In my closing column on Monday I outlined how the market danced around to the news flow about China trade. Unfortunately this dynamic is likely to continue all week and it makes logical trading extremely difficult.
Tuesday morning early indications are for a sizable drop at the open following a headline that U.S. trade negotiators are focused on limiting the ability of government pension plans to own Chinese equities. Stocks such as Alibaba Group (BABA) and JD.com (JD) are indicated lower on this news but what is of greater concern is that it indicates an escalation in the trade tensions rather than a move toward some sort of limited agreement.
The positive spin on the negotiations at this point is that no one seems to expect a major deal at this point. President Trump has said he wants a great deal or no deal but he seems to have backed off from that position and the talk has been about a deal on some items that are already agreed upon.
While the lower expectations may help to ease a negative response, this market has been consistently saved by the hope of some progress with China. Every time the indices start to suffer some technical damage and test support levels due to growing pessimism, there is a vague, but positive, headline from the likes of White House economic advisor Larry Kudlow that trigger algo buying. This has happened so often for so long that most market players regard it as a joke, but the risk of being on the wrong side of positive news has prevented the bears from pressing their bets.
The bears are loaded with ammunition to take this market down but the hope for some progress on China has helped to hold them off. The early indications Tuesday are that the market is quickly losing its optimism that China can continue to be a crutch and the pressure is building.
There are growing concerns about economic growth and third-quarter earnings season too, so the path to the downside becomes a slippery slope if China doesn't provide some support.
While the trade headlines are negative now the great likelihood is that there will be something positive during the day to make it much more difficult for the bears. The optimism about a China deal is eroding quickly but hope springs eternal and is going to prevent the bears from pressing too hard.
This is a tough trading market environment and there is little choice but to error on the side of defense.