Market Focus Will Shift To Econ and Profits In A Week – I’m Ready To Buy

Posted 9:30 AM ET - Yesterday the market tanked as the threat of a trade war increased. Relationships between the US and its trading partners have deteriorated. Retaliatory tariffs are being imposed and investors reduced risk. The S&P 500 tested the 100-day moving average. We can expect choppy price action for the next two weeks. A busy economic news cycle (official PMI's, ISM manufacturing, ADP, ISM services, FOMC minutes and the Unemployment Report) starts next week and it will take the focus off of tariffs. Economic growth has been strong. Earnings season starts in two weeks and it typically attracts buyers. Corporate profits are at record levels and guidance has been excellent. Stock valuations are reasonable given growth prospects. The tariff news is daunting, but the impact is unknown. It will take time the consequences to play out. The here and now (earnings) will be the priority and traders will focus on profits. The tariffs are still negotiable and corporations are very fluid. They will shift manufacturing to other countries to minimize the impact. Monday Harley-Davidson announced that it will shift production and it is a classic example. China is in a bear market (down 20% from the peak in January) and the PBOC is adding liquidity to financial markets. They stand to lose the most from a trade war, but Xi does not have to worry about elections or media attacks. I do worry that an economic recession could spark a credit crisis in their shadow banking industry. I will be watching for real estate defaults if this trade war escalates. US bank stress tests will be released Thursday and the results should be excellent. Financial institutions have deleveraged and balance sheets are strong. The same cannot be said for the EU. Trump feels like he has the upper hand and he will remain steadfast even if the stock market declines. He wants a global zero tariff policy and our trading partners will not change their practices unless he proves that he is willing to follow through on his threats. I like his zero tariff goal, but I don’t know if his strategy will work. Swing traders were stopped out of the IWM call position yesterday when the index closed below $166. It is currently going through rebalancing and that will end this week. We will reenter the position if the IWM closes above $166. The Russell 2000 has less exposure to tariffs relative to the S&P 500 because smaller companies rely more on domestic trade. Day traders need to watch the early action. Any weakness will be seen in the first hour. If stocks grind higher, trade from the long side. It will be a sign that buyers are eager to buy this dip and that support at the 100-day moving average is firm. As long as SPY $270 holds, I will favor the long side. . .

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