Tariff-ic Tuesday - Market Shakes Off Trade Wars As Kim Considers Disarming

Summary

• The markets seem to be recovering nicely.
• Tariff fears are quickly forgotten.
• Kim Jong Un talks peace.

Trump wins!

North Korea said they are willing to hold talks with the US about giving up nuclear weapons and "normalizing" relations with Washington (whatever normal is these days). The two Koreas also agreed to hold a summit meeting between Mr. Kim and President Moon Jae-in of South Korea on the countries’ border in late April, Mr. Moon’s office said in a statement.

“The North Korean side clearly stated its willingness to denuclearize,” the statement said. “It made it clear that it would have no reason to keep nuclear weapons if the military threat to the North was eliminated and its security guaranteed.”

“The North expressed its willingness to hold a heartfelt dialogue with the United States on the issues of denuclearization and normalizing relations with the United States,” the statement said. “It made it clear that while dialogue is continuing, it will not attempt any strategic provocations, such as nuclear and ballistic missile tests.”

Between that news and the growing consensus that Trump's tariffs won't really affect much of the Global Trade (the EU retaliated with just $3.5Bn in proposed sanctions against US goods) the markets are sharply higher yet again and, once again we'll check in on the S&P's bounce lines to answer the eternal question: "Are we there yet?" Here's the line we were looking for a month ago:

And here's where we are today:

I would be more excited but last Monday we had a fake 80-point gain on low volume and yesterday we had an 80-point move on low volume - so it remains to be seen if it actually holds up for more than a day. Also, last Monday was far more impressive than where we are now and we fell 140 (5%) points by Thursday - so let's not get carried away, OK?

There's not too much market-moving news, we had Powell's testimony last week and then the Tariff thing and now we have possible peaceful moves in North Korea, but were we really discounting the market over North Korea in the first place? Hard to say something is now a positive when it wasn't really a negative before. We're out of earnings season and data has been mixed so what catalyst do we have to take the market back to it's highs (S&P 2,872 - still 5% higher than we are now)?

Where we are, at the moment, is halfway between where we peaked out and January and where we fell to in February. A bit bullish if we stay above the strong bounce line - but certainly nothing worth throwing a party over.

The key is getting back over the 50 dma at 2,736 - otherwise we're likely consolidating between the 50 and 200 dma and that means this is the top, not the bottom, of the range to come. It's a little scary to short this morning but if the Dow Futures (/YM) dip back below 25,000 - that's a good line to keep a tight stop on with a short below. It should line up with 2,730 on /ES, 6,720 on /NQ and 1,555 on /TF (also fun to play short) so look for 2 to go below and then short the laggard - stopping out if any of them go back over.

Again, nothing has fundamentally changed, this is most likely dip buyers running in again because they believe that 2,872 was the "right" price but that's like thinking 105.9 is the "right" body temperature, just because you spiked that high once. Markets overshoot the mark all the time and then they settle down to a more realistic level - we don't believe 2,872 or even 2,640 is a realistic level - most likely it's the top of a channel that goes 10% lower to 2,420.

We've been saying that for a month and Goldman Sachs disagrees with me, (they say 2,449 is the right level for the S&P 500) using this chart and the following voodoo;

The index saw an initial selloff that was impulsive in nature (wave A). This tends to mean that there’s likely going to be another impulsive 5-wave decline to complete an ABC 5-3-5 count. From current levels, an eventual C wave could reach somewhere close to 2,449.

Having said that, it’s not uncommon for wave B to form complex structures (often triangles). Although ultimately bearish, there’s scope for some initial consolidation/ range-bound price action while still in the “body” of the February range.

The next significant retrace level below is 61.8% from Feb. 9th at 2,631. The 200-dma will likely be critical at 2,560. This particular moving average held very well at the prior low. Getting a break below it would therefore help to confirm that this is in fact wave C targeting at least ~2,449.

Reaching this 2,449 level would also mean retracing ~38.2% of the immediate advance from Feb. ‘16 (2,467). This would therefore be an ideal target from a classic wave count perspective; that is, if correcting the rally from Feb. ‘16.

