Market Rally Will End This Week – Here’s Why
I don’t have anything new to add today. There is not any incremental news to justify the 15 point S&P 500 drop this morning. Major economic releases are scheduled the rest of the week.
Earnings season has been strong so far. Fantastic results are expected and Apple will be the last of the mega cap tech stocks to report today. Amazon, Facebook, Intel, and Netflix were down after reporting and Microsoft and Google traded higher. Sellers typically remain passive in the first few weeks of earnings season because it is “front-loaded” with the best companies reporting early in the cycle. I believe that the buying momentum will stall this week and if the FOMC does not hint at a September rate cut we will see profit-taking.
Mega cap tech stocks have been leading the charge for years and the action has been very lackluster for these names the last two weeks. At a forward P/E of 17, great news is priced in. We have not seen tariff related warnings and that is a positive for Q3 guidance.
The Fed has plenty of breathing room. Domestic economic conditions are strong and China’s growth seems to have stabilized. I don’t believe they will cut rates in September with the market currently at an all-time high.
Face-to-face trade negotiations with China are scheduled today and Wednesday. The rhetoric will be positive, but there will not be any progress. China is preparing for naval exercises near Taiwan, Iran is ramping up heavy water production and North Korea is firing short-range missiles. Xi has his minions stirring the pot. Trump is also trying to apply leverage by challenging China’s “developing nation” status with the WTO in an effort to remove many of the advantages they currently enjoy. In a Reuters article Trump accuses China of “stalling tactics” in trade negotiations and he said that Beijing may be waiting for the November election in hopes of a democratic win. I have been saying this from the start of the year. There will not be a trade deal with China.
As long as economic conditions remain stable, the market might not care about tariff wars. China will find ways to subsidize industries so that they can sell product at lower prices. China will also devalue its currency. This will neutralize the effect of tariffs. In the end, consumers may not feel much of a pinch.
Credit is the key to this rally. Only a credit crisis will lead to sustained selling. I don’t see any issues on the horizon, but I will be watching closely. Europe and Japan are in serious economic decline and a hard exit for England is possible. Until we have a credit crisis, money will flow into equities. Central banks are easing and yields are near historic lows. Investors don’t want to buy bonds because the returns don’t keep pace with inflation and they lose purchasing power in this investment. This is pushing investors out on the risk curve. With central banks considering future rate cuts, the market has a safety net and investors become overconfident because the declines are brief and shallow. This can continue for years, but ultimately it does not end well.
Swing traders should remain in cash. A market pullback in August is likely and provided that the macro conditions remain stable we will buy at that time. I’ve missed the upside from a swing standpoint and I don’t want to chase. I still feel the upside rewards are smaller than the downside risks.
From a day trading standpoint I’ve been able to catch this move higher intraday. The bid is tested each morning so there is always a chance to enter on support. I don’t like holding overnight positions with this strong macro undertow. The market is down before the open and I will be looking to buy. The intraday action yesterday was horrible and it will die down after the first two hours of trading today (Dead till the Fed).
I expect to see a few more bullish days and a very soft finish to the week. This should be a short-term market top.
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