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China Trade Deal Is All That Matters - Bullish Speculators Getting Flushed Out

Posted by Pete Stolcers on May 8

Posted 9:30 AM ET – Yesterday the market sold off on the possibility that US/China trade negotiations might break off. China reneged on previous commitments and Trump responded with a tariff threat that could take effect tomorrow. This deadline has been known and Chinese officials will meet with US trade officials tonight and tomorrow. This 4 day meeting was reduced to a 2 day meeting this week. There might not be much information that comes out before the market closes on Friday and this is a binary event.

Much of the recent rally has been predicated on a deal with China. Officials were hoping for an agreement this week and the market was pricing that in. Consequently, any surprise favors the downside. I believe that Xi will drag this out as long as possible, perhaps even into 2020. Trump is the first president to stand against China and they would rather see someone else in power. A trade deal with China would strengthen Trump’s chances for reelection and it would give him leverage in trade negotiations with Europe and Japan. I also believe that China is using North Korea as a pawn. They are telling Kim Jong-un to fire a few missiles so that China can play the “white knight” in exchange for trade concessions. I have been skeptical of a trade deal for months and I hope I’m wrong.

China reported that exports sank 2.7% from a year ago and that was down from a 14.2% increase in March. Imports rose 4% and that is up from last month’s 7.6% decline. These results are not consistent with the rebound that many analysts have been predicting.

If we strike a trade deal the S&P 500 should be able to reach 3000 this summer (provided global economic conditions are stable). Without a trade deal we could drop to 2700.

The Fed is dovish, but they are not ready to entertain a rate cut. Some analysts were hoping that they would signal one last week.

Earnings season has climaxed and the results have been good. Unfortunately, stocks have not been able to rally on the news. They are fully valued at the upper end of their P/E range (16) and the back half of earnings season tends to be lackluster.

The news is fairly light and Chinese trade negotiations will drive the action.

Swing traders are sidelined and we will wait for this event to play out. If trade negotiations breakdown we will short the market and if an agreement is reached we will buy.

Day traders need to watch for more selling. Yesterday I warned you not to buy the early bounce and that a nasty day was likely. Stocks sold off hard the entire day and they did not bounce until the last half hour of trading. There will not be any trade deal news today so I believe bullish speculators will be tested again. Sellers will force them out of positions and we could see another drop today. Support at the SPY $284 level will hold until the outcome of the trade talks is known.
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