Just as I’m writing another newsletter with no real excitement or market-driving news, this past Friday gives us a jolt to the downside by 460 points as the yield curve inverted and the Mueller investigation wraps up.
Now we find ourselves back at the same market levels from last summer. These levels are very significant because we have spent so much time trading here over the last 12 months. In fact the 2800 level has now been tested for the sixth time over that span. And as we mentioned in last July’s newsletter regarding support/resistance levels, “sometimes these are round numbers that can be psychologically significant, like 2700… Typically, once you break through a number that has been a resistance point, that level will serve as temporary support going forward.”
I had written this Thursday prior to the selloff: “This brings us to the fact that we have broken above the 2800 now on relatively no news over the last month. 2800 served as resistance twice over the past month before finally giving way to this most recent breakout. Does the market know something we don’t?”
This is very interesting because Friday’s selloff has brought us back to 2800 on the dot. So far it has served as support but how long can it hold? What news is lurking around the corner that could send us higher or lower?
What I’m focused on:
Fed: Just wrapped up a 2-day Fed meeting on Wednesday. Powell has pivoted from 3-4 rate hikes to not a single one. They sounded about as dovish as they could be which is good for the market, however it also shows that they have concerns about economic growth. Some think they could even possibly cut as an insurance measure to fight global headwinds/risk management.
China (trade deal): On March 14th Chinese negotiators suggestedlinking an official state visit by President Xi with a historic trade deal. This visit is supposed to take place at Trump’s Mar-a-Lago resort following Xi’s late March trip to Europe. Trump’s economic advisor, Larry Kudlow also echoed his optimism of a trade deal being finalized in April. “I think we’re making great progress. I don’t want to predict. It’s up to the president and not to me, but I think the headway has been good,’ he said to Fox News Sunday.
China (economy): March 5th, Chinese Premier Li announced a tax stimulus reducing taxes 2 trillion yuan, or around $298 billion. This is an effort to fight their current slowdown by boosting domestic consumption. This has seemed to help so far so it looks like they will continue this route in the short-term.
Brexit: Still no real clarity but time is ticking for the UK to sort its Brexit mess out.
Interest Rates: As I mentioned earlier, there was an inversion in the yield curve on Friday where the 3-month treasury rates exceeded the 10-year rates. When this happens it is often seen as a preliminary sign of a recession which is why we saw the panic from the markets. While it is worrisome, it is not always the case as sometimes it represents a rate cut, not a recession.
Looking ahead: 2800 is the current bellwether. As we have mentioned, it seems apparent that the market is content here based on the news and expectations which are currently out there. Any move higher or lower without news to back it up would still seem premature.
I remain cautious at the moment acknowledging the potential economic headwinds. But I also don’t want to rule out a surprise move by the Fed or Trump that could send gas back into this rally. I know I say this often but we are DEFINITELY at a crossroads this time.
Stay tuned as we continue to navigate these markets together.