Markets are China dependent

Profit-taking is a natural and expected part of the stock market. That’s why no one should be surprised that this week we are witnessing a period of consolidation. It is actually a good thing. Given that most investors need a reason to explain any market declines, this week’s announcement that President Trump is postponing his meeting with Xi, his Chinese counterpart, was both a surprise and a disappointment. It shouldn’t be. Over the last few months, I have tried to reduce investors’ expectations of an easy, one-shot, Chinese break-through on the trade front. The postponement is actually a positive, in the sense that both sides are taking the negotiations seriously. There is just too much to negotiate, which is why I expect that the March 1 deadline to institute additional tariffs will again be postponed. Part of the problem is the president’s insistence that he be the one to make most, if not all, of the decisions on the China front. That is difficult to do when his attention has been focused on getting his Wall money, fending off investigation after investigation, shutting down the government (or not), and feuding with Nancy Pelosi and Chuck Schumer. There just isn’t enough time in the day. To accomplish all of the above and move forward to solve an array of issues that have evolved over decades of trade with the world’s second largest economy is asking the impossible. I have to hand it to Trump for even attempting to renegotiate our long-standing China trade issues. No other president before him has tried. As such, investors should take a more realistic view...

The Fed finds religion

After two years of tightening monetary policy, the U.S. Federal Reserve Bank signaled this week that it was time to put their monetary tightening program on hold. The stock market soared in celebration. As we closed out the month of January, stocks are gaining. The October-December declines that culminating in the “Christmas Eve Massacre,” which were the worst in 80 years, are rapidly disappearing. Investors who were smart enough to hold fast should be made whole again by the end of this quarter, if not before. That does not mean that the volatility that has beset the markets of late will fade away. Quite the contrary, I expect the wild swings in the stock market to continue. But for now, the Fed has once again provided a floor of support for equities. The question to ask is: “Was the Fed’s move justified, or did the markets (and Donald Trump) scare Chairman Jerome Powell and his committee into backing off?” I would say there is a little of both in the Fed’s actions. While the economy is still growing, “the case for raising rates has weakened somewhat,” according to Powell, who spoke after the FOMC meeting on Wednesday. Of course, he reminded his audience that the Fed would still be “data dependent” in deciding when the next interest rate hike might occur. That was a sea change in rhetoric from last quarter when the Fed chief said rate increases and sales of $50 billion/month U.S. Treasury bonds were largely on auto pilot. President Trump threw a fit, making his own dissent from that policy quite clear. He believed that the...

Conditions are ripe for further upside

  The markets needed a break. Overbought, extended, and tired of buying, traders took a time out this week. It is a necessary part of the market equation. Two steps forward, one step back. Now that we have had six days of consolidation, expect more upside. I know, I know, that’s not enough. You want to know what the next level we might reach before a pullback occurs and what is the time frame? Looking at the S&P 500 Index, I would guess that we take out 2,715 before this phase of the market’s recovery (from the Christmas massacre) is complete. That should take us another week or so, unless we get another negative tweet from you know who. But what, you might ask, drove the markets down almost 2% earlier in the week? The short answer is more noise about the Chinese trade negotiations. Every word, every meeting, every guess concerning the continuing negotiations between the U.S. and China will likely continue to move the markets up and down 1-2% a week, if not per day. Investors should be aware that another high-level meeting between the two antagonists will take place next week on January 29-30. The Chinese are sending thirty people to the confab, so they mean business. As I have been saying for months, expect progress but no break-throughs. Wilbur Ross, the U.S. Commerce Secretary, in a televised interview this week echoed my thoughts on the subject. He explained that there are a whole host of issues with China that need to be resolved and we can’t expect solutions to happen next week or the week...

Markets retrace December losses

It was a week where lackluster earnings battled with the Fed’s willingness to hold off on rate hikes for investors’ attention. The Fed won. Investors bought on the dips and helped to push the markets out of correction territory. From a technical point of view, however, all the U.S. indexes are overbought, extended, and in need of some kind of pullback. Traders know this and have been shorting the market as it climbs, betting that we will see at least a 100-point decline in the S&P 500 Index. It hasn’t happened–yet. Normally, markets will do what is most inconvenient for the greatest number of traders. In this case, the indexes simply keep going up. But before you exhale in relief, be advised that when the last bear throws in the towel, that’s when the markets will blind-side you. For those who followed my advice last quarter and have remained invested, your paper losses are rapidly disappearing. I expect that, despite continued volatility through March, the second half of the year should see all your losses recouped and I expect further gains after that. Earnings, which were not forecasted to match the gains of the last few quarters, have come roughly in-line with investor’s lower expectations. So far, the average results indicate about a 7% gain for the quarter. In cases where a company announced less than that, traders were quick to punish their share price. In some cases, for example, banking stocks, where trading profits were down last quarter as a result of the steep drop in equities, the Algos were whipping prices around on almost an hourly basis....

Markets bounce 10 % since Christmas

The stock markets have gained almost one percent per day since the beginning of the year. If you had panicked and sold during the Christmas holidays, you are sitting in cash wondering when to get back in. Here is some advice. Patience should be at the top of your “to-do” list. If you believe we are in a bear market, then the kind of rebound we are seeing in the equity markets is completely normal. Bear markets are characterized by waterfall declines followed by sharp, explosive upside rallies. Unfortunately, these fantastic trading opportunities are just that—trades. If you are not living the markets every single moment, day-in, day-out, then forget about profiting from it. Most retail investors will get chopped up into little pieces and spit out by the proprietary trading desks and their quantum computers. Once the markets’ rally hits some kind of peak (usually, but not always a technical resistance point in the indexes), another waterfall decline will occur. Usually this kind of action goes on until whatever low has been put into place is re-tested or breaks. That, my dear readers, is what I predict is in store for us sometime in the first quarter. How you handle that is up to you. My advice is if you can’t stomach the ups and downs of this market, you should take this opportunity to reduce your risk tolerance. That does not mean get out of stocks. It means reduce your exposure to the more aggressive areas of investment but continue to stay invested. “Why,” you might ask,” should I not just sell everything, get into cash, and...

The Trump Dump

The sell-of in stocks has now exceeded the 2016 decline. Investor sentiment is as low as it has been since May of that year. The Fed refuses to save us, and Donald Trump insists on his wall or he will lay off thousands of federal workers. Did I say Merry Christmas? The reasons for this rout are well-known by now. The latest disappointment was on Wednesday when, contrary to investor’s expectations, the Fed stood firm in their quantitative tightening agenda. For a more in-depth view of the reasons for their stance, please read my Thursday column “The Fed Stands Tall.” The markets expressed their unhappiness by declining 1.5% in the last four days. But it wasn’t just the Fed. Last Sunday evening, China’s President, Xi Jinping, made it clear in a speech celebrating forty years of Chinese progress and reform that “no one is in the position to dictate to the Chinese people what should or should not be done.” In essence, Xi is calling Trump’s hand while upping the stakes. He is betting that Trump has a weak hand. Between the continuing revelations of the Mueller investigation, the slow-down in the U.S. economy, a divided Congress, and his shrinking popularity among voters, Trump is, at best, a paper tiger. Investors, in my opinion, are beginning to agree with Xi. Despite Trump’s tweets and assurances, the trade war he has started won’t be resolved anytime soon. As that understanding takes hold among investors, the markets are selling off. The prospect of a debilitating trade war has now permeated the economy. It is slowing growth, reducing earnings and transforming a...