In the last two weeks we have warned that the market has topped in late July. We didn’t know what would be the exact fundamental reasons to cause the market move lower, but the price actions have shown plenty warnings in advance. The market has shown amazing cyclical behaviors in the face of uncertainty, which allows us to forecast the market with reasonable confidence.
Last week, the bears tried really hard to knock it down to pass the first initial S&P 500 selloff low @ 2822.12. S&P 500 and NASDAQ successfully defended the August 5th selloff low, but the DOW was not able to defend the first initial low and made a lower low on August 15th.
All three indices fell below last month’s low on the first trading day of August. August started on a very weak note. August has been the worst month for stocks for the last 10 years and September has been the worst month for the last 100 years. So seasonally we are in the worst period of the entire year.
In our last blog, we thought the 50-day moving averages of the three indices may provide temporary support. But on Monday, August 5th, all three indices plunged to violate the 50-day moving averages with heavy volume. The heavy selloff has changed the characteristics of the bull market that started from the December 2018 low.
The market was surprised to find out that 10% tariffs on the additional $300 billion Chinese imports will take place on September 1st. The trade war risk was always there, but the market chose to gloss over the risk and chased the technical price momentum. The trade war started as fixing trade deficit with China, now it has morphed into a currency war. A currency war has far more reaching impact than a trade war because it will endanger the global financial system. The reason why the market has down played the trade war risk is the belief that Trump needs to have a trade deal in order to be re-elected. With the escalating trade war, the market will not rally even with lower rates.
From Trump’s words and behavior, right now it appears that Trump may not care if he gets a trade deal or not before the re-election. We do believe that if the market crashes 10% from here, Trump will care and that’s when a trade deal will be made, whether is good or bad. So the market is the only one that can discipline a reckless president.
The FAANG stocks have not taken out their respective all time high since the December 2018 low was made. It is very interesting to see the old leaders are not leading at this juncture. Perhaps it is sending a message about the next bull market. Many of the biggest ideas in technology over the past decade have centered on how people communicate, consume, transact and travel. Over the next decade, however, the most profound innovations—and investment opportunities—could be on factory floors, in operating rooms, at mining sites and energy facilities.
On the last day of July the Fed announced an interest rate cut by 25 basis points citing the reasons of “implications of global developments for the economic outlook as well as muted inflation pressures”. Less than 24 hours later, President Trump announced 10% tariffs against Chinese imports of $300 billion.
