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China Deal Still Likely But Sell Programs Could Trigger Today

Posted by Pete Stolcers on May 6

Posted 9:30 AM ET – Last week the market rallied to an all-time high. Earnings have been good enough to keep the market inching higher, but not good enough to spark major buying. Domestic economic releases have been strong, but ISM manufacturing and ISM services missed expectations. This was going to be a quiet week, but president Trump has changed that.

The S&P 500 is down 50 points overnight on strong rhetoric from Trump. He wants a Chinese deal now and he has threatened to impose tariffs if they can’t get one across the finish line soon. Chinese Premier Xi struck back and said that the constant tariff threats are not constructive. He suggested that China could withdraw from the negotiations and the PBOC is ready to weather the fallout. China’s market suffered a large overnight loss.

With so much at stake is unlikely that both sides will throw away months of hard work. Insiders have been saying that a trade deal is only a week away. They are negotiating implementation and enforcement (the final details). It is hard to imagine that a few weeks would matter at this stage. From my perspective, Trump needs a deal. It would increase his leverage with Japan and Europe as we begin those negotiations.

Earnings season has been good, but the expectations were high. Stocks are trading at the upper end of their valuation range and the results had to be spectacular to fuel the next leg higher. Mega cap tech stocks kept sellers at bay through Apple’s announcement. We could see some profit-taking since the back half of earnings season tends to be lackluster. Analysts have a good feel for where the overall results will finish.

The FOMC statement was dovish, but not dovish enough. Some traders were disappointed that the Fed did not mention the possibility of a rate cut if inflation continues to decline.

Global economic conditions are soft. Official PMI’s are straddling contraction territory (50). Some countries are above that level and some are below. China is the primary concern. It had a small uptick in activity during March and that bounce reversed in April.

GDP came in at 3.2% and the Unemployment Report was very strong (263,000 new jobs). Both are backwards looking releases. ISM manufacturing and ISM services tend to be more current and both numbers missed expectations. The absolute levels for both are well above contraction territory so they are not a major concern at this time. Investors will stay in the market as long as domestic economic conditions remain strong.

Swing traders are long the SPY at $293. I am not overly concerned with the knee-jerk reaction to Trump’s threats, I am little worried that sell programs could kick in. Bullish speculators will try to hold positions hoping for an immediate reversal. If we have another leg down from this level they will exit and we will hit an air-pocket. The upside rewards are smaller than the downside risks. Sell the SPY 15 minutes after the open and go to the sidelines.

Day traders should expect early weakness and a bounce in the first hour. There is minor horizontal support at SPY $290. The duration and magnitude of the bounce will tell us where we go next. If the rebound is steady and gradual we could reverse most of the losses. This type of price action will keep bullish speculators in their positions. If the bounce is fast and the momentum stalls, sellers will test the bid and we could drift back down to the lows. The big drop in December was largely program driven. They feed on themselves. Steady downward momentum would chase bullish speculators out of their positions.

I believe that this is a normal pullback and that it will set us up with a good buying opportunity in a few days. If Trump backpedals the market will bounce right back.
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