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Bank Profits Strong - China Trade Numbers Mixed

Posted by Pete Stolcers on April 12

Posted 9:30 AM ET – The market has been as flat as a pancake this week and traders are waiting for a catalyst. Earnings season will determine direction and major banks have reported results this morning. Financial stocks are rallying and the S&P 500 will open 20 points higher.

J.P. Morgan Chase, Wells Fargo and PNC kicked off earnings season. All three stocks are up before the open and the good results were fueled by higher interest rates. Guidance was also solid and the market needs financials to participate if it is going to challenge the all-time high.

Buyers are typically engaged during the early part of the earnings cycle. Mega cap tech stocks fuel optimism and the bid should remain strong until Apple reports. The S&P 500 is 2% below its all-time high and stock valuations are at the upper end of their range (forward P/E of 16.5). Most analysts believe that profit growth will decline for the first time in three years, but profits will still hit record levels. Good news is priced in and guidance will be critical.

England will have another six months to figure out Brexit. Politicians will drag their feet this summer and nothing will get done until September. When there is only a month left on the extension they will start to scramble. For now, Brexit is not an issue.

Trade talks with China are progressing and enforcement mechanisms are being negotiated today. These are the final stages of a trade deal and it could be formalized in May.

China’s trade numbers were mixed. Exports jumped 14.2% year-over-year for March (6.5% expected) but that is considerably below the 40% increase year-over-year that was suggested a week ago. Imports declined 7.6% year-over-year (versus .2% increase expected). The uptick in the March PMI sparked a market rally 10 days ago and it might be premature. China has thrown the “kitchen sink” at their declining economic growth and this trend will be hard to turn.

EU ambassadors have scheduled a vote on April 15th that would mandate trade negotiations with the US. France is opposed. Trump will impose tariffs if progress is not made. He is close to a deal with China and he will focus his attention on Europe. Robert Lightheizer suggested this earlier in the week. Claude Juncker promised a comprehensive free trade deal with the US last October and that looks very unlikely.

Japan plans to increase its sales tax in October. That will not have any bearing on the market right now, but it could send their already weak economy into a recession.

The Fed sees increasing global risks and they do not plan any rate hikes until 2020.

Swing traders should raise their stop on the SPY position. We only have a half position and you should use an intraday stop of SPY $287. That stop is above our entry point and we will keep raising it as the market moves higher. The headwinds are blowing and gains will be hard fought as we challenge the all-time high. Earnings will break us out of this compression one way or the other. Guidance is critical.

Day traders should wait for the action to subside. Gaps higher have typically been faded and sellers are constantly checking the bid. Once support is established, favor the long side. Focus on stocks that have broken through major horizontal resistance after a lengthy compression. This pattern is one of my favorites and we have searches to find these stocks. The follow-through is excellent and these stocks don’t need a market tailwind. Intraday trading ranges have been compressed so avoid day trading the S&P 500.

Watch financials. They are the key to the next leg of this rally and they will dominate earnings releases next week.
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