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The US stock market has survived the first deadline in the new White House tariff policy via an extension of steel and aluminum exemptions for Canada, Mexico, and the EU beyond May 1.
But the malaise still lingers with the S&P 500, Dow, and Nasdaq all stuck between their 50 and 200-day moving averages despite the strongest Q1 earnings season in 7 years.
In the video that accompanies this article, I show all the charts including the Philly Semiconductor Index (SOX) which has a chance to form an inverted head-and-shoulders bottom.
I also show the best and worst sectors to be in since the first shots were fired in the trade war: Consumer Discretionary (XLY) and Industrials (XLI), respectively.
So what’s eating the market? Why aren’t investors buying more of all the great companies reporting record quarterly sales and profits, and continued strength in their business forecasts?
It’s the looming trade war. We haven’t heard a lot of companies complain on their conference calls about the uncertainty. But the uncertainty is there because so many unknowns are on the table and this breeds some degree of anxiety for corporate managers and strategic planners.
And that anxiety is showing up in stocks as investors ponder, calculate and game who could be most impacted by the enactment and escalation of tariffs, especially between the US and our “frenemy” China.
Besides the potential for a decrease in global sales, with 45% of S&P 500 revenues coming from “exports,” there is also a credit impact. The Financial Times just published an article this afternoon titled US groups warned of credit hit from US-China trade war in which Don Weinland, writing from Hong Kong, shared some research notes from S&P Global…
US companies are the biggest losers in Donald Trump’s trade war with China, rating agency S&P Global has warned, with the likes of Tesla, Texas Instruments and Peabody Energy facing greater credit risks than Chinese peers after the exchange of fire between the world’s two largest economies.
“Considering the complexity of international supply chains, many market participants are on edge that new tariffs might have damaging unintended consequences,” S&P said.
Ross vs. BABA
In my video, I also share some quotes from Commerce Secretary Wilbur Ross when he spoke at the Milken Institute Global Conference in Beverly Hills on May 1.
Basically, Ross is prepared to go to war and thinks any short-term pain for US companies and the economy will be worth it in the long run. Many investors, myself included, hope that he is more right than wrong.
But President Trump also has some big investors in support of his goals and methods. Speaking on a panel at the MIG conference was Thomas Barrack, a Trump friend and chairman of the $43 billion asset management firm Colony Northstar.
“Look, we’re going to practice a little bit of dynamite diplomacy,” said Barrack. “You need to blow up the system sometimes to make the system work and it starts at home.”
I agree that some unfair practices by China need to be addressed and that we should use our position of strength — we help create their trade surplus and wealth with our appetite for Chinese goods — to negotiate better terms and agreements in many areas, especially regarding intellectual property.
But we also need to approach the “war” very strategically because China now has the world’s single-largest middle class, with a consumer population of over 500 million.
I’ve been speaking about this “big picture” view for years as an investor in companies like Apple (AAPL – Free Report) , Lam Research (LRCX – Free Report) , and Alibaba (BABA – Free Report) , the “Amazon (AMZN – Free Report) of China.”
When BABA CEO Jack Ma did a PR tour of the states in 2017, he was asked if his goal was to get US consumers to buy more Chinese goods. He emphatically stated the opposite; he wanted American businesses to see their access to sell to the Chinese consumer through a gateway like Alibaba.
So it was especially exciting for me to hear that Alibaba co-founder Joseph Tsai spoke at the MIG conference. Barron’s reporter Reshma Kapadia was posting live quotes on Twitter Tuesday and she caught some great ones from Tsai…
“Alibaba’s Tsai re: trade: Can see it devolving into tit for tat; time for cooler heads to prevail to look at what real issues are; ironic US producers facing greatest opp to sell to China’s middle-class, US deciding to put down gate”
She later paraphrased in an article on Tuesday morning…
Tsai found it “ironic” the U.S. was picking this point for a trade war since the growth of the middle class in China created a large group of consumers that could be a big market for U.S. companies.
Can the Bullish Structure Survive the Month of May?
The next inflection point for the “trade war” is likely May 21 when the US Treasury is due to recommend new rules to block Chinese takeovers of America’s advanced-technology assets.
As if May wasn’t tricky enough as the proverbial month to “sell and go away” until the market typically resumes its bullish nature in Q4. And the “mid-term” election curse every four years isn’t helping either.
Here’s what I told my TAZR Trader group earlier this week…
As I’ve been talking about, the SPX and the NDX still have bullish structure with higher lows, despite the weak chop and insisting on hanging out between the 50 and 200-day MAs.
Even the SOX chart has a decent shot at turning up from its bullish structure of an inverted head and shoulders pattern (see video for the chart).
If I’m right about the charts being able to pull up from this slow-motion malaise, even this persistent “correction in time” is overall good for the market in the long-term.
All the economic, earnings, tax, and trade issues are getting washed, wrung, and hung out to dry.
See my video and article from last week The Not-Good-Enough-Yet Earnings Season for more details on why the fundamentals are still bullish.
We want to see lots of investors throw in the towel in impatience over this slow process and the maddening chop that we’ve all experienced.
The difference for us is that we have a less-stressed and more-seasoned view of it all.
(end of TAZR commentary on 5/1)
So what exactly is my “less-stressed and more-seasoned view of it all?” Right now, it mainly involves being long-term bullish and short-term very nimble. Strategic and tactical.
Here are more details on that “strategic and tactical” approach…
If these charts do break down and bring an extended correction into the summer months, I still believe it will be a terrific buying opportunity.
That’s why I have a very high cash balance in TAZR, waiting either to join a confirmed move to new highs or to pounce on new lows with bargains galore.
Disclosure: I own shares of BABA and LRCX for the Zacks TAZR Trader portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click Follow Author above to receive his latest stock research and macro analysis.
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