As has been discussed in previous updates, the market could also be starting a much bigger/more structurally corrective process, counter to a V wave sequence from the ‘09 lows. If that’s the case, there should be room to continue a lot further over time. At least 23.6% of the rally since ‘09 which is down at 2,352.

Bottom line, it’s worth considering the possibility of continuing further than 2,467-2,449. Doing so might imply that this is not an ABC but rather a 1-2-3 of 5 waves down, in a larger degree ABC count that could take months to fully manifest. While it is still far too early to make this call, the important thing to note is that the 2,467-2,449 area will likely be trend-defining.

I don't know about all that nonsense but our 5% Rule™ says 2,420 and the 5% Rule™ is not TA, it's just math! On the whole though, it does have many of the same elements as the Fibonacci Retracements Goldman's technical team is hanging their hats on so we'll agree to disagree on the exact target but, if I were you, I'd take the main point seriously and make sure your positions are well-hedged (see last week's Reports for trade ideas to that effect).

Steve Burns did a good job of summing up what's wrong with the current market valuations - they are based on NOTHING! We are valuing middleman companies like Amazon (AMZN), Uber, Facebook (FB), AirBnB and Netflix (NFLX) at tens of Billions of Dollars - even though they are essentially the same dot-com models that evaporated into dust 20 years ago (next year is the Crashiversary).

And why not? As Steve points out, we're buying them with currency that is backed by nothing to the point that we're willing to exchange that for currencies some kid made up in their basement last week (see the Madness of DogeCoin for a great example of that). There are always "experts" willing to explain to you why "this time is different" and we can create wealth out of thin air and everyone will be a Billionaire and there will be no consequences - it all sounds great, until it doesn't.

I don't like to be Cassandra or even Chicken Little but I turn 55 this month and I've seen it all before - several times and we're still 80% in CASH!!! and very well-hedged in our portfolios because we don't think this is the end of the selling - just an intermission.

Be careful out there!

Analyst’s Disclosure: I am/we are short DIA, SPY, QQQ, IWM, NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise slightly bearish mix of long and short positions - see previous posts for other trade ideas).

Comments

[rjroberts]

Thanks for your insights Phil.

I agree with you about the voodoo-technics; when most everyone is thinking the same thoughts on "fibs and Elliott Waves", does it not seem fundamentally that this is the "herd's-tracking-patte... Therefore most trading algos are set accordingly.

[kesslerblvd]

Nasdaq keeps on with one step back and three or four steps forward. Nasdaq 8,000 this year and SPX 3,000.

[Shark39]

Wow, working for Fair Trade instead of Free trade when American's got the short end of the stick. Now just maybe making the World safer. A leader instead of a politician. The we have Goldman Sach's Wall Street largest manipulators, better known as a Crook. Thanks Phil for your insight.

[agent bitter]

"And why not? As Steve points out, we're buying them with currency that is backed by nothing to the point that we're willing to exchange that for currencies some kid made up in their basement last week (see the Madness of DogeCoin for a great example of that). There are always "experts" willing to explain to you why "this time is different" and we can create wealth out of thin air and everyone will be a Billionaire and there will be no consequences - it all sounds great, until it doesn't" YAAAAZ.

it doesn't. vxx, uslv, nugt, cash.

ONE PROBLEM. The spike down will look like like brexit. so many people are waiting with cash....

[rod_s]

Trump wins? Take that, libtards! Also, about manufacturing money out of thin air, I just recently started playing with options and I am continuously amazed at how frequently I can start a position and then close it out profitably, by buying or selling to someone else in a matter of hours/days. Have both parties created any real value, at all? Or are we really just tossing a few electronic credits around for fun? I also used bitcoin profits to buy some plane tickets for the holidays and was amazed at how a made up currency was converted to "real" currency (backed by nothing) that then showed up on an airline carrier's income statement as "real" revenue! Amazing times we live in!

[Comfortably Numb]

There ain't no way in hell Kim is gonna disarm. Nukes are his insurance policy. He saw what happened to Libya and Iraq...he knows that once he gives it up.......he will be attacked.

