Many market players thought the imposition of tariffs by both the U.S. and China on Tuesday finally would produce a negative market reaction. They were wrong, and that set the stage for sizable rallies in markets around the world. Shorts were forced to cover once again and underinvested bulls put more cash to work.
Stocks in Asia continued to climb last night as officials in China hinted that they would develop a stimulus program to offset the negative fallout from the trade war and the Nikkei continued to rally as the yen fell and the Bank of Japan promised to keep interest rates low for an extended period of time.
The most notable development as stocks shrugged off tariffs was that a number of pundits gave up on the idea that the trade war would kill the market. They have been advancing that thesis for months and have been gloriously wrong. The market reaction yesterday seemed to be the tipping point for some who have thrown in the towel on this issue and now will look for other reasons to support their pessimistic predictions.
This is classic contrarian behavior. When the bears finally give up on an issue we must watch carefully to see if the action shifts. However, as I've been writing for quite a while, the market simply refuses to embrace that negative narrative. It doesn't view the trade issue as a major negative that will kill the market. If anything, there may be a number of eventual positives from the head-butting over trade.
Although the rhetoric from China remains loud and obstinate, the truth is that the Chinese government is out of bullets. There is little it can do but try to find a way to save face. It won't be an easy resolution, but the market believes that ultimately the trade war will be a positive not only for the U.S. market but for others as well.
Ironically, the trade war issue has been a positive for the market as it has helped to create both a wall of worry as well as a steady diet of buy-the-dip opportunities. These two things combined have kept the market trending higher. Price action matters more than any fundamental argument that might be made and market conditions have promoted positive price action.
Despite these positives, there recently has been one major negative, which is some poor action in individual stocks. As I discussed in my prior post there have been an unusually high number of both new highs and new lows at the same time, which is viewed as instability that often resolves itself to the downside.
Trading in individual stocks has been much tougher in September than in August, but that has been hidden by the indices. It isn't bad action, but it is a different market environment that has been narrower and more difficult due to rotational action.
We have a minor positive open on the way and generally positive sentiment due to strength overseas. Stay focused on the price action. As the trade war battle has shown us, the pundits have no clue how this market will react to news.