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The Market Will Follow the Trade Winds - They Are Currently At Our Back

Posted by Pete Stolcers on October 15

Posted 9:30 AM ET – Yesterday the market compressed in a very tight range and the gap from Friday held in light holiday trading. I view that as bullish from a technical perspective and stocks are up this morning as Q3 earnings season kicks off.

Trade negotiations with China went well for those who think that a cease-fire is progress. China has tentatively agreed to purchase more agricultural products and to enforce intellectual property laws if the US cancels the next round of tariffs in December. Tariffs on $250 billion worth of Chinese goods were supposed to rise from 25% to 30% today and I have not heard any news on that front. I suspect we will hear that the tariffs have been postponed. Both countries know that a full-blown trade deal will not happen before the 2020 election and they’re simply trying to calm the markets.

Chinese consumers are paying higher prices due to its country’s agricultural policy. They are not purchasing commodities from the US to put pressure on Trump’s main constituency (farmers in the Midwest) and it has led to a 3% increase in consumer prices. Higher pork prices were a primary contributor to the recent spike. The longer China maintains its current policy on US agricultural products, the higher their food prices will climb. Agriculture is China’s primary import from the US and it is one of the only areas where they feel they have some leverage.

China will post industrial production, retail sales and GDP Friday morning. This is the most significant economic release of the week.

On the flipside, US consumers have not felt the pinch from tariff increases. China’s currency has weekend and that has offset the impact of the tariffs. The benefactor in all of this is the US government because they have collected billions in tax revenues.

US/EU officials are scheduled to meet for trade talks today. There has not been any progress on this front and by comparison the US exports more than twice as much to Europe as it does to China. Weak economic conditions in Europe are starting to impact domestic economic growth.

There is a glimmer of light for Brexit. The Prime Minister’s for England and Ireland feel that a deal is close and European officials are also involved as the deadline draws near. I view the feverish pitch as a good sign.

J.P. Morgan chase, Citigroup and Goldman Sachs will kick-off earnings season this morning. Results should be good for the current quarter, but future earnings could be negatively be impacted by lower interest rates and an economic soft patch in the US. Major banks will dominate the early earnings releases. At a forward P/E of 17, good news is priced in and stocks are trading at the upper end of their valuation range. The market bid is typically strong through mega cap tech earnings. Apple is one of the last to report and buyers should be engaged through October 30th.

The FOMC will meet on October 30th and investors are expecting a rate cut. That is also the day before the Brexit deadline so this looks like it will be an important date for the market.

Swing traders don’t have a long position in the SPY, but they should be selling out of the money bullish put spreads on stocks that have relative strength. Sell below major technical support and take advantage of time decay. As I mentioned in my comments the bid is strong at the 200-day moving average and resistance is strong near the all-time high. We can expect this range to continue the rest of the year. If we get a dip down to the 100-day moving average I will be ready to buy.

Day traders should focus on the long side. The gap from Friday held and we are above the 100-day MA and horizontal support at SPY $294. We will lean on those two levels. Earnings season, a possible truce with China, a possible rate cut in two weeks and a possible Brexit agreement will keep buyers engaged. Any of these market drivers can sour in an instant, but the wind is currently at our back.

Provided that the tweets are minimal, the market should be able to grind higher the rest of the month.
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