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Market Could Tank Today - Tariffs Are Only Part of the Problem

Posted by Pete Stolcers on May 31

Posted 9:30 AM ET – Yesterday the market tried to bounce and it clawed its way back to the 100-day moving average. The overnight news was negative and the S&P 500 is down more than 30 points before the open. The low from Wednesday will be challenged and the market will open below the 200-day moving average.

Tariffs are the primary concern. Trump plans to raise tariffs on Mexico (June 10th) by 5% and he will increase them on the first of each month by that same amount if illegal border crossings continue. The tariff will top out at 25%. Trump has tried to get Mexico to control its side of the border to no avail. Illegal crossings have reached a record level (4500 people per day). When he first said “Mexico will pay for the wall”, tariffs are what I thought he had in mind. The market is terrified that Trump will use tariffs as a weapon to settle all of his disputes.

Trade negotiations with China have stalled. If Huawei (largest Chinese telecom) is blacklisted then China will retaliate. Apple and other tech giants will be in its crosshairs. Asset Managers are hoping that the G20 meeting will keep the tone civil for the next few weeks and that a face-to-face discussion will calm nerves. China has been threatening to use rare minerals as a bargaining chip. I posted an article link yesterday if you want to read more about it. Trade officials were supposed to go to Beijing this week, but a meeting has not been scheduled.

This morning China’s official manufacturing PMI came in at 49.4 (49.9 expected) and it is clearly in contraction territory. New orders slumped to 49.8 (down from 51.4 in April). The nonmanufacturing PMI was in line with expectations (54.3) and that is flat month-over-month. Fiscal/monetary stimulus has not sparked the economic growth analysts had projected.

There are plenty of other week data points around the globe. Hong Kong’s April retail sales were down 4.5% and Japan’s retail sales fell .6%. Italy’s Q1 GDP came in at -.1%. In general, Europe’s growth is dismal (.4%).

Monday ISM manufacturing will be reported. ISM services will be reported Wednesday along with ADP. The Unemployment Report will be posted Friday. All of these numbers will help us gauge the health of the US economy. Any kink in the armor will send investors towards the exits.

As I’ve been saying for months, trade wars won’t stop the global economic slowdown, but they could accelerate it. A global recession is the greatest market threat and credit concerns will surface. Chinese corporate bond defaults have increased threefold year-over-year.

Swing traders are short a half position of SPY at $279. We will add to the position next week if the SPY closes below $277. For now, ride your short position. I believe we could hit an air pocket today.

Day traders should focus on the short side today. I believe that many premium sellers are short out of the money SPX/SPY puts below the 200-day moving average ($277). Those traders will be forced to buy back their puts and that will put additional selling pressure on the market. Additionally, some traders bought the first bounce off of a major moving average on Wednesday. They will also be shaken out and we could hit an “air pocket” today.

The drop today will rattle investors and I expect to see additional selling next week.
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