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Market Will Move To This Level - It Is A Magnet - Light Volume Ahead

Posted by Pete Stolcers on August 27

Posted 9:30 AM ET – Friday stocks sold off in anticipation of Trump’s harsh reaction to China’s tariff hike on US goods. Worst-case scenarios were priced in and the S&P 500 dropped to support. Yesterday stocks bounced off of that level and the tone softened slightly. As I mentioned in my comments two weeks ago we would see volatility and the 100-day moving average would act as a magnet in August. I believe that we will hug that level during the next two weeks.

The news calendar is light the remainder of the week and the trading volume is low. Major holidays suck the life out of trading activity and we are likely to see a “hangover” Tuesday. Major economic releases will start Wednesday and the activity will gradually return to normal levels.

The FOMC will meet on September 18th. That will be a major event and traders are expecting a quarter-point rate cut. Investor confidence has been shaken, but has the recent market volatility been high enough to prompt a rate cut? Domestic economic conditions are slipping, but they are still strong. The Fed has breathing room and unlike every other central bank they don’t want to fire all of their bullets until they have to.

A trade war with China is likely. I believe we will see tariff delays and attempts to find middle ground. There will be inflammatory statements and then retractions. The market will drop and then bounce. This process will keep Asset Managers from hitting the panic button for the next year, but trade relations will continue to deteriorate.

The USMCA is ready to be signed, but it is not likely to get through Congress before the 2020 election. A trade deal with Japan seems likely, but it is uncertain if congressional approval is required.

England is bracing for a hard exit. Boris Johnson was a little more optimistic after his G7 meetings. This still looks like a train wreck in the making (October 31).

The debt ceiling and the budget will be addressed in October. I doubt that Democrats will stand in the way. Both parties want to avoid controversy a year out from the election and Trump is likely to softened his tone.

Global economic conditions continue to slip and central banks are out of “bullets”. Interest rates are negative around much of the world. Last week Germany issued a 30-year bond with a 0% yield. The demand was less than half of what they expected. It’s shocking that they would be able to sell any bonds since they don’t even keep pace with inflation (bond buyers lose purchasing power and have negative real returns).

Stocks are trading at a forward P/E of 17. That is at the upper end of the valuation range and any “whiff” of economic deceleration in the US will spark profit-taking.

Swing traders should stay in cash. This is a low probability trading environment. An interest rate cut in September will provide a “sugar high”, but a strong economic undertow will eventually take its toll. The only hope is that the US and China can maintain economic growth into year-end. If they do the market will limp into year-end. The upside reward is smaller than the downside risk.

Day traders should expect a tight intraday range today. The market wants to float up to the 100-day moving average. Find stocks with relative strength and try to make your money early. Prices will compress during the day and we are likely to stay in the first hour range.

I will not be posting market comments Thursday or Friday.
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