Stocks Tank As Trade Woes Continue
Stocks fell hard last week as renewed trade woes from both China and Mexico dragged the market lower. May 2019 was a brutal month for the market as the benchmark S&P 500 plunged nearly 7% from peak to trough. The tech-heavy Nasdaq Composite shed nearly 9% during this latest pullback. The Dow Jones Industrial Average & the small-cap Russell 2000 both slid 8% and 7%, respectively. Clearly, the selling is widespread and unless something changes quickly this pullback may quickly enter “correction” territory (defined by a decline of 10-19.9% from a recent high). The internals look awful and the market is now deeply oversold. I wouldn’t be surprised to see it bounce from here in the near future. On the other hand, if the selling continues, investors will be looking for the Fed to step in help curb the selling with more easy money.
Stocks were closed on Monday for Memorial Day. On Tuesday, the market opened higher but closed lower after treasury yields and trade woes dragged the market lower. On Wednesday, the yield on the benchmark 10-year note slid to 2.26% which was the lowest level in 19 months. Remember, bond prices are inversely related to yields. So when bond prices rally, yields fall and vice versa. On Tuesday, stocks sliced below near-term support as a trifecta of negative news hurt the market. First, China fired back and used very harsh language and told the U.S., ‘Don’t say we didn’t warn you.’ That is considered very harsh language and led many to worry that the trade war will get worse. Secondly, Mueller gave a statement and said, ‘If we had had confidence that’ Trump ‘did not commit a crime, we would have said so.’ Trump reacted to the report by tweeting, “Nothing changes from the Mueller Report. There was insufficient evidence and therefore, in our Country, a person is innocent. The case is closed! Thank you.” The third piece of news that hurt stocks was that yields continued to weigh on investor confidence. Buyers showed up after the S&P 500 traded near its 200 DMA line (near-term level of support).
Thursday & Friday Action:
On Thursday, stocks were quiet as investors digested the recent and sharp sell-off. After the close, Trump announced near tariffs on Mexico and that sent futures sharply lower. On Friday, stocks fell hard after the U.S. Chamber of Commerce is mulling legal options in response to Trump’s new tariffs on Mexican imports. In other news, a slew of apparel stocks reported earnings and the group has not seen earnings this bad since the 2008 Financial Crisis. According to Retail Metrics apparel retailers’ earnings, as a group, are down a whopping -24% for the first quarter of 2019 which is the worst reading since 2008. The market is now hoping the Fed will step in and help stem the decline.
Market Outlook: Sideways Action
Stepping back, the market is pulling back as trade woes continue to hurt stocks. The market has soared all year based on two key points: optimism that a trade deal will be reached between the U.S. and China and the Federal Reserve reversed its stance and moved back into the easy money camp. Near-term resistance is the 50 DMA line then the recent high while near-term support is March 2019’s low and then 2018’s low. As always, keep your losses small and never argue with the tape.