Market Has To Grow Into Valuation – Expect Choppy Trading This Week

Posted 9:30 AM ET - The market tested the 100-day moving average last Friday and it reversed sharply. We saw follow-through buying Monday and Tuesday. As I've been mentioning in my comments we can expect additional volatility. The S&P 500 is down 20 points before the open. The problem du jour is the departure of Trump's Economic Advisor Gary Cohn. He was instrumental in drafting the tax cut and he was opposed to steel tariffs. The market feels that this resignation is a sign that Trump will follow through with his plan. Gary Cohn was an asset to the administration and he will be missed. As a capitalist I believe in free trade. China imposes tariffs on most goods imported from the US and they have not been challenged until recently. In November (after Trump's visit to China) they reduced the average tariff from 17.3% down to 7.7%. Here is a sample of goods that were reduced: cosmetics, such as lipstick, eye shadow, and perfume, reduced from 10 percent to five percent; Electric razors and electric toothbrushes reduced from 30 percent to 10 percent; Coffee machines and smart toilet covers reduced from 32 percent to 10 percent; Mineral water reduced from 20 percent to 10 percent; and Oral hygiene products such as toothpaste and dental floss reduced from 10 percent to five percent. If China wants to avoid a trade war they simply need to reduce tariffs on US goods. Trump is using steel as a bargaining chip. Unfortunately, the media does not tell this side of the story. They want to focus on another cabinet departure and how this will increase the cost of a 12 pack of beer. The market has been volatile and it is fearful that wages are going to spike when the jobs report is posted Friday. That is what sparked the 10% correction a month ago. This morning ADP reported that 234,000 new jobs were created in the private sector during the month of February. This was a fantastic number. I believe that tax cut related bonuses/raises will temporarily fuel wages and we can expect another "hot" number Friday. This should subside in coming months. The Fed is going to raise rates and we need strong economic growth. ISM manufacturing and ISM services were robust. Stocks are trading at the upper end of their valuation range. I feel that they will need time to "grow into" the forward P/Es. We will see choppy trading for a few months and the market should settle in around the 100-day MA. Swing traders should remain on the sidelines. We need to let some of this volatility come out of the market. I will let you know when it's time to get back in. Day traders should let the market come in this morning. I believe that there will be a buying opportunity once support is established. The first support level is SPY $270 and the next support level is the 100-day moving average. Be patient and let the market find its footing. . .

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