Jul 12

The reason we rallied in the middle of a trade war

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

The S&P500 surged to the highest levels in nearly six-months, erasing almost all of this winter’s big selloff. What’s driving this strength? If you go strictly by the headlines, it seems the market loves Trump’s trade war. That can’t be right, can it???

No of course not. The stock market hates anything that gets in the way of free trade and the only one winning this trade war is the taxman who is enriching himself at the expense of hard-working Americans. But if the market hates this trade war, why is it rallying so strongly after Trump started taxing $36 billion in Chinese imports and is threatening to add another $200 billion?

First, lets be perfectly clear, the market most definitely isn’t rallying because of Trump’s trade war. It simply isn’t selling off on the news because these headlines are already priced in. Rational traders sell the first hints of bad news. No one waits for the inevitable to happen before they react to it. When we see a rock flying toward our head, we move before it hits us, not after. The same goes for the stock market. Traders reacted to Trump’s trade war months ago when he first announced it. Anyone waiting until now to sell the trade war headlines clearly doesn’t understand how this works. All of this selling ahead of time meant there was no one left to sell the news when it finally happened. Remember, we fear what we don’t know, not the things everyone is talking about. Trump’s trade war is old news and is why the market doesn’t care about it anymore.

While this strength is obvious after the fact, these things are far harder to see ahead of time. But luckily regular readers of this blog saw this coming. (Don’t miss out next time, signup for FREE email alerts!) Two-weeks ago I wrote the following as this market teetered above 2,700 support:

Bears claim their time is coming, but is it really? If they couldn’t deliver the goods with such a perfect setup, what makes them think waiting a little longer will make a difference? Trade war headlines are as dire as they can get with Trump and China already threatening to tax all the trade between the world’s two largest economies. At this point things cannot escalate any higher. How did the market respond to this latest round of bearish headlines? With a lethargic, drawn out, two-week slide that barely gave up 2%. Everyone who has been doing this for any length of time knows market crashes are breathtakingly fast. Sell first and ask questions later affairs. Yet here we are two-weeks later, still waiting for the promised crash. The cold, hard truth is if it was going to crash, it would have happened by now.

And not only did we not crash, we rebounded to the highest levels in nearly half a year! People often claim the market is fixed when it doesn’t do what they think it should. The brutal truth is the market is most definitely not fixed, these people are simply looking at the wrong things. Everything makes perfect sense if you know what to look for. This was a strong market, not a weak one. Anyone who realized this wouldn’t have been surprised when the market brushed off stale headlines that had been priced in months ago.

But that was then and this is now. Most people already know what happened, what they really want to know what comes next. If this market was signaling strength two-weeks ago, it was shouting strength over the last several days as it defied conventional wisdom and rallied in the face of bearish headlines. If this market was fragile and vulnerable, there have been more than enough excuses to send us tumbling. Instead it is holding up incredibly well. Just imagine what will happen when we move past these negative headlines. This market most definitely wants to go higher and it won’t let anything get in its way.

I don’t expect a strong surge higher from here because we are still stuck in the slower summer months. Breaking 2,800 resistance is all but a done deal and no doubt that will trigger a short-squeeze as bears give up in frustration. But expect the gains to slow down after that because even though this market doesn’t want to go down, headlines are negative enough that those with cash will remain reluctant to chase prices higher. That won’t happen until big money returns from their summer cottages this fall. Those deep pockets will fuel the chasing into year-end and things are setting up for a strong finish to 2018. What doesn’t kill this market only makes it stronger.

If you found this post useful, return the favor by sharing it on Twitter, Reddit, Facebook and StockTwits!

Jani

What’s a good trade worth to you?
How about avoiding a loss?

For less than $1/day, have analysis like this delivered to your inbox every day during market hours

Jul 10

Here we go again

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

Tuesday was a good day for the S&P500 as it extended its win streak to a fourth day. But that hardly matters anymore because after the close Trump announced tariffs on another $200 billion in Chinese goods. That sent after-hours markets tumbling nearly 1%.

Thus far U.S. stocks have largely ignored Trump’s trade war and Tuesday we closed within 3% of all-time highs. The same cannot be said for Chinese markets that are quickly approaching a bear market. The question for us is if this latest escalation is the straw that finally breaks the camel’s back and we join the Chinese with our own bear market. Or if this is just one more thing our “oblivious” market ignores and we continue defying gravity.

For a historical perspective, we only need to look back a few days. Last Friday Trump launched his second round of tariffs on the Chinese and they immediately responded in kind with their second retaliation. What did our market do? It had one of the biggest up days this summer. How could something so negative lead to such a positive reaction? Was this market even paying attention? No sane market would rally in the middle of an escalating trade war, would it?

Luckily for regular readers of this blog, the market’s strength came as no surprise. We know markets are always looking ahead and quickly price in new information as soon as it becomes widely known. Trump launched his trade war this spring and Friday’s escalation didn’t surprise anyone, even the bears saw this one coming. But here’s the thing about rational traders, they don’t wait for something to happen before they sell it. Instead they start selling as soon as the rumors surface. Since we’ve been talking about this trade war for awhile, owners who feared these headlines bailed out months ago and were replaced by confident dip buyers who demonstrated an obvious disregard for these headlines. The more we talk about a trade war, the less it matters to the market.

