It was one hell of a week for the S&P500. Trump’s escalating trade war and the Chinese retaliations dominated headlines. At last count we ran through three rounds of tit-for-tat tariffs and subsequent retaliations. Combined both sides are looking at $300 billion in products being taxed at up to 25%. If the two largest economies battling a trade war doesn’t send a shiver through global growth, I don’t know what will.
Early in the week there was optimism this was little more than posturing ahead of far more sensible negations and compromises. By midweek the markets surged higher in relief and left Monday’s lows in the dust. But any feelings of relief were short-lived because Thursday night Trump lashed out at China’s “unfair retaliations” and tripled the size of his proposed tariffs. That sent markets into a tailspin Friday and we finished the week near the lows.
Trump promised us he didn’t want a trade war, but his actions say otherwise. What started as a complaint about Chinese policies is now threatening hundreds of thousands of American jobs and higher prices will plunder middle America’s discretionary income. If that is how Trump looks out for hard working Americans, they would probably be better off if he stopped trying to help them.
I wrote a fairly critical post Thursday evening. If Trump is your guy, then you probably won’t like it. But if you want to understand what is going on and how it affects the stock market, it is a worthwhile read.
As for next week’s outlook, expect the volatility to persist. The market was willing to give Trump the benefit of doubt and is why prices rebounded nicely in the middle of the week. But Thursday night’s betrayal will stick with traders for a while and they will be far less willing to give him a pass next time. Even though this trade war will most likely cool down over the next few weeks, don’t expect traders to chase stock prices higher anytime soon.
Even though it was a challenging week for the market, my analysis proved to be quite insightful and profitable.
While the market’s resilience is impressive, we could still see a little more near-term weakness before this is over. Rebounds from oversold levels are shockingly fast. Instead of rebounding higher, we seem to be drifting sideways. The market rarely gives us this long to buy the bottom and that means we might not be at the bottom yet. This is still an attractive level to buy the discounts, but any dip-buyers need to be patient and be prepared for a little more weakness.
This was the Friday before Monday’s dramatic, 2.3% plunge.
But rather than run for the hills, on Monday I told subscribers:
Most likely this [trade war] won’t amount to much over the near-term and prices will rebound once the headlines cool off. But until then, expect volatility to persist. Thing will get ugly if Trump and China turn this into a major trade war, but that is the worst case scenario and is weighing on the market today. Anything short of that will be a relief and prices will rebound. We could see further near-term weakness, but most likely this is the time to be buying, not selling.
Two days later the market was 100-points.
Trump is the biggest wild card in this. If he says the wrong thing, that could lead to another 3% down-day. If he says nothing, then prices rebound and dip-buyers make a lot of money. Without a doubt that makes this a challenging time to own stocks, but the only way to make money is by taking risks. By the time things are safe, the discounts will be gone.
That afternoon stocks exploded higher when Trump held his tongue following China’s second retaliation. For a brief moment in time traders thought the worst of the trade war headlines were behind us. And Wednesday the surge higher continued. But Thursday night Trump proved everyone wrong by tripling down on his trade war. Thursday Night I told free blog readers:
Are today’s threats simply more political posturing ahead of negotiations? I wish I knew. But the one thing I do know is the market hates uncertainty and I don’t think the stock market is going to forgive Trump as easily this time. Fool me once, shame on you. Fool me twice, shame on me. It will be interesting to see how this turns out, but this is one of those things that is better watched from the safety of the sidelines…
…I was one of those confident dip buyers and everything looked awesome this afternoon as my profits were piling up. But all of a sudden I’m not as confident anymore. I have a reasonable profit cushion, but I’m definitely less confident than I was this afternoon and I will seriously think about locking in profits tomorrow. If too many people feel the same way, Friday could be an ugly day. The only thing we can do is wait for China’s response and hope that confident owners stay that way.
On Friday the stock market actually recovered a big chunk of those overnight losses. But that was as good as it got because not long after the stocks rolled over and we didn’t stop until we fell more than 2%, erasing nearly all of the week’s prior gains. I was lucky the market opened fairly strong and I was able to lock-in profits before things got a lot worse.
Now I will be the first to admit I was a bit lucky in calling this week’s moves so well and it often isn’t this easy. But the better we understand the market, the more lucky we tend to be.
Looking ahead, even though I locked-in profits this week, Friday’s volatility is setting up another buyable dip and I will be looking to jump back in soon. The best profit opportunities come from the scariest markets. Not all that long ago people were begging for a pullback. Now that the market has answered our wishes, don’t lose your nerve.
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.