Published May 10, 2019
After weeks of calm, stocks were rattled this week as the expected trade agreement between the U.S. and China appeared to encounter serious pressure. Entering the month of May, the Trump Administration was encouraging investors with comments that the agreement was in the “final laps” with “productive” meetings being held. However, this week the tone out of the Administration changed dramatically. Initially, there was a bit of saber-rattling with the reappearance of the threat of tariffs (the tariff threat had been set aside while negotiations proceeded). Then, words from the Administration that China was stepping back on a number of points in the agreement. In a matter of a few days, a deal that markets had assumed was all but done was on the verge of collapse.
Stock markets were set up to react badly to any negative change in the agreement. After a blistering fourth quarter driven in no small part by fears of a trade war, investors had spent the early months of 2019 being reassured by the White House that a deal with China was likely to avert a trade war. Concerns about the Federal Reserve raising interest rates, another sore point for markets in the fourth quarter, had been set aside as the Fed backed off, adopting a wait-and-see attitude while economic data showed a happy balance between solid growth with below-target inflation. The volatility index (known as VIX) dropped below the 15 level that typically serves as the floor in a bear market. This led investors to believe that the fourth quarter stock selloff was merely a necessary cleansing before markets resumed their march upward. Large-cap stock indexes and the tech/consumer-focused Nasdaq, in particular, showed a stunning about-face as the chart below shows.
That unceasing uptrend produces complacency, opening markets up to a sharp reaction if notable negative news pops up. And so it has been this week, with the S&P 500 crashing back below the 2900 level that it worked hard to rise above and sending the QQQ back to the 10-week moving average, a trendline that has been such a key level of support and resistance over the past couple of years. In the chart below, see the many times the index found buyers at this moving average (all the green arrows). Conversely, the downtrend in the fourth quarter saw sellers press down the index at the blue line (the black downward pointing arrows). The index sits back at this line looking for buyers to provide support with the Nasdaq having given back almost five weeks of gains in a few days of negative trading. As we noted weeks ago, the trade deal with China controls this market in the intermediate term. This week was a reminder just how important that deal is to the psychology of the stock market.
Investors struggled this week with the potential impact of renewed trade tariff angst between the U.S. and China. Monday saw concerns about trade knock stocks down as much as -1.6% before buyers stepped in to narrow the loss to -0.5% for the day. Buyers were unable to reverse the slide Tuesday as trade hawkishness spread beyond the routine tweets of President Trump to his chief negotiator, U.S. Trade Rep Lighthizer. Sensing that the imposition of trade tariffs might be more than just a short-term negotiating tactic, investors chose to step back from risk, selling stocks down by -1.7%. Investors caught their breath a bit Wednesday, though a positive day faded to a -0.2% slip by day’s end. Thursday brought yet another negative day for investors as the imposition of trade tariffs on Friday began to look certain. Once more, though, buyers swooped in to limit the losses with a nearly -2% drop being pared back to a quite modest -0.3%. Stocks were jerked dramatically again Friday with the imposition of the trade tariffs going into effect. The news sent stocks sliding -1.5% during the morning hours before buyers rushed in to halt the declines and reverse stocks higher to a +0.4% gain for the day. Gains were heaviest in the defensive sectors with the S&P Low Volatility ETF ripping higher by +1.3%, well above the broad market’s rise. The point being that investors were willing to buy the dip, but did so in a relatively low risk manner.
Almost every trading session this week saw substantial losses of 1-2% before buyers came in to limit the damage. The net result of this back-and-forth trading was a -2.02% loss for the S&P 500 (SPY), but solid support at its 10-week trendline. Same story for the Nasdaq 100 (QQQ) which took a -3.20% hit but also found support at that key trendline. For the Nasdaq, it was only the second losing week since mid-December, an extraordinary streak of gains. Smallcaps (IWM) continued their recent indecisive trading, slipping -2.44% this week to spend their fifth week basically trading sideways.
Warm wishes and until next week.