Don’t Call It A Truce, This Is Why You Should Fade The Rally
U.S. Equities Surge After The Trump/Xi Trade Truce
The U.S. equities surge to a new all-time high following the announced trade truce between President’s Trump and Xi. The truce means the two leaders will not impose new tariffs on each others goods, that restrictions on Huawei will be eased, and that negotiations between China and the U.S. are back on track. What it does not mean is the trade war is over or that previous tariffs will be lifted. What trades and investors need to remember is that global economic activity is slowing due to current trade relations and that situation is not ended.
Economic data released today proves the point. Chinese and EU manufacturing data shows activity in both regions has contracted again. With activity contracting the outlook for future GDP growth is souring and along with it expectations for future corporate earnings. Estimates for future earnings have been steadily falling over the past two months and now indicate negative growth in the first three quarters of 2019. Along with that growth estimates for 2019 and 2020 are falling and that is undermining the true value of the stock market.
What I’m trying to say is that the trade truce is great, the market rallying to new highs awesome, but it’s a situation where you’re better off taking profits or fading the market than you are jumping on board the rally. Economic activity will likely continue to slow up to and until a trade deal is actually struck. Even then, outlook for growth will not significantly brighten until there is proof economic activity is picking up. What this is creating is a buy-the-rumor/sell-the-news event. When the trade deal is struck, if it is struck, the market is going to sell off in a way reminiscent of the tech bubble bursting.
The Technical Picture Is Not Good
The S&P 500 technical picture is not good. The index did indeed move up to set a new all-time high but there are many red flags. The first is today’s gap higher, the move shows a rapid advance in sentiment on a Monday morning, the worst day for traders to follow in terms of making real profits. This move set’s the index up to form an abandoned baby, shooting star, or other resistance confirming formation but it’s not the real reason I fear correction.
The reason I fear correction is the wicked amount of divergence I see in the indicators. Both the MACD and Stochastic are diverging from the new high in a way that suggests not only a correction, but a deep, hard, swift downdraft in prices that could put the index into full reversal. Right now, there are support targets at 2,960, 2,940 and the short-term moving average. If these break down I would not be surprised to see the S&P 500 move lower to retest levels near 2,720 or lower.