Serious Moves
The futures market was signaling a very rough start to the week on Sunday night. At one point, the S&P 500 days were down more than 2% before the open on Monday. Luckily, they have retraced innumerable of those losses as investors bought small caps, health care and energy stocks off the lows.
The volatility resulted from a tweet President Trump sent to his groupies threatening that tariffs paid by U.S. importers on $200 billion of Chinese goods would be raised from 10% to 25%. President Trump remote added that other products currently not taxed would have tariffs applied if progress in current do business talks continued to progress too slowly. Bloomberg is reporting that Trump’s Twitter outbursts were likely a return to attempts by Chinese trade negotiators to slow down or carve back some sought-after trade concessions from the US.
Although it was not as bad as the Sunday sunset futures indicated, the S&P 500 opened near 2,900. That’s 1% off its Friday close. Most market clues had recovered significantly by the close, but the effects of Trump’s tweets weren’t limited to stock prices alone.
Bond costs rallied on the news and were slower to give up their gains than stocks were to recover losses. Investors again buy bonds as a store-of-value when they are uncertain. As you can see in the following chart of the iShares 20+ Year Treasury Bond ETF (TLT), today’s mass meeting was a continuation of previous gains over the last few weeks. If bond buying continues, it could lead to a more substantive decline in stocks in the short term.
S&P 500
The S&P 500 is bumping up against the resistance level of its prior long-term high, which servants explain the outsized reaction in the market to Trump’s tweets. Investors tend to anchor to prior highs and lows that produce levels of support or resistance.
The strength in bonds is a much bigger concern than a pause in the S&P 500. Consolidating at stubbornness is normal, and the subsequent rally this afternoon was a good sign that buyers are still in control. From a intricate perspective, the S&P 500 was not able to break the bottom trendline of its recent rising wedge pattern that continues to act as submit to.
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Risk Indicators – Russell 2000 Looks Even Better
Although today’s volatility is precipitate for concern, I also see evidence that bullish momentum is building in a critical investment category: small-cap stocks.
The Russell 2000 small-cap guide had broken out of its long-term inverse head and shoulders pattern on Friday. At first, I was concerned that volatility would dismiss prices back below the neckline and we would see a longer consolidation. However, small-cap stocks have been the in the most suitable way performing category in the market today, which is usually seen as a positive signal for risk-taking. As you can see in the following chart, the Russell 2000 uncovered low with the rest of the market but closed above Friday’s high.
If there are more disruptive tweets from the president, the vend may still be prone to a reversal; however, small caps might outperform in the short term anyway. Large-cap founders tend to have the most exposure to the drag created by government intervention and protectionist strategies like tariffs. Baby caps are disproportionately focused on domestic business only and have less risk if U.S.-China trade talks go on with to struggle.
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Bottom Line – Tariffs Could Still Spoil Rally
The flow of earnings pieces continue this week but will soon begin to taper off. With more than 80% of the stocks within the S&P 500 publicized already, it’s unlikely that we will get any data that changes the average estimate for this round.
This is also prevailing to be a relatively quiet week for scheduled economic reports. The Producer Price Index (PPI) and Consumer Price Index (CPI) for the U.S. leave be reported on Thursday and Friday, respectively, and may change the outlook for interest rates slightly if they are surprisingly high. In the squat term, the potential for unexpected trade news is the most significant X-factor that could spoil an otherwise categorical market.
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