An ugly bearish narrative is taking hold of the market as the price action erodes and key technical levels start to fall.
Wednesday morning, the S&P 500 is set to open under the 2800 level, which has been a psychological support levels since late March. The indices have been struggling for several weeks, but have held on to some tentative support.
There is no mystery as to what is driving the poor action. There has been no progress on the trade standoff with China. The stalemate actually intensified, as China indicated it was ready to withhold access to rare earth materials that are used for batteries and electronic devices. President Trump raised the stakes again with more comments about raising tariffs on China.
The China issue alone is enough to upset the market, but worries about the global economy have been growing lately and are intensifying. Money is moving into bonds, which are forcing yields to the lowest levels going back to 2016-17.
Even more troubling is that the three-month T-bill yield exceeds the 10-year rate. This is an inverted yield curve and is generally believed to signal that the economy is weakening. When the short-term interest rate is higher than the longer-term rate, that is a pretty good clue that there is worry about the longer-term economic picture.
Usually, when there is this perfect storm of negatives leading to poor price action, market players look to the Fed and other central bankers for relief, but right now there is no indication that a rate cut will be coming soon. The Fed has indicated it will act as needed, but the likelihood is that they will start to signal an impending decision well before anything actually occurs.
So we have poor price action and a bearish narrative gaining traction. There really is no choice but to embrace the idea that the market is in a downtrend and to stay out of the way. Of course there is the usual chorus of folks rushing to predict a bottom but there simply isn't any reason to worry about that right now.
Our primary job right now is to protect capital and to be ready when the price action improves. We don't know yet what stocks will lead when conditions improve, but we should monitor the action closely and watch for new ideas that will be of interest in a better market environment.
This is not a complicated market right now. The market is under intense pressure, and our job is to stay out of the way and protect capital.