Stocks fall hard again! Last week fear of a looming trade war between the U.S. and China grew. I think the fear is overblown but the market’s opinion is all that matters. It’s important to keep in mind, all things being equal, investors like the status quo and fear change (unless it is a massive tax cut). Having said that, the fact that the market is down substantially this month should come at no surprise considering all of the major political headlines we have seen out of D.C.
Some people, specifically, the strict chart reading market technicians out there, are calling for a big top. Clearly, this has the potential to turn into a big top. However, it also has the potential to turn into another bullish base that the market will use to rally from. After a big move (Q1 2016-Q1 2018), it is perfectly normal and healthy to see the market pause for a few quarters to digest the rally. Only time will tell if this will be another bullish base or turn into a big ominous top.
The market has 3 bullish fundamental things going for it: 1. Earnings are expected to grow massively, 2. The economy (both U.S. and global economy) is expected to grow & 3. The tax cut is going to kick in which should spark more upward momentum.
Stepping back, the next big important levels to watch are 2018’s high (resistance) for the major indices and February’s low (support) for the market. I have to expect this sloppy sideways choppy action to continue until either level is broken. Remember, next week is the last week of the month and quarter which usually has a small upward bias.
A CLOSER LOOK AT WHAT HAPPENED LAST WEEK…
On Monday, stocks sold off hard as Facebook and negative political headlines, dragged the market lower. Check out the weekly chart of Facebook to the right. Facebook was the worst-performing stock in the S&P 500, after shares of the social media giant fell after reports said political analytics firm Cambridge Analytica was able to collect data on 50 million people’s profiles without their consent.
Separately, President Trump tweeted a lot over the weekend and specifically named Robert Mueller for the first time. Stocks bounced back on Tuesday after Facebook continued to fall and the Fed started its 2-day meeting. Shares of other tech stocks bounced back nicely on Tuesday, helping the market bounce back from deeply oversold levels. On Wednesday, the market was quiet after the Fed raised rates by a quarter point and hiked its expectation for GDP.
Thur & Fri Action… STOCKS FALL HARD
On Thursday, stocks plunged over 700 points as fear spread regarding a potential trade war with China. The selling intensified into the close as the Dow fell nearly 300 points in the final hour and change of trading. The Trump administration unveiled tariffs designed to punish China for intellectual property theft, imposing about $60 billion in retaliatory charges. Overnight, China said they will impose tariffs on 128 items they import from the U.S. Stocks fell hard again on Friday as the tough week came to an end.
Market Outlook: Chop City
The market is trading between important resistance (2018’s high) and important support (February’s low). Until either level is broken, I have to expect this sloppy, sideways action to continue. The big level of support to watch is February’s low and then the 200 DMA line for the major indices. For now, as long as those levels hold, the longer-term uptrend remains intact. As always, keep your losses small and never argue with the tape.