November 12, 2018
Posted 9:30 AM ET - Last week we got two important pieces of information. The Democrats won the House and the Fed remains hawkish. Both outcomes are bearish and sellers are taking advantage of seasonal strength. Unless Trump caves in at the G 20 meeting at the end of the month (unlikely) I don't believe the S&P 500 will get above its 100-day moving average this year. Democrats are already planning multiple investigations against Trump. They will look into his tax statements, revenues from foreign dignitaries staying at his hotels, his efforts to impose regulations on media (Amazon/Washington Post, AT&T/Time Warner/CNN) and the firing of Jeff Sessions. In short, they will do everything they can to discredit him. This is dysfunctional and the market won't like it. Last week the FOMC statement was hawkish. They only changed 30 words and they did not mention the global slowdown or the October correction. A rate hike is likely on December 19th and we can expect a lump of coal in our stockings. Domestic economic growth is strong, but analysts believe the Fed is missing the global picture. Powell will speak in Dallas Wednesday morning. Stocks in Europe are down overnight as Brexit concerns weigh on stocks. Until this is resolved we can expect a negative backdrop in Europe. Germany will report Q4 GDP this week and data suggests a decline. The EU is struggling with Italy and the deadline for a new budget is tomorrow. All indications are that the 4th largest economy in the EU will not budge. This defiance will rattle the entire EU. Trump and Xi will meet at the end of the month in Argentina (G20). At very best they will agree on a framework and postpone proposed tariffs (20% chance). This is the only bullish scenario. There is an equal chance that they will agree on a framework and that proposed tariffs will go into effect while they work on it. If this happens there will be “bad blood” and the negotiations will drag on. I believe that there is a 60% chance that both sides will continue down the current path. Trump feels that China has taken advantage of the US for decades and he is going to strike a very hard deal. China is preparing for a long battle based on its actions/rhetoric. China will post industrial production and retail sales on Wednesday. This will be an important number and we could start to see some signs of weakness. Companies have been building inventories ahead of the tariffs and that is artificially propping up China’s economic data. Alibaba reported that "Singles Day" sales increased 27% year-over-year. Those results are fantastic, but they are below the 39% year-over-year growth reported in 2017. The continuing resolution is on December 8th and a shutdown is possible if Trump doesn't get funding for the wall. When the market can't rally into year-end on strong earnings there is a problem. Last week the S&P 500 could not even challenge the 100-day MA before rolling over. We tested the 200-day MA Friday and I believe it could fall this week. If it does, we could test the low from October. Swing traders should remain in cash. If the S&P 500 closes below the 200-day MA today and if Italy does not adjust its budget, we might go short tomorrow. The calendar is filled with potential landmines and I do not like the backdrop. You know from my comments last week that my bias as shifted to bearish. Day traders should favor the short side. Take profits at the 200-day MA and wait to see if that support level holds. If it fails, reenter short positions and prepare for a steady slide. Typically, Asset Managers buy stocks into year-end. They "goose" the market and investors are happy when their portfolios prosper. Performance fees and bonuses also increase. This is a powerful seasonal force and when it fails to materialize it is a sign that the smart money is selling while the going is good. This is a time to be very cautious. The upside rewards don't justify the downside risks. . .
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