I’m not claiming the trade war doesn’t matter to the economy and the stock market. Without a doubt this is a negative event and will hurt businesses and consumers alike. The stock market hates barriers to trade because they create inefficiencies and only enrich the government. But the thing to remember is stocks don’t need to fall for something to get priced in. Going sideways is often enough to compensate for a headwind.

The market was on fire last year and Trump’s tax cuts added fuel to the fire. In fact the Fed is worried about the economy overheating. But what has the stock market done while the economy continued ramping up this year? A lot of nothing. We got hit by waves of rate hike fears, rising interest rates, Trump’s trade war, and the icing on the cake is a growing investigation into the White House. Take these things away and without a doubt the stock market would be significantly higher. If we are lower than where we would have been otherwise, then these negative headlines are actually priced in even though we haven’t crashed.

Back to the present, not only did the U.S. stock market ignore Friday’s escalation, it’s been ignoring the trade war for months. Overnight futures would dip on a negative headline. But the thing to remember is overnight futures are an extremely thin market and easily influenced by a small number of players. As soon as the regular market opened and real volumes returned, prices rallied from their opening lows. No doubt something similar will happen Wednesday or Thursday. If this market was going to crash on trade war headlines, it would have happened months ago. If it didn’t happen then, it’s not going to happen now. Prices could slip a little further over the next couple of days, but these are buyable dips and no one should be bailing out “before things get worse”.

Before anyone accuses me of being a perma-bull, I am most definitely not. I’m an opportunist and personally I wish the market would crash so that I could make even more money riding these waves down and back up again. Unfortunately this market keeps telling us it doesn’t want to selloff. I’ve been doing this too long to argue with a strong market and am more than happy to play along. Without a doubt the latest round of trade war headlines could trigger further near-term weakness (and I would love it if it did), but this market has told us time and time again it simply isn’t interested in these headlines. I would be surprised if we dip much lower than 2,650 and no doubt we will hear bears howling in pain again when prices bounce back and they claim the market is fixed. There is nothing fixed about this market and everything makes perfect sense if you know what to pay attention to. If this market was going to crash on trade war headlines, it would have happened months ago. Instead any near-term weakness is simply another dip-buying opportunity.

If you found this post useful, return the favor by sharing it on Twitter, Reddit, Facebook and StockTwits!

Jani

What’s a good trade worth to you?
How about avoiding a loss?

For less than $1/day, have analysis like this delivered to your inbox every day during market hours

Jul 05

What to do on the eve of Trump’s trade war

By Jani Ziedins | End of Day Analysis

Free After-Hours Update:

On Thursday the S&P500 closed higher, erasing Tuesday’s pre-holiday slump. Trump’s trade war continues to dominate headlines, but to the great frustration of bears, these negative stories have been unable to dent this market. Are we on the verge of collapsing as bears claim, or do they have this all wrong?

Trump’s Chinese tariffs go into effect Friday and China promised immediate retaliations. At this point the first round of tariffs is unavoidable and I don’t know anyone still hoping for a last-minute reprieve. Yet on the eve of the trade war, paradoxically the market finished higher. Something doesn’t seem right.

Either we stubbornly argue with the market, or we try to understand why the market is doing what it is doing. I learned a long time ago that no one wins an argument with the market, so I always go for the latter option. Rather than insist the market should be crashing, I want to understand why it is is holding up so well in the face of these obviously negative headlines.

Anyone who has been reading this blog already knows the answer since I have been talking about this market’s resilience for weeks. I wrote the following June 26th when we first tested 2,600 support and it is every bit as valid today:

News gets priced in over time and we have been talking about Trump’s trade war for months. Anyone who feared these headlines bailed out months ago and was replaced by far more confident dip buyers. This turnover in ownership created a far more resilient market and explains this lack of a crash. If owners don’t sell a headline, it stops mattering. Since we trade the market and not the news, if the market doesn’t care, then neither should we.

Anyone can identify the reasons the market did something weeks after the fact when everyone knows what happens. But it takes far more thoughtful insight and analysis to figure out what is going to happen before it happens. I wish I had a crystal ball, but after doing this long enough and learning the eccentricities of the market, I don’t need one because the market always tells us what it wants to do before it does it. This time the market was definitively telling us it wanted to go higher, not lower, and that made this latest bout of weakness a buying opportunity, not a time to bailout before things get worse.

Quite simply, if this market wanted to crash, it would have happened by now. We have been living under the clouds of a trade war for months. If it didn’t matter before, that tells us it is already priced in and we don’t need to worry about it. Without a doubt we could slip a little further, but that would just give us an even better buying opportunity. If this market was afraid of Trump’s trade war, we would have crashed months ago. If the market doesn’t care, then neither should we.

If you found this post useful, return the favor by sharing it on Twitter, Reddit, Facebook and StockTwits!

Jani

What’s a good trade worth to you?
How about avoiding a loss?

For less than $1/day, have analysis like this delivered to your inbox every day during market hours

1 2 3 147