That Didn’t Last Long: Positivity from Trade War Progress is Short-Lived

Over the course of the past year, the trade war between the United States and China has plagued the market. It has caused a great deal of concern and created a more volatile market. There were also disputes with Canada, Mexico, and the European Union, but those were settled much more quickly.

Because of the concerns about the trade dispute, when news came out over the weekend that the U.S. and China had agreed to a 90-day ceasefire in tariffs, world stock markets jumped sharply.

I have to admit, I was excited about the news and checked on futures early Sunday evening, knowing that index futures for the U.S. indices would be sharply higher. Sure enough, they were all up over 1.5% when I checked on Sunday evening.

The enthusiasm carried through the overnight hours and into early trading on Monday. When the market opened, all four of the main U.S. indices were up over 1.5%. The Nasdaq was even up over 2% at one point that morning. The enthusiasm waned a little in the afternoon and the indices gave back some of their gains. At the end of the day, the Nasdaq had gained 1.51%, the Dow was up 1.13%, the S&P notched a gain of 1.09%, and the Russell lagged slightly with a gain of 0.89%. These are all very nice moves, but not as nice as they were earlier in the day.

Fast forward to Tuesday morning and all four of the indices were down more than 0.75% and the Russell was down 1.35%. That means the small-cap index had erased all of the gains from the tariff ceasefire within 24 hours. The S&P was holding on to a gain of approximately 0.38% since the news came out.

While the headlines inspired enthusiasm for stocks, as investors had time to process the news, apparently it wasn’t as good as what they had originally thought. Analysts started issuing cautious statements that the trade war wasn’t over and that there was a lot of material that needed to be agreed upon to bring the dispute to an end. Some expressed concern that there was too much to get accomplished in only 90 days.

I think the moral of the story is that the trade war isn’t exactly over and that there are other concerns for the market as well.

One thing that happened on Monday that didn’t get nearly as much press as the ceasefire was the first instance of a rate inversion in the treasury market. The 3-year treasury yield moved above the 5-year treasury yield—only by 1.4 basis points, but it was inverted never the less. Of course, the relationship between the 2-year and the 10-year is the most closely watched spread, and the one most consider as a bad sign if they invert. On Monday, the spread dropped below 15 basis points and that is the lowest the spread has been since 2007.

Turning our attention back to the equity market, the chart of the S&P that I have shown before does a good job of depicting what is going on currently. We see that the index moved higher from early 2016 through early 2018 with little in the way of sharp pullbacks.

The overall trend was maintained and a trend channel defined the cycles within the long-term trend. In the past few months, that trend channel seems to be failing as the index has fallen below the lower rail of the channel. The index fell below its 52-week moving average and now it looks as though the 13-week moving average will cross bearishly below the 52-week. For me, that is a major concern.

The concerns about the market and the economy are numerous with the trade war being just one. I sincerely hope the U.S. and China can come to an agreement and can do so in record time. If the trade war continues to linger while there are also concerns about an inverted yield curve and slowing earnings growth in the first quarter of 2019, we could see the next bearish trend starting in the market.

It’s still possible that this phase of the market is just a consolidation like we saw in 2015, but I am worried that it could be the start of the next big move lower—the next trend where we see the indices drop 30% or more. When the market is truly in a bullish phase, it shakes off bad news and keeps moving higher. The opposite is true as well. When it is in a bearish phase, the market shakes off good news and continues moving lower.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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