Trade War Stock Market Analysis
July 12 2018 - We Left The Tariff Penalty Box — Now What? By Dr. Van Tharp Trading Education Institute
At the end of June, I wrote about the tariff issues that were heating up. I said that the modest market drops and restrained moves in the VIX volatility index still pointed to more upside. And – after two weeks of sideways up-down-up-down bouncing — that’s exactly what we got. The sideways move resolved with a breakout to the upside. On this chart, we can see the breakout as well as lots of other useful information:
After two weeks of tariff "penalty box” action, the markets broke out for three days of upside push. Last night (Tuesday), however, tariff announcements rocked the markets again.
But how much did potential new tariffs on $200 billion worth of goods effect the markets?
Not much. A -0.7% drop on the S&P 500 at the low as of midday Wednesday. So I’m compelled to repeat a recurring theme. In part, markets exist as a “discounting mechanism” — meaning that traders and investors consider the probabilities of future events and best reflect those future outcomes in the market price today.
If that is our active premise, then the markets don’t really think that the world is on the brink of an all-out trade war. In fact, the biggest drop the market could muster from the highest to lowest points of June — was just -4.1%.
And the markets today, including the VIX, had a very muted reaction which revealed that market participants continue to think there’s a low probability of an all-out trade war. It’s certainly not currently pricing in much fear.
And if you look at the chart above again — you can see that the next support zone (at the top of the previous sideways box) is still over a percent below the current price. In terms of daily ranges, that’s 1.5 below where we are now.
The Jobs Report
Tariffs aside for a moment, the market is still digesting a nearly perfect jobs report from last week. The employment report struck a great balance between a nicely growing economy and one that is growing so fast that the Fed would need to apply the brakes a bit. Three things of note showed up in this important report from Bureau of Labor Statistics:
Job growth remained strong, with 213,000 jobs added vs. an expected 195,000.
Importantly, that job growth was tempered by an actual increase in the unemployment rate from 3.8% last month to 4.0%. More people are looking for employment, a normal summertime occurrence.
Most importantly, the wage growth at 2.7% was lower than the expected number of 2.8%.
This combination of more jobs added (a sign of a strong economy) and low wage growth (a sign that inflation is not yet heating up) puts us in a sweet spot were the Fed is not likely to tighten monetary policy any faster than it had planned. That’s a very market friendly outcome as we saw in the early price moves this morning.
So our posture is to keep a bullish short-term bias buying stocks as they reach pullback extremes.
In the meantime, there will continue to be tariff hiccups, especially when China responds to the U.S. president’s Tuesday night reveal. But until those moves challenge a few support levels below this, any drops will just be opportunities for new long swing trade entries.
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