Bulls Will Get Flushed Out – Stay In Cash – We Are Going To Buy This Dip
Posted by Pete Stolcers on June 19
Trade negotiations between the US and China have broken down. Trump has asked his advisers for an additional $200 billion worth of goods that could be subjected to a 10% tariff. China said that the retaliation would be quantitative and qualitative. They also said that immediate steps would be taken. China’s market was down 4% overnight and a trade war looks likely. The S&P 500 is down 30 points before the open.
The two largest economies in the world are showing their might. Analysts are worried that tariffs could reduce economic growth. When both sides took a break a few weeks ago they said that they needed to work on the framework. In my comments I said that it sounded like “spin” to me. Rumors were circulating that both sides were miles apart and Trump just wanted to get through the summit.
Congress wanted to join the action so they passed legislation to re-impose the ban on ZTE. This was a big deal to China and a battle was imminent.
Xi and Kim are going to meet this week to discuss the summit in Singapore. China (not the US) controls this situation and we will see if the trade war impacts North Korea’s decision to de-nuke.
Trump imposed steel and aluminum tariffs on our G6 partners. They have also retaliated.
Trade wars are inflationary and that stifles growth. If the rhetoric continues to escalate both sides will stick to their guns and they will see who has the upper hand. As Warren Buffett said years ago, “When the tide goes out you see who has a swimming suit.” This battle could spark a shadow banking credit crisis in China. When this happens it will make our housing crisis 10 years ago look like a cakewalk. It might not happen for years, but it will happen. Global credit markets are intertwined and a credit crisis in China would impact the world.
The US has been pushed around by China for decades and Trump is flexing his muscles. Both sides realize the stakes are high and they are jousting. Perhaps this escalation was needed so that they can reach a meaningful agreement.
Stocks have been extremely resilient and the market has shouldered negative news for the last week. That is a sign that the bid is strong. Major support is at SPY $270.40. The 100-day and 50-day moving averages converge at that level. This first wave of selling could get nasty as bullish speculators are flushed out. We could easily test that support today. Swing traders should not short this market. I view this as a buying opportunity once support is established.
Day traders will have a shorting opportunity today. Financials and industrials will get nailed. If the market makes a new low after two hours of trading we will continue to drift lower. The rhetoric between China and the US is heated and investors are scared. Let the early action play out and get short on bounces. A new low every 30 minutes would be a sign of persistent selling. I use these cycles as a guide. I like to get short once the bounce stalls and I like to take profits when a new low is established.
Earnings season is only a few weeks away and this drop will set up an excellent buying opportunity. I have a number of tech stocks that I want to buy and I will be searching for relative strength. It will be easy to spot today.
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