Let’s continue to be defensive in our trading. Do not chase anything. If you have a small profit, get out and book it. Wait for an oversold setup and do it again. Be very suspicious of anything in the mainstream financial news.
The mainstream financial media reported on July 31, 2018, that markets were up because of the resumption of talks between the US and China to defuse the trade war:
NEW YORK, July 31 (Reuters) – Stock markets edged up globally on Tuesday on a report that the United States and China were seeking to resume talks to defuse a budding trade war…
Today, August 1, 2018, the Dow and S&P 500 closed down. Did everything with the trade war change in a single day?
At this point it may be better for you to just stop reading the mainstream financial news if they are getting inside your head.
The mainstream financial press is just making something up each day for why the market is either up or down.
Here’s what I think will happen with the trade war with China. China will capitulate rather than blow up its $550 billion trade surplus with the U.S. China’s stock market is already in a Bear market and things will get a lot worse for China if they don’t come to the table and strike a deal with the U.S.
Today, President Trump did his “Art of the Deal” thing where he threatened to increase the rate of proposed tariffs to 25% on an additional $200 billion worth of goods from China. China responded by allowing their currency to fall to a record low against the US dollar in order to lower the prices of their exports to offset U.S. tariffs. I predict China will cut a deal soon rather than allow the completely destruction of exports to the U.S. China may be hoping that attempts by the Deep State and Mueller to impeach President Trump will succeed and are trying to hold out as long as possible. If China doesn’t cut a deal, that may just be the stupidest thing to come out of the communist country in the last decade.
A China trade war has nothing to do with the fact that algos and quant traders are selling into strength right now.
The 2 Truths About Why the Stock Market Is Bad Right Now
1. The 4.1% GDP was largely the result of the $1.5 trillion tax cut. However, $800 billion of Trump’s tax cuts went to share buy backs in 2018 instead of making capital investments here at home. These share buybacks made US markets overvalued. Which takes us to the second reason why the stock market is acting poorly: interest rate hikes. It was the Fed’s aggressive rate hikes that caused the market correction in February. That correction marked the end of the Trump Rally. Fed rate hikes slow the economy and hurt GDP growth but they don’t just slow our economy. Rate hikes push up the US dollar which is pushing down Emerging Markets (EMs). EMs have an estimated $11 trillion in debt and much of that is dollar based. As the dollar goes up, it pushes EM currencies down and makes it harder for them to service that $11 trillion in debt. The MSCI’s 24-country EM index is down -14% from its high and is only -6% away from bear territory.
The Fed’s rate hikes are slowing down the US economy and are also slowing down the global economy. EMs are rapidly slowing down which means they have less money to buy US goods and services.
2. The stock market is acting poorly right now because of seasonality and the weakest 6 months of the year. The seasonality will pass but we have another 8 weeks or so to go but even then, I think we have to be cautious. How do we know that current momentum in the US economy will be propped up as much as possible through the November mid-term elections? November is the start of the best 6 months of the year but do you really want to go all-in around election time with the Fed bringing on a bear market?