Here we go again

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.

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Jani

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