The stock market was able to retrace 2/3 of what it lost on Tuesday during yesterday’s trading. It was actually a better day until there were 20 minutes left before the closing bell. At 3:40pm, the S&P had retraced 75% of its previous day decline…when Reuters reported that Beijing had lowered expectations for progress on any trade deal this week. That news turned a 1.25% gain into a 0.91% advance…and it took the breadth in the S&P 500 index from 14 to 1 positive to just over 6 to 1.
However, it was still a good day for stocks. Although the breadth came down late in the day, 6 to 1 positive is still quite positive. All eleven S&P groups closed in positive territory…and two other leadership groups (the Transports & the semis) both rallied more than 1%. If there was one disappointment, it was the underperformance of the Russell 2000 index. It rallied 0.47%, but since that is still a decent advance, we cannot say that this was the kind of outlier that raises a big red flag.
(BTW, the volume fell to only 2.2bn shares, but that decline almost certainly had more to do with the holiday than a lack of buying interest. FYI, although the volume during Tuesday’s decline was higher than it was on the previous day, it was still only 2.75bn that day. So the rise in volume on Tuesday and its decline yesterday was not a very compelling development.)
Needless to say, the trade negotiations are going to be front and center for investors over the next two days…and any news/tweets/leaks on this subject will dominate the movements in pretty much all of the markets for the rest of this week. What in the world do you say after the conflicting reports that we’ve all heard on this subject over the past 24 hours??? In our opinion (as we have said several times this week), the longer-term prospects for the markets due to the trade war are not very good. The most we can possibly hope for on the core issues the White House has been pushing-on from the start (like intellectual property) is some lame lip service. There will be nothing even remotely concrete on these core issues, so the uncertainties surrounding trade will create headwinds for many months to come.
HOWEVER, on a shorter-term basis, the events of the past 12 months tells us that President Trump is obsessed with the stock market. If these week’s negotiations fall apart and thus the new tariffs scheduled to go into effect in mid-October do indeed proceed, it’s going to clobber the stock market. (It will also have a negative impact his re-election prospects (not to mention the impeachment fight). Therefore, we believe that some sort of short-term positive resolution this week is likely. China will get a delay of the October tariffs (and maybe even some mention of a postponement of the December tariffs) and the U.S. will get an agreement from China to purchase a lot of our agricultural products. This is our best guess on what will happen over the next few days.
If we do indeed get some sort of minor positive resolution on a short-term basis, it should keep the stock market from getting hit in any significant way…at least until we get deeper into earnings season. The more important question is whether it will lead to a substantial rally in the stock market…one that finally takes the S&P 500 index meaningfully above 3,000 (after several failed attempts to make that kind of move over the past 21 months). We believe the uncertainty surrounding the lack of progress on the “core issues”…the continued slow-down in both global and U.S. economic growth…the very poor level of earnings growth here in the U.S…the situations in Hong Kong, Turkey, and Iran…will make it very tough for the S&P to break-out. Therefore, as we highlighted yesterday, successful “stock picking” (and/or “group picking” and “asset class picking”) will be essential for investors to reach their investment goals going forward.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.