The indices are rebounding Friday morning as President Trump apparently is softening his stance on Huawei and states that the Chinese telecommunications company could be part of a bigger trade deal with China. Previously Huawei was being characterized as a separate "security" issue but it is obviously a potent weapon in the dispute with China and an integral part of the overall problem.
The action we are seeing is very similar to what occurred back on May 13 and 14. The indices dropped sharply when China retaliated on tariffs and then bounced back sharply over the next three days as trade tensions cooled. There was a similar selloff Thursday and we are now rebounding as tensions are alleviated. The big question for us to ponder is whether this bounce can develop into another big V-shaped move like that what occurred on May 14-16.
One difference is that we are heading into a three-day holiday weekend. Markets are closed on Monday for Memorial Day and there will be news risk that some market players may want to avoid.
British Prime Minister Theresa May announced