Should we fear Trump’s trade war?

Free After-Hours Update:

On Thursday the S&P500 stumbled again as trade war nervousness persists. While things definitely feel ominous, don’t lose sight of the fact we are only 4% from all-time highs and prices barely slipped 1% since this latest round of trade war headlines flared up on Monday.

As with everything in the market, there are two ways to look at this muted reaction. The lack of a larger selloff could be telling us most owners don’t care about the escalating trade war because it is already priced in. Alternately, holding near recent highs leaves us vulnerable to further weakness as last week’s relief turns into this week’s anxiety.

The truth ultimately lies somewhere between those two opposing views. Clearly equities are holding up remarkably well given the headline uncertainty. Stock market crashes are brutally quick and typically happen before most people figure out what is going on. The classic “sell first, ask questions later.” That is definitely not happening here since this selloff has only managed to shave off a couple dozen points in nearly a week. Bears are telling us the crash is coming, unfortunately for them crashes don’t work like that. No doubt the trade war situation could get worse, but it is hard to imagine how much worse it could get worse since both sides are already threatening to tax nearly everything they import from the other.

For anyone still tempted to argue we are on the verge of collapse and missed what I wrote on Tuesday, let me share it again because it is just as relevant today as it was then:

Pundits love to tell us complacent markets are bearish. But what they forget to tell us is complacency can last an awful long time. Confident owners don’t sell and the resulting tight supply makes it easy for modest demand to prop up prices. And that is exactly what has been happening here. Rather than argue with a market that isn’t doing what we think it should be doing, we should try to understand why it is acting the way it is. If we used this approach, it wouldn’t take long to realize this is an incredibly strong market. We are not vulnerable. We are not overbought. Anyone who understood these things wouldn’t have been overly concerned by this morning’s headlines and weak open. Complacency will eventually catch up with us, but this is not that time.

The market’s muted reaction thus far means we can take “crash” off the table because if it was going to happen, it would have happened by now. But there is a big difference between a shocking crash and a drawn out grind lower. Even though we might not crash, we can still give back a large chunk of the latest gains. Risk is a function of height and this month’s gains left a lot of air underneath us and it wouldn’t take much to slip back to 2,700 support.

Most people would rather the market keep going up, but we knew that wasn’t reasonable given that we are in the middle of the slow summer season. 2,800 resistance was always going to be a hurdle and if we didn’t slip on trade war fears, something else would have knocked us down. So far the market is acting well. Resilience in the face of bad news is a good sign and means we should stick with what has been working. Don’t fall for all the misleading noise swirling around us. If this market was fragile and vulnerable, we would have crashed by now. Instead, view this weakness as a simple and routine dip. If this is nothing but a routine dip, then that means it is creating buyable entry point for those of us that are paying attention.

The headlines are predominately bearish, but the price-action remains constructive. Everyone knows markets trade sideways most of the time, but that is easy to forget when we are looking at the far right edge of a chart. Too often we convince ourselves every headline and price gyration means something. But the truth is today’s price-action will most likely be as inconsequential as any other random day over the last 12 months.

If there was something fundamentally wrong with this market, it would have shown up in the price-action by now. Instead we are holding up remarkably well and that tell us we are still standing on solid ground. But solid ground doesn’t preclude us from dipping modestly over the near-term. As I wrote on Monday, these things are rarely one-day events and we should expect uncertainty to persist. But I would be surprised if we failed to hold 2,700 support. In fact I doubt we even get that far. Which is unfortunate because I’d love to buy those discounts. Instead this dip will most likely bounce way too soon and won’t give us that great entry point.

As for our favorite buy-and-hold investments, there isn’t much to do except ignore the noise and keep holding.

Apple is the only FAANG stock struggling with these trade war headlines, but that’s not a surprise. They are the only one with huge Chinese manufacturing exposure. The rest of the FAANG stocks are escaping this uncertainty and are a good place for investors to hide out. Most likely this trade war stuff will blow over, but if it doesn’t and AAPL keeps slipping, that would be a better place to be buying more, not getting defensive and selling. People beg for a discount and any further weakness in AAPL would be answering our prayers. Don’t be afraid to take advantage of it.

Bitcoin is muddling along in the $6k’s, but the same thing happened in the $9k’s, $8k’s, and $7k’s. Unless we can find buyers willing to pull us out of these lows, it is almost inevitable another negative headline will come along and send us tumbling lower. At this point dip buyers don’t want to (or can’t because they are already fully invested) save this cryptocurrency and that means lower-lows are ahead.

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Jani

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