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Add To Short Positions Now - The Storm Is Here

Posted by Pete Stolcers on March 8

Posted 9:30 AM ET – I’ve been telling you for weeks that the market is pricing in positive outcomes for all of the unresolved issues and that surprise favors the downside. Yesterday the S&P 500 tested the 200-day moving average and this morning it will open below it. Good news has not been able to curb profit-taking and the selling pressure this week has been constant. We are going to short the other half of our SPY position on the open today.

These issues soured overnight.

China’s trade numbers were horrible. Exports fell 20.7% Y/Y (versus -5% expected) and imports fell 5.2% (versus -.6% expected). The PBOC has been easing to no avail. Next Tuesday China will release retail sales and industrial production and those numbers will be critical. Taiwan’s exports in February were down 8.8% (-.7% expected) and imports fell 19.7% (versus 4.8% increase expected).

Two articles (New York Times and Wall Street Journal) outline trade deal concerns with China. The framework has been approved, but the gap on each individual issue is still very wide. Xi will preserve his strong public image and he will not meet with Trump later this month if he does not feel that all of the details have been hammered out. The Chinese are very leery of Trump’s habit of changing terms at the last minute. Investors have priced in a good trade deal with the signing at Mar-a-Lago on March 27th.

Speaking of trade deals, I’ve been mentioning that the EU is impossible to strike a deal with because they are fragmented. Yesterday Cecilia Malmstrom (EU Trade Commissioner) said, “A full, comprehensive trade agreement – TTIP-style: there is no support for that in the European Union right now. That’s the truth.” They only want to negotiate a trade deal on industrial goods and autos. Car manufacturers are putting an extreme amount of pressure on European leaders. This statement came after she met with Robert Lighthizer and it is not what Claude Junker (EU President) promised in October. This is going to spark backlash from Trump.

The European Union is making it very painful for England to leave. A team from the UK is trying to negotiate Irish border checks with the EU. Even if the UK team succeeds the deal might not pass in the Parliament. EU officials said they will not extend the deadline unless they are certain that an agreement can pass. Brexit is a potential train wreck and it is only three weeks away. Central banks are preparing to backstop trillions of dollars in derivatives trades.

The ECB outlined extremely dovish policy yesterday and they postponed a rate hike until 2020. They lowered GDP forecasts and with zero rate interest policy they are painted into a corner (they have nothing in their monetary policy arsenal to stimulate growth).

Germany’s factory orders for January fell 2.6% (.5% increase expected).

The jobs report was horrible. Only 20K new jobs were created in February (185K expected). This could be related to the government shut down, but investors are worried that overseas weakness will spread here. Also, the wage component was up a relatively hot .4%. This has inflation implications and the Fed is watching.

Trade negotiations will not be easy, global economic conditions are faltering and Brexit looms. Swing traders should short the SPY on the open today. This will be the second half of our position. Use a closing stop of $280. We were a little early to the party a few weeks ago and we took a small loss on that short. All of the issues I have been outlining are finally coming to fruition and it’s time to sell.

Day traders should look for opportunities to get short this morning. Overseas markets were very weak so I’m not expecting much of a bounce. Take short positions early and use $275 (200-day MA) as your stop. The price action has been very weak the last few days and the selling pressure will accelerate now that we are below major support. I expect to see sell programs today and this could get nasty.

This is the moment we’ve been waiting for.
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