[Ben Gee]

There was no China backing up Libya nor Iraq.

[Fabien Hug]

Ben, even if China said so, do you think they'll intervene?

[Ben Gee]

China did intervene in the 1st Korean war.
If the US start a war, maybe China will lend N Korea a few of its missiles. And if the US use nuke, China may lend N Korea a few of its nuke too.

[Fabien Hug]

Short NFLX? It takes some.... I like that list above; the economy of nothing. Except for NFLX; they create content that is pretty successful I believe. I'm not long NFLX by the way.
NK readies itself to be invaded by the US; they crave some Coke(tm) and McDo(tm) finally.
I agree that prudence is warranted, I don't have a good feeling about this giddy market.

[Truebluealpha]

Thanks for this daily dose of comedy, Phil. ("Whatever normal is these days" indeed!)

That's an impressive and hilarious list of our vaporous economic giants (Amazon, et al), and it could probably benefit from a separate category of companies that don't bring in dollars, dogies, or any other kind of coin that translates into that antiquated term, "profit." As in, "Tesla makes cars but no money," and then you can take it from there...

All right, back to upping my cash position in the U.S. while looking for a nice tidy index fund in the North Korean stock market!

[Comfortably Numb]

I happen to agree with you Phil. There are a lot of land mines out there. Willing to take some chips off the table and not chase the remaining upside here.

I am using UVXY as my hedging tool.

[agent bitter]

where's your exit if you don't mind me asking?

[Buyandhold 2012]

Kim considers disarming?

If you believe that, I have a bridge to sell you at the North Pole.

[Bubrub]

Looks like North Korea threw an easy pitch, let's hope for the sake of the markets, world peace, etc that the Trump admin doesn't screw this up. Peace in exchange for giving up nukes is *exactly* what we have always wanted...Will Trumpy look this gift horse in the mouth?

[Ben Gee]

All N Korea want is a promise from the US, S Korea and Japan not to take military action against N Korea.
This is like the Cuban crisis.

[Jay5]

I am short both REITS and SPY via put contracts through end of April at yesterday's close prices and long on some mining stocks bought cheap and a silver ETF... Bit of a gamble but I read the graphs and sentiment slightly differently. No big positions, small ones taken during yesterday's run ups. Plan to add if SPY goes below $271, getting out if SPY breaks solidly above $274.

[Jay5]

Also, thank you for the information Philip, I plan to subscribt tomorrow.

[Philip Davis]

Looking forward to seeing you inside!

[Jay5]

So, to follow up. My SPY short puts have not yet gotten into profit region, they are basically sitting on neutral, as for the REIT puts. The silver ETFs are up, but those will be volatile I believe. The stocks and silver stuff are more of longer term plays. While the ETFs are purely for gains on priciple, the stocks pay dividends, are good value companies and I think will do well over the next 5 years. I attach a graph to anyone who is interested in some of my logic with SPY:
http://bit.ly/2Fm01b4
I bought puts as SPY was breaking below the 61.8 Fib last week. On Friday I maintained my puts as we openened on a gap down on the day, but as we broke above the 38.2 Fib and other trend lines indicated we would be filling the opening gap, I took my profits and ran. That is until the end of Monday hours as it looked like the market could not break the 61.8 Fib again. We didn't have a solid bounce, but I took a small short put position again as the SPY chart suggested further decline, combined with what I saw happening around the world and in the White House. If you look at silver, it looks poised for a major break out (see commercial versus private short vs long positions and examine your charts as you see fit). This again suggests to me a decline in the stock market. Plus, larger and very overvalued companies are due for a reckoning soon. Tesla already seems to be breaking down, likely on word of Q1 production and earnings short falls plus the competition starting to come out in impressive ways with their electric cars. I have no idea what is going on with Netflix...
Not that I really expect anyone to pay attention to my comments, but I think comment count helps authors plus putting my underware out in the open has been helping me stick to plans and keep more focussed. That said, a solid and constructive smash of my thought process is always welcome.
Good luck to all and happy hunting.