Market Rally Is Out of Gas – Heed These Warning Signs

Posted 9:30 AM ET - The overnight news was extremely bullish, but the market is not moving higher. Trade talks with China are progressing and the framework has been forged. The S&P 500 jumped higher on the news and now it is down four points before the open. As I've been mentioning in my comments, a trade deal with China is largely priced into the market. The US submitted a memorandum with six structural issues: force technology transfer and cyber theft, intellectual property rights, services, currency, agriculture and not-tariff barriers to trade. An outline of 10 items that could reduce the US/China trade deficit was also submitted. Trade negotiators were so encouraged by the progress that they considered working through the weekend. Xi has given a Chinese negotiator binding authority. We still don't know if a deal can be reached and Trump said he would not extend the deadline unless material progress was made. This decision would need to be made right away to avoid tariff increases at the end of next week. Even if the trade deadline is extended, we don't know if a deal will be reached. There are many sticky points that China might not agree to. The market's reaction could mean that a deal is priced in or it could mean that investors are skeptical. A trade deal with China will keep their growth from falling off a cliff, but it won't stop the downward trend. As I mentioned yesterday, flash PMI's could spark selling. Europe's numbers were soft with manufacturing at 49.2 versus 50.3 expected. Germany (Europe’s largest economy) posted a manufacturing PMI of 47.6, the lowest level since 2012. Europe's services sector was decent at 52.3 versus 51.3. Japan's flash PMI is in contraction territory and it came in at 48.5 versus 50.3 in January (third largest economy in the world). Australia's flash PMI was 49.7 (down from 51.3). Without question global conditions are deteriorating. I've also been mentioning that US conditions could falter and that last week's 1.3% drop in retail sales could be a warning sign. Durable goods orders increased .1% (.3% expected) and the Philly Fed came in at -4.1 (14 expected). Global economic conditions are deteriorating it is only a matter of time before it impacts our economy. The Fed cited economic risks in their FOMC minutes from the last meeting. This is one reason that they have taken their foot off the brake. Most of the officials want to quantify the balance sheet roll-off soon. This would improve transparency and it is dovish since they might end this before year end. Most Fed officials also feel that if their economic projections for the US are accurate, they will hike rates at least one more time this year (hawkish since none are price in). On balance the FOMC minutes were neutral. Theresa May suffered another blow when 3 supporters moved over to the new independent party. The UK Parliament voted not to extend the deadline and Europe will not budge on their exit agreement. With 40 days remaining, this could be a train wreck for England. The market was not able to rally on fantastic trade news and that is a warning sign. Global economic conditions continue to slip and a trade deal will not fix that. Trump is preparing to slap auto tariffs on Europe and there have not been any trade negotiations. With a US/China deal in the works he will start to apply pressure. Swing traders should short the SPY if it trades below $274. We will use a closing stop of $278. With each economic report that is released we are one step closer to a market decline. Official PMIs will be posted next week and they include China (they will probably inflate their numbers during trade negotiations). Day traders should look for a choppy day. Buyers and sellers will duke it out so we should have good price movement. Use the first hour range as your guide. As long as we are in the range, fade the extremes. If we breakout of the range, favor that side. The market has made a fantastic bounce off of the December low, but the momentum is starting to slow. I believe the next decent move is down. . .

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