Daily Commentary: June 27, 2018

Scott Green1Option Commentary

Market Not Afraid of A Trade War – Here’s Why – Use This Strategy

Posted by Pete Stolcers on June 27

The market is discounting the threat/impact of trade wars. Yesterday stocks rebounded after the 100-day moving average was tested on Monday. The rally was tenuous, but buyers are engaged. Major economic releases will be strong next week and earnings season will be upon us after the Fourth of July holiday. Look for nervous trading and light volume the rest of the week.

Asian markets tumbled overnight. China’s president Xi advised his staff to prepare for a full-blown trade war. He also suggested that purchases of US Treasuries will be halted if tensions escalate. China is in bear market territory and their index is down 20% from the January high. Xi does not have to worry about elections or negative press. China has been known to subsidize its industries and it could use this strategy to negate tariffs.

Trump does have to worry about mid-term elections in four months. He needs to maintain consumer confidence and his popularity is rising in the polls. A deep market drop could negatively impact polls and he is likely to soften his tone. Grain tariffs would also impact the heartland (his strongest base) and he can’t afford to lose that support.

Today Trump mentioned that Chinese investment restrictions might not be used as a tool to protect intellectual property rights for domestic tech companies. The S&P 500 jumped 12 points on the news. If Trump wants a “red wave” in November he needs to soften the tone and return to the negotiating table. He is unpredictable, but I believe the market is pricing in this course of action.

Trump needs to win Senate seats and he needs to control the House. Democrats won’t vote for a single bill he supports and the only way he can execute his agenda is to win in November. I believe this is his priority and he will hold off on trade wars. If Democrats win the House he might also have to battle a push for impeachment and he won’t get anything passed by Congress.

Major economic releases are scheduled next week and they will be market friendly. In two weeks earnings season will begin and profits will overpower trade war concerns. Tariffs will take a long time to impose and companies will not know the impact for many months. I’m not expecting too many warnings for this reason. The guidance for Q3 would benefit from a softer tone from the White House.

Swing traders should be long IWM calls since it closed above $166. We are going to hold without a stop for the next two weeks. The index is going through rebalancing and that will end this week. Small to medium-size businesses are less exposed to tariffs and they will benefit from domestic economic strength and tax cuts.

Day traders need to tread carefully. The price action yesterday was very choppy and I expect the same today. Global markets were down and the S&P 500 was down an hour before the open. We are likely to see nervous trading today. I will look for opportunities to buy energy stocks today. That sector is strong. The DIA has been weak relative to other indices and it is below the 200-day moving average. That would be my preferred short. Let the early action play out and use the first hour range as your guide.

If my suspicions are correct Trump will soften his trade war rhetoric in the next few weeks. He does not have to lose face by retracting his statements; he just has to go back to the negotiating table for a few months. The market would be happy with that and China would be happy to continue the status quo. If this happens we could see the SPY challenge the all-time high in August.


Market commentary provided by OneOption, LLC a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.

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