Proper Focus Ahead

Thu, Apr 5, 2018 - 8:21pm

The news Tuesday night that China slapped a $50B tariff on important trade goods found the S&P 500 futures down almost 2% at one point. The market has been in rally mode ever since it opened — only down 1.2%. The cause of that rally was a very strong ADP private payrolls print (241k versus 203k consensus) intimating we may get another strong month of non-farm payrolls this Friday.

We begin next week with the first quarter earnings season that really kicks off Friday with several banks reporting. Companies are likely on blackout periods from purchasing stock so there is a lull in corporate buy-backs currently that should go away relatively soon. First quarter earnings growth is shaping up to be the best quarter of earnings growth in seven years according to FactSet, and that may finally provide the catalyst investors need to move on from trade war concerns.

The new tariffs to China are in a comment period so they aren’t official or in effect yet. Couple earnings growth with a support level that continues to hold near the February 9th lows and the 200-day moving average for most stock indices and we have the possible setup for the market to rally — as long as Trump holds off on any new tariffs and tweets against large-cap companies.

That’s not to say that some technical damage hasn’t been done. I am most worried about the technical shape of some of the foreign indices like the Shanghai, the Stoxx 50 (Europe), and the Nikkei. These areas will need more damage control and I would advise that right now, US is the better market to concentrate in.

The hourly chart on the S&P showed some bullish divergence at the lows on Monday, warning the move was extended. The jobs number and wage inflation (yay or nay) tomorrow will be important to determine whether this rally is a bull trap or the start of the next and final leg higher of this bull market.

The 10-year yield is back above 2.8%, which is good. I’m not sure how the market will respond to a rate above 3% if economic and earnings growth continues to progress this year. My feeling is that 4% will start a recession. Housing sales have been falling due to high prices. Couple high prices with higher rates and that should hurt the housing market. Given how much debt the US has piled on in 10 years, higher rates will likely curtail fiscal spending, or it won’t and we’ll be dealing with a debt expense crisis.

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