 weeks until the
next Fed meeting, and very few economic reports on the docket, a bit of a pause
is in order for the markets.
Last
week, “…while a new trade deal is not expected to come from the G20 meeting,
holding tariffs at current levels and a commitment to further talks (trade
truce) may be enough in the near-term”. This is exactly what we got, and
equities rallied to a new record high. I also said, “Expect to see the whole
situation as one of asymmetrical risk; the upside may be a couple percent but
the downside is a whole lot more than that if negotiations fall apart”. The
point here is that the trade-truce upside was essentially baked into the
market, which is why after hitting new highs, equities pulled back on a
stronger than expected jobs report on Friday (7/5). Still near record levels, a
substantial amount of downside risk remains leaving equities vulnerable to any
negative news.
The
above statements notwithstanding, most of the short-term indicators moved
toward a more neutral position. This speaks to the fact that there are very few
upside catalysts available to push the markets higher until the 7/31 Fed
meeting. However, with earnings season not quite started yet and few economic
reports next week, there are also very few negative catalysts on the horizon.
Economic
Calendar: Consumer Credit (7/8), FOMC Minutes (7/10), CPI (7/11), PPI (7/12)
Some of the major earnings announcements on
deck: HELE, LEVI, PEP, FAST, BBBY.
$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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