In the very early going, U.S. markets are indicated higher as President Trump attempts to de-escalate the trade war with China. The President said over the weekend that he regretted not increasing tariffs more, but this morning he said that China had called U.S. officials, saying: "let's get back to the table." Several Chinese sources dispute this course of events, but the President is trying to shift his tone and that is producing some early bounce.
The markets exploded on Friday, following a tweet by Trump asking: "who is our bigger enemy, Jay Powell or Chairman Xi"? Few, if any, market players viewed this inflammatory rhetoric as a positive and the markets collapsed into the close. Many questioned Trump's emotional state and even some of his strongest supporters were disappointed by the comments.
Trump now appears to have some regrets about his comments. He has always been concerned about the reaction of the market and that seems to be driving him this morning. On Sunday night he tweeted about how the market is still up substantially from his election but it was very clear that he is concerned about how the market views his actions.
The big question for market players is whether this chaos is leading to a major shift in market trend. The indices have been in a trading range since early August. After several attempts to break through over the 50-day simple moving average of the S&P 500, the bottom of the range came back into play after the collapse on Friday. Market players will be watching very closely to see if support around 2825 continues to hold. If it fails, then the 200-day simple moving average at 2802 will come into play.
From a strategic standpoint, traders often view the failure of a support level to be a catalyst for a bounce. The logical place to set stops is the bottom of a range. When those stops are triggered, it causes a spike downward, which often attracts algorithmic buyers.
Market players have been burned so often on false promises of progress on China trade that they are going to be very hesitant to embrace another bounce for long. Bears have worried about being caught on the wrong side of good news, but now it's the bulls that are more concerned about news that will send the market down.
The market's focus is on trade right now, but the Fed continues to lurk in the background. Fed Chair Jerome Powell was quite vague in his Jackson Hole speech on Friday, but he made it clear that the Fed would react to economic weakness created by trade war issues.
More rate cuts are expected and will help to keep a bid under this market, but the trade war is a major uncertainty now and there is a struggle to discount its impact. There just isn't enough information to do that efficiently.
A few things to keep in mind as you contemplate this action:
1. This is macro-driven action, which means that stocks will move in a correlated manner and without regard to the merits of individual stocks.
2. Good stock picking will develop once the big-picture issues become clearer, but valuations don't much matter in this sort of action.
3. Focus on capital protection so that you will be in a strong position to put money to work when the market finds its footing.
4. The risk of big swings on tweets and headlines is extremely high. Focus on being reactive to the news flow rather than trying to anticipate what craziness may occur next.
The good news is that the strong emotions and high level of volatility will lead to a new crop of opportunities. If you can avoid major capital drawdowns then you will be in good shape to capture gains when the cycle turns back up.
My game plan is to watch for opportunities to sell into this bounce. The market is likely to remain very skeptical about progress with China and that will keep buyers on the sidelines.