Market Direction: BULLISH alert issued 6/20/2019
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Market Direction Week Review: Stocks
recorded their worst week this year on worries that escalating trade tensions
could further slow global economic growth. The U.S. announced a 10% tariff on
$300 billion worth of Chinese goods starting in September. Crude oil prices
experienced the largest one-day drop in over four years before partly
recovering later in the week, while 10-year Treasury yields fell to the lowest level
since 2016. In what was an action-packed week, the Federal Reserve cut rates
for the first time in a decade, citing uncertainty in the outlook, softness in
business investment, and below-target inflation. The Fed's assessment of the
U.S. economy, however, did not change, with officials acknowledging strength in
the labor market, a pickup in consumer spending, and a moderately growing
economy. The July jobs report confirmed that despite trade tensions and other
global uncertainties, the labor market remains a source of strength for the
U.S. economy.
The
2-year debt ceiling and budget deal struck by President Trump and Congressional
leaders last week, has been passed by the Senate and is expected to be signed
by the President next week. Under the bill, discretionary spending will
increase to $2.7T over the next 2 years, and it suspends the debt ceiling until
July 2021; well after the 2020 presidential election. With $320B in additional
spending, it is expected to add more than $1T to the annual deficit over each
of the next 2 years; a level that many House and Senate republicans chided as
an unsustainable increase. While the deal does avoid a government shutdown when
the fiscal year ends on Sept. 30, Congress still needs to pass individual
appropriations bills to fund specific agencies and programs.
As
mentioned last week, U.S. trade negotiators traveled to Shanghai on Wednesday
(7/31) to meet with Chinese trade officials, but left with little if any
progress. While the talks were described as constructive, and new meetings are
expected to be set for September, a new trade deal remains elusive. The lack of
progress seemed to irk President Trump, as he again accused China of reneging
on previous promises (such as increasing agriculture purchases and cutting
fentanyl sales) and finally admitting (as I have said numerous times) that a
deal was unlikely until after the 2020 election. Then on Thursday (8/1),
President Trump caught the markets off-guard by announcing that he would be
imposing a 10% tariff on the remaining $300B of Chinese imports (mostly
consumer goods) starting on Sep 1. If these tariffs ultimately go into effect,
every product imported from China will be assessed a tariff at some level;
China has vowed to retaliate.
Britain’s
new Prime Minister Boris Johnson’s majority has been cut to only one seat
following a Liberal Democrat win, making his ability to negotiate a successful
Brexit by October 31, that much more difficult. While he won enough support to
earn his new role, his hardline “come what may” attitude on Brexit continues to
be problematic among some supporters. His ability to negotiate a better deal
than his predecessor Theresa May, continues to look rather questionable to
many. Time will tell.
How
the market finished last week, the S&P 500 down 3.1%, the Nasdaq down 3.9%,
and the Dow down 2.6%.
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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. The current stock
market environment is under pressure trade with caution (see Market Direction Mid Week Update: Trading Strategies).
How quickly things change. Only a week ago, equity markets were at all-time highs, anticipating the first Fed rate cut in over 10 years. Yet despite the Fed delivering the goods, an unexpected threat from President Trump of new tariffs on China has deflated the equity balloon and sharply raised anxiety levels once again.
With 384 companies (77%) of the S&P 500 reporting second-quarter results investors have plenty to digest. Earnings reports can prompt volatility in individual stocks.
Since last week’s favorable outlook was off the mark, it was a good reminder that neither fundamental nor technical analysis, nor any of the various options and futures market indicators discussed in this report can anticipate what President Trump may tweet on any given day. Like it or not, the President’s twitter feed is likely to continue to “trump” all other factors in determining market direction, and traders must remain ever diligent of that fact.
Market indicators this week suggest a much more bearish direction, though some of the shortest of the short-term indicators (VIX IV Gap and VIX Futures) point to the potential for a small bounce at the beginning of next week. However, the overall mood in the market has clearly soured and the outlook for next week is clearly an investors nightmare. Additionally, with the VIX already elevated, it is reasonable to assume that the stock market will remain volatile.
Economic Calendar: ISM Services (8/5), Wholesale Inventories (8/8), PPI (8/9)
Some of the major earnings announcements on deck: MCHP, ROKU, DIS, ALRM, UBER.
$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
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