July 5, 2018
Posted 9:30 AM ET - The market wants to go higher but tariff threats are creating volatile conditions. In the last hour of trading on Tuesday the market dropped and investors reduced risk ahead of the deadline. The US will impose tariffs on Chinese steel and aluminum tomorrow. China said it will retaliate immediately. This tit-for-tat could escalate, but the market is giving Trump the benefit of the doubt. November mid-term elections are only a few months away and Trump's popularity is on the rise. He needs to maintain that momentum so that Republicans can gain Senate seats and maintain control of the House. China is aware of the situation and their agricultural tariffs will hurt farmers (Trump's most loyal constituents). China stated that they will stop buying US Treasuries if the tariffs are placed. The PBOC has been injecting liquidity and reducing bank reserve requirements. They know this could get nasty. China's market is down more than 20% from its high (bear market). Corporate bond defaults are increasing. We're only halfway through the year and bond defaults are at 75% of last year's record level. China's shadow banking industry is highly leveraged in real estate and it is estimated that there are 50 to 60,000,000 vacant homes. History tells us that countries with the largest trade surplus (China) are at greatest risk. Trade wars are bad for everyone, but some countries will feel greater pain. The market is hoping that China gets the message. They have already taken more pain (stock market losses and Yuan is tanking) and the tariffs have not been implemented. Trump will try to get them back to the negotiating table to avoid a trade war and this will preserve his popularity into the November elections. Both leaders are unpredictable and we will see if investors were right. This is a big week for economic releases. ISM manufacturing was very strong (60.2) and today we will get ISM services after the open. ADP showed that 177,000 new jobs were created in the private sector during the month of June. This was in line with expectations. This afternoon the FOMC minutes will be released. The Fed is steadfast in its efforts to tighten. Traders will try to gauge dissension once the report is released and they will see if there is any chance for a pause. Earnings season starts next week and profits will be robust. The future seems dire with trade wars looming, but investors will focus on "cash in hand". Many stocks have retraced and they have upside potential. Guidance will be strong and the impact of tariffs is largely unknown so the warnings should be minimal. Swing traders should be long IWM calls from the $166 level. There has been some time decay, but the index is slated to open at that level this morning. We will hold this position without a stop. Solid earnings will offset trade war concerns as long as Trump does not increase them after the first round. Day traders should watch for a possible reversal. Big up gaps have often failed and once the selling begins the momentum is difficult to stop. If the market is going to reverse we will see signs of weakness in the first hour of trading. If the market is able to maintain SPY $272 we should grind higher. Support is at SPY $270 and resistance is at $274. Use the first hour range as your guide. All of the timelines are converging. We will see if strong economic growth and robust profits are enough to negate trade war concerns. The market is poised to breakout of this range in the next two weeks. . .
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