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Are We Hitting The Point Of Maximum Trade War Concern?

Apr. 05, 2018 10:23 AM ETSPY, VOO, SH, SDS, IVV, SSO, SPXU, UPRO, SPXL, RSP, SPXS, VFINX, EPS, BXUB, SPLX, SPUU, BXUC, SFLA-OLD, SPDN, SPXE, SPXT, PPLC, SPXV, RYARX, SPXN, DMRL, YPS, USMC10 Comments
Chris Ciovacco profile picture
Chris Ciovacco
10.62K Followers

Summary

  • Markets may have underestimated the pre-negotiation posturing taking place.
  • Why the tariff announcement spree may be over or nearing an end.
  • The bearish wildcard.

PRESS IS IN THE EYEBALL BUSINESS

Financial networks and websites are in the eyeballs and click business; not that there is anything wrong with that. The uncertainty related to a possible trade war between the United States and China is good for attracting eyeballs and generating clicks. Therefore, some of what has been written needs to be taken with a "what business are they in" grain of salt.

A PRUDENT LOOK AT BOTH ENDS OF THE TRADE SPECTRUM

Are there reasons to be concerned? Yes

Are there reasons to believe the worst may be behind us? Yes

CASE A: WE ARE NEARING THE PEAK OF FEAR ON THIS TOPIC

A rational argument can be made that Trump's tariffs are nothing more than a negotiating tactic to increase leverage when discussions begin with China. China's response to Trump's moves have basically the same "we will not be pushed around at the negotiating table " objective.

“Now listen to me. I am negotiating. Negotiation, this is what you do in business.

A protracted trade war is not in either side's best interest. Tariffs, even the threat of tariffs, create numerous squeaky corporate wheels for Trump in the United States and for Xi Jinping in China. Nobody wants to deal with squeaky wheels for a protracted period; it can be very draining.

Trump is most likely looking for some way to declare victory or show some progress on the China trade topic before midterm ballots are cast. He has some specific objectives, including steel, aluminum, market access, and intellectual property; hence the need for proposing to enact several tariffs. China has simply responded in kind to maintain a powerful posture. Trump does not want this topic in the problem hopper when midterms arrive; China does not want to be perceived globally as anti-free trade.

This article was written by

Chris Ciovacco profile picture
10.62K Followers
Chris Ciovacco is the founder and CEO of Ciovacco Capital Management (CCM), an independent money management firm serving individual investors nationwide. The thoroughly researched and backtested CCM Market Model answers these important questions: (1) How much should we allocate to risk assets?, (2) How much should we allocate to conservative assets?, (3) What are the most attractive risk assets?, and (4) What are the most attractive conservative assets? Chris is an expert in identifying the best ETFs from a wide variety of asset classes, including stocks, bonds, commodities, and precious metals. The CCM Market Model compares over 130 different ETFs to identify the most attractive risk-reward opportunities. Chris graduated summa cum laude from The Georgia Institute of Technology with a co-operative degree in Industrial and Systems Engineering. Prior to founding Ciovacco Capital Management in 1999, Mr. Ciovacco worked as a Financial Advisor for Morgan Stanley in Atlanta for five years earning a strong reputation for his independent research and high integrity. While at Georgia Tech, he gained valuable experience working as a co-op for IBM (1985-1990). During his time with Morgan Stanley, Chris received extensive training which included extended stays in NYC at the World Trade Center. His areas of expertise include technical analysis and market model development. CCM’s popular weekly technical analysis videos on YouTube have been viewed over 700,000 times. Chris’ years of experience and research led to the creation of the thoroughly backtested CCM Market Model, which serves as the foundation for the management of separate accounts for individuals and businesses. Copy and paste links into your browser: Market Model: http://www.ciovaccocapital.com/sys-tmpl/ccmmarketmodel/ More About CCM: http://www.ciovaccocapital.com/sys-tmpl/aboutus/ YouTube: http://www.youtube.com/user/CiovaccoCapital Twitter: https://twitter.com/CiovaccoCapital CCM Home Page: http://www.ciovaccocapital.com/sys-tmpl/hometwo/

Analyst’s Disclosure: I am/we are long VOO. 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.

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Comments (10)

a
One other thing I would mention is that, as the video points out, today neither the fundamental nor technical backdrop is similar at all to 2000 or 2007. However, it seems to me that there are some similarities to 1987. In 1987, traditional recession markers such as the yield curve were not signalling an imminent recession when the market dropped 8.7% over the span of 9 trading days. The low was retested and then the market rallied for 10 trading days before heading back towards the low a second time. The low did not hold on the second re-test and a few days later the infamous Black Monday selloff occurred, in which the market lost 20% in one day. I realize that interest rates were significantly higher in 1987 and that the market was even more extended than it is today, but on the other hand there are some similarities to the present day, which include:

1) An overheated market created by unnecessary tax cuts
2) A rising interest rate environment with a new Fed chair
3) A technically extended market (as measured by ADX/DMI) showing that the prevailing trend may be stumbling; according to TradingView the monthly ADX for SPX is currently at 35.29, down from 35.46 a month ago, and it is above both the green and red DMI lines. This is a concerning indicator that Chris has covered in past videos - see http://bit.ly/2H4dmst
4) Protectionist trade rhetoric spooking markets

I realize that today's ADX reading of 35, while indicative of an extended market, is still nowhere near what it was in 1987 (60). But on the other hand I think the potential for irresponsible rhetoric as well as action from the present government is higher than it's ever been. We have a president who is not only corrupt and incompetent, but may also be the most narcissistic person on the face of the planet. And he's surrounded himself with appointees who are similarly corrupt and incompetent.
a
I have nothing but respect for Chris and his analyses, but as we saw again today, if the market is counting on Trump behaving rationally and intelligently then the market is going to be disappointed. Trump is neither rational nor intelligent, he is a liar, a self-promoter and a bully. Those are his skills, and they got him the presidency, but unfortunately they are not very useful for conducting international trade negotiations. Right now he appears to be playing a high stakes game of chicken against China with the American people in the passenger seat. He's turned to us and said, "don't worry, we're not going to crash - they'll blink first, trust me", except that he's mic'd up and they can hear him just as well as we can. And if there is a crash, you can bet it will be the passenger side that gets hit first.
Some Lazy Bum profile picture
This https://cnb.cx/2HeCNWe suggests that your hope ("Trump was fairly silent on this topic for a few days that were marked by wild swings in the financial markets. His April 4 tweet (text above) may mark the end of that silence and signify he wants to tone down the rhetoric and move closer to the negotiation/resolution phase.") might be misplaced.

Do you think Friday will be like Wednesday? Do things like this https://cnb.cx/2EmV00J and this https://cnb.cx/2JkpO5Q make you think the market will open down and drop a bit more?
Tactical111 profile picture
Lots of Trump haters on here. Gee, I guess protecting your jobs and securing the border is stupid? How is it "free trade" when China has tariffs in multiples of our tariffs on Chinese products. Country after country takes advantage of the U.S. as Globalists seeking our destruction exert pressure to keep the USA at a huge trade deficit; the largest in the history of the World. The net effect of balancing trade will be GOOD for the USA and it's middle class.
f
Sad that most of the damage from this trade war is to those who supported Trump the most. China specifically targeted those folks. Add in the tax cut for the rich, and middle America is being asked to grab their ankles without lube - again.
MWinMD profile picture
Yeah. The sad thing is that they will likely be told over and over on Fox each night how somehow the whole thing is the Democrats' fault. These people fell for Trump, they will fall for anything, unfortunately.

As for the author's thesis, having faith in Trump's "negotiating" would be a more rational course if it weren't for the fact that his Alpha in the real estate business - minus 59% - during an historical boom period in American RE was absolutely abysmal. He's stellar at self-promotion to the Trump U/QVC type set. Deal-making, not so much.

That's according to a University of Texas economist who looked at his investments relative to the broader market:

http://bit.ly/2uO9gQr
l
the saying goes "be afraid of what you ask for.. you might just get it". they knew what they were getting since it was an election promise.
x
I would say, never underestimate what Trump can and will do. That said, one should not trade on the headline news, it's the least effective way to trade, if not impossible at all.
Correct Me If I'm Wrong profile picture
Noting that 'The Art of the Deal' includes piles of you-know-what, it's saved me more than once to focus on economic fundamentals than shifting postures.
microhoo profile picture
"George : Yeah, I should do the opposite, I should.
Jerry : If every instinct you have is wrong, then the opposite would have to be right.
George : Yes, I will do the opposite. I used to sit here and do nothing, and regret it for the rest of the day, so now I will do the opposite, and I will do something!"

=> Buy the darn Dip!
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