Market Lift-off In A Few Weeks – China Is Taking Some Heat

August 20, 2018
Author: Peter Stolcers, Founder of OneOption

Posted 9:30 AM ET - We are in the summer doldrums and the market is trapped in a range. The economic news is light and earnings season is winding down. Politicians and traders are taking time off and the market lacks a catalyst. We can expect choppy conditions through Labor Day. Not much has changed over the weekend. Turkey is steadfast in their decision to imprison the American pastor and they will not be “bullied” by the US. Economic sanctions will take a toll on their strained banking system and a credit crisis looms. This problem can be easily resolved so the market is discounting a potential crisis. Iranian sanctions are scheduled for November and French oil producer Total has ceased operations. Iran is threatening to shut down the Strait of Hormuz and this would negatively impact global oil supplies. China's president Xi is planning a trip to North Korea. Kim’s talks with global leaders continue. US trade negotiations with Europe and Mexico are in progress and Trump wants a deal. Chinese officials plan to meet in the next few weeks to discuss trade. A Wall Street Journal article outlined a scenario where a trade deal in November is finalized - the market rallied on the news. I believe the rhetoric will settle down ahead of the mid-term elections, but both sides are miles apart and a deal seems unlikely. China is starting to feel pressure (market correction and currency devaluation). Walmart is shifting its cosmetic supplies away from China and it is likely to do so with other products as well. Domestic economic growth is strong and consumers are spending money. Retail sales were up .5% in July and department stores are reporting strong profits. Walmart's same-store sales were up 4.5% in Q2 and online sales grew 40%. Earnings for the S&P 500 were up 25% year-over-year in Q2 and guidance was strong. At a forward P/E of 16, stocks are reasonably priced and there is room to run. This is keeping buyers engaged while the issues described play out. Swing traders are long a half position of SPY. Hold without a stop and buy the other half at $280. We missed adding to our position last week by $0.16 and we will keep trying. The market is compressing like a spring and the pressure is building. This fall it will release and the market will surge to a new all-time high. Day traders should reduce size and trade count the next few weeks. Use the first hour range as your guide. If we are above the high, buy healthcare and retail stocks. If we are below the low, short tech stocks and Chinese stocks. The summer doldrums will end in a few weeks and normal trading will resume. Some of the dark clouds will part and buyers will return. . . image

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