July 12, 2019
Posted 9:30 AM ET - The news is light and that favors the upward momentum. Comments from Fed Chairman Powell suggest a quarter-point cut hike in two weeks and that has investors excited. Stocks are grinding higher without questioning the rationale behind the move. Short-term traders can ride the wave, but swing traders should stay sidelined. I believe that the upside rewards are smaller than the downside risks and that a buying climax might surface in the next few weeks. Fed speak has been extremely dovish and bond prices reflect a 100% likelihood of a rate cut on July 31st. That news is priced in and the market will instantly be looking for another rate cut in September. China's economic numbers have been soft and we can expect the PBOC to cut as well. China's imports fell 7.3% (weaker than expected) and that is a leading indicator. Exports declined 1.3% (-1.4% expected). Monday China will release GDP, retail sales and industrial production. I expect these numbers to be soft, but it won't translate into heavy selling pressure. The market is addicted to easy money and this will prompt the PBOC to ease. Slowing economic conditions in the world's second largest economy will eventually take its toll on profits and Q3 earnings guidance will be critical in the next few weeks. Trade talks with China are in limbo. Negotiators are not even meeting face-to-face. This is a sign that it's not worth their time to get in a plane. Last night China said that it has not formally agreed to increase grain purchases from the US. I have been saying this since December. There will not be a trade deal with China before the 2020 election. I am in the one percentile with this viewpoint. Xi has been playing games from the beginning and North Korea/Iran will be used as bargaining chips. The market latches on to every tidbit of positive news and most analysts believe that a deal is close at hand. The US is also using political pressure. Diplomats have met with protesters in Hong Kong and the US is close to signing a weapons deal with Taiwan. Global monetary easing creates a safety net under the market. As yields drop investors are forced to buy stocks because interest income does not keep pace with inflation (investors lose purchasing power when they invest in bonds). Eventually, profits start to decline as global economic growth contracts and that is when the selling starts. Stock valuations are at the upper end of their range (forward P/E of 17). It will take exceptional profits and strong guidance for the market to move higher. The first few weeks of the earnings cycle are bullish and the market should be able to grind higher. In the back half of earnings season industrials and retail will start reporting weak results. There was a piece of good news overnight. Research firm Gartner said that PC sales increased 1.5% worldwide in the second quarter (PC sales have declined the last two quarters). Unfortunately, mobile PC sales declined in Q2. Swing traders should stay sidelined. It's difficult to watch the market grind higher, but the gains have been marginal. Investors are lured in by daily six-point moves and it's important to remember that they can be stripped away in one day. I will wait for a buying climax. I believe that this final push higher will hit a snag when Q3 guidance fails to impress. Furthermore, the debt ceiling will be reached in a few weeks and Congress will scramble ahead of recess. There will be plenty of mudslinging and they will agree to a Band-Aid at the last second. The market will get very nervous in August when there is no one at the helm. Day traders should fade the early rally. The bid will be tested and stocks will retrace. Once support is established, buy stocks with relative strength. This has been our strategy the last week and it has worked well. If you look at a daily chart you will notice doji's. That means the market will close at or near its open. The farther we get away from the opening price, the better the fade. For instance, if the market surges higher wait for the rally to stall. Know that we should be able to get back to the opening price and we will probably go below it so that a lower tail is established. Once the selling stalls, look for a bounce back to the opening price. This is how we day trade in the chat room and the 1Option indicator predicts these moves. Look for a quiet day today. China's news Monday should be bad from a longer-term perspective, but we might see a rally (bad news is good news). . .
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