Once again the market is rallying on news that progress is being made on an U.S.-China trade deal. The Wall Street Journal is reporting that negotiations are in a final stage and that China will cut tariffs on U.S. farm, chemical, auto and other products in return for removing most of the recent sanctions on Chinese products.
President Trump and Chinese President Xi are working to arrange a meeting at the end of the month, at which time a formal agreement would be signed.
The market is trading higher on the news, but the reaction isn't nearly as celebratory as it has been on prior headlines about progress on trade. In view of how many times the market already has rallied on trade optimism it isn't a big surprise that the reaction isn't as strong, but it is still far from the "sell the news" reaction the bears have been anticipating.
As the potential for a final China trade deal increases, the battle lines in the market are becoming clearer. The bulls argue that the market still has not fully priced in all the positives that come from a trade deal. The market is below where it was when the issue first took hold and there is still much potential upside when this heavy weight on trade is lifting.
The bears argue that the market already has priced in the positive aspects of a trade deal. The rally off the Dec. 24 lows has more than discounted the good news. In addition, the market is not taking account of growing evidence that economies around the world, including the U.S., are slowing.
The bears also argue that as the details of a trade deal become known it will be clear that there is a lack of progress and many of the same issues remain. The deal will be attacked as having little impact on some of the basic issues that are at the heart of the problem.
So who is right? We don't need to make that judgment right now. The market will provide the answer in the form of the price action. It is our job to navigate that action rather than try to predict all the twists and turns that are likely to follow over the next several weeks.
From the bulls' standpoint the reaction here on Monday morning is a bit disappointing so far. The trade news doesn't come as a big surprise and the rally is limited. The good news is that there are stocks in a number of sectors that are reacting well and there is still good technical action in many names.
The thing we need to watch for at this point is a market that refuses to run up further or reverses on the news. In other words, we need to watch for signs that the good news was expected and is already priced in to a great degree.
A failure of progress in the indices will excite the bears, but bulls who stay focused on individual stock picks should continue to find good opportunities. This market is still in the process of separating out winners from losers and is not focused on overall market direction like it was during last year's downtrend or this year's early uptrend.
If the indices go red after the positive news it is going to cause some major concern. Be ready to move as conditions evolve.