Once again, trade war worries are weighing on the market in the early going. After President Trump directed that tariffs on certain Chinese goods be increased to 25% from 10%, China indicated it was prepared to escalate the battle. The Chinese secretary of commerce indicated that his nation is willing to fight back in order to defend the dignity of the country and the interests of its people.
There isn't anything particularly surprising about this news, and the market has been able to shrug it off to a great degree when these skirmishes occur. However, it is clear that market players are tired of how the battle is dragging on and they are concerned about the uncertainty it is creating.
The market has been sputtering for a couple weeks now, although some good earnings news and a strong economy have provided some support. The problem is that under the surface of the major indices there has been poor breadth, limited momentum and little leadership. Yesterday, more stocks hit new 12-month lows than highs.
Earnings season is winding down now and we are entering the doldrums of summer. The end of August is peak vacation season on Wall Street and there tends to be muted momentum even when the news flow is better.
The thing that has saved this market from a deeper correction so far is the hope that there may be a sudden breakthrough on trade. Last week we had a taste of it when President Trump announced the outline of a deal with the European Union. That produced a market spike, although many questioned whether it really was a meaningful breakthrough.
The battle with China looks more entrenched and no one seems to expect a quick end to the issue. That is why we are seeing this pressure this morning. There is likely to be a positive resolution longer term, but who knows when that will be or what repercussions there might be in the short term. There will be plenty of short-term pain if Trump really is going change trade dynamics with China.
In addition to trade we will hear plenty today about the earnings news from Tesla Inc. (TSLA) . Tesla has been the ultimate battleground stock for a while and the momentum has shifted back to the bulls. Although Tesla missed its earnings-per-share mark by 24 cents and it posted a loss of $3.06, cash flow was better than expected and Elon Musk provided a very upbeat forecast going forward and indicated that it will not be selling more equity.
There is a large short contingent in Tesla and it is being badly squeezed this morning with the stock up more than 8%. You can be sure that the bears will be promoting their negative view of the company, but they will need to deal with the renewed vigor of the Tesla bulls, whom many characterize as a cult.
This is a tough market right now and, as I've been saying for about two weeks now, stock picking is challenging and momentum limited. Until the price action improves, the main focus should be on capital preservation and very selective stock picking.