Bad things happen when the charts turn ugly and there are a couple unpleasant surprises hitting the market this morning. China PMI came in below expectations and there is no progress on U.S.-China trade but, much more significantly, the trade war has now been extended to Mexico.
Mexico was expected to benefit from the trade war with China as it became a more-important cog in the supply chain -- and the market is completely caught by surprise that trade is now being used as a weapon in the border security battle. Trump has been unable to overcome the political opposition to his efforts to stiffen border security and surprised everyone with this shift in policy.
The surprise news is generating a significant negative reaction, but this market has been sending a clear signal of problems for several weeks now. There was some hope yesterday that maybe some of the poor news has been discounted, and that prevented further downside, but only the most-optimistic of bulls were anticipating a market low.
The big problem created by Mexican tariffs is that there is just no easy way to quantify the impact. The fallout is far reaching and if it drags out, the tariffs will increase. There is no way the cost of these tariffs will be borne primarily by Mexico and it will have an impact on the economic growth that has become a major worry in the past week.
The good news is that if you have been paying attention to the price action, you should already be holding substantial levels of cash while waiting for better technical conditions. There has been no reason to be a buyer lately. This action is going to create even better opportunities now. There will be some short-term pain, but the potential for some real bargains in increasing.
I've been writing about it for weeks now, but the key to dealing with this market is to get out of the way and protect precious capital. Don't try to predict a low. Respect the trend and wait for new technical setups to develop.
While the folks in the business media are painting pictures of disaster, I can't help but be excited about how this chaos is going to lead to some great trading down the road. We just need to be patient and make sure our precious capital stays safe.
We'll see if there are any brave dip buyers at the open this morning, but this Mexican tariff news is a classic example of surprise news that creates tremendous uncertainty. It isn't easy for the market to quickly discount its impact.