Market participants knew that the indices would be dancing around to China trade headlines all week and they have not been disappointed. After some hopeful headlines on Monday morning the mood has turned negative as the Trump administration took several aggressive steps that seemed to set a hostile tone for the negotiations.
However, despite a move by the U.S. to restrict visas on Chinese nationals for human rights violations and talk of restricting government pension plan investment in Chinese equities, there is reporting from Bloomberg that the Chinese are still looking for a partial agreement of some sort. The goal appears to be to stop the imposition of further tariffs in exchange for some concessions. It would be far from the major deal that Trump has been promising but both sides seem anxious to show some level of progress while negotiations drag out.
There is very likely to be more news as negotiations continue. After the moves by the Trump administration some reprisals by the Chinese on visas are already being put in place. The parties seem to be keeping the trade negotiations separate from other issues right now and that is what is providing hope that some sort of limited deal can be hammered out.
We are going to see the market jump around some more in anticipation of a meeting of the principal parties on Friday and then the big question is whether the news will be sufficient to generate a sustained rally. That seems highly doubtful as conditions will be very good for a "sell the news" reaction to a limited deal that leaves the most contentious issues unresolved.
If the indices continue to rally into a deal announcement on Friday it will create a very dangerous situation for the indices as technical conditions are poor. In addition, earnings season is fast approaching and expectations are lows. Trade wars have taken a toll on many companies and a limited trade agreement this week isn't going to do much to fix the situation.
Many market players are anxious to catch some sustained strength on a China deal but market conditions are going to make that very difficult unless there is a shift in the negotiations and a major agreement can be made. The likelihood is that is some progress is made but that negotiations drag out and many key issues linger.
We are seeing a relief bounce this morning but technical conditions suggest it can't be trusted and the news flow suggests that the ultimate outcome may not be as good as many are hoping.
My game plan is to continue to hold very high levels of cash, to be very selective with any buying and wait for better technical conditions before building positions. I'll be looking for some better stock-picking in anticipation of third-quarter earnings season but so far there are few signs of solid support levels.