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.
Clearly Trump wasn’t happy that the Fed didn’t go far enough by only cutting 25 basis points. By escalating the trade war Trump just created the reasons for the Fed to cut interest rates further. Can monetary policy alone save the economy? Will the low interest rates embolden the White House to engage in a wild and reckless trade war? The absolute dollar amount in this new round of tariffs is small relative to the GDP, but how is the global business confidence going to hold up when the global supply chain is facing such uncertainty?
We don’t have answers to the questions. We do know that the secular bull market is in the mid cycle of the 17-year cycle that started in 2009. The market has been range bound since the beginning of 2018. In order for the December 2018 to be a valid 4-year cycle low, the S&P 500 first weekly cycle low at 2728.81 has to hold. If this low is violated, for sure the market is heading to re-test the December 2018 low. If by October 2019, the S&P 500 is able to defend the low of 2728.81 successfully, then the market will resume the 4-year cycle from there. If by October 2019, the market fails to defend the support at 2728.81,, then the selloff will continue all the way to Q1 2020.
The above two scenarios are entirely possible because the current administration is reckless, to say the least. It took over 30 years to build today’s global supply chain, a few Tweets have done a lot of damages. If the 10% tariffs against the $300 billion Chinese imports implement on September 1st as announced, it will increase the likelihood of extending the selloff to Q1 2020. It’s very possible that the White House changes the trade policy suddenly in order to reverse the market crash since the market rally is of paramount importance to the Trump re-election.
In short term, all three indices closed above 50-day moving average on Friday. It may have found temporary support at this level. It may start a relief rally from here.
The upside resistance is first at 2952.22 which is the low of last month. If it can get pass 2952.22, then it may continue to try 2983-2990 level.
The earnings season is nearing the end, another round of the Fed policy announcement will have to wait until September. So we are left with a huge vacuum in August to digest the major events of trade war development and Brexit.
So we suggest:
1. Stop opening new positions.
2. Take some money off the table, especially if you have over 20% profit in open positions.
The market can only get scarier from here until October or Q1 2020. But rest assure, better days are ahead of us. A tech inspired grand bull market is waiting for us.