The market correctly anticipated that tariffs would not be imposed on Mexico and that there would be a quick agreement. There is still a positive reaction this morning, but the question that market players have to ponder is how much the market can build on what was the best week of the year for the indices.
In addition to the Mexican deal, there was some progress in the China negotiation as well as Treasury Secretary, Mnuchin, had the first meeting with his counterparts in some weeks. There is also a huge merger of equals between Raytheon (RTN) and United Technologies (UTX) , which illustrates that there may still be some reasonable valuations in the market.
The market will continue to dance around to news on trade and tariffs, but what will be the more important issue is the Fed and the likelihood of interest rate cuts. Expectations for interest rate cuts rose sharply last week, which is what really drove the upside in the indices, but is bad economic news something that will keep this market running with rates already at very low levels?
Market players have a nearly automatic positive response to Fed dovishness. Any talk of lower rates has boosted the market for the past 10 years, but the situation this time is different as there is some danger of actual economic slowing. Part of that is due to trade issues and part of that is due to just the business cycle, but rate cuts in response to a slowing economy is a much different situation than rates cuts as the economy slowly trends upward.
One of the issues that will be of particular interest is what happens if there is now some positive economic news or good news on trade. The market is pricing in up to three cuts this year, but what if there is a change of opinion and there are only one or two cuts instead. Will that put pressure on the market that is expecting a very aggressively dovish Fed?
Technically, the market saw momentum soar last week, and that tends to create stickiness to the upside even though many stocks have become extended. Some market players are looking for a "sell the news" reaction to the Mexican deal, but in recent years the computer algorithms have played havoc with simplistic "sell the news" reactions.
The strong move last week helped to repair quite a bit of technical damage but what is needed now is some consolidation. Markets that make moves that strong don't tend to reverse and go straight back down. There are too many folks that were left out and are now interested in buying the dips.
What we have technically is a battle between "sell the news" and "fear of missing out." The news narrative is now much more positive due to the dovish Fed and progress on trade, but that can change very quickly.
Many market players struggled to keep pace with the market last week and are trying to make up ground this week, which will provide support, but the potential for some downside volatility is high.
I'll be looking for some entry points, but it is not going to be easy to put capital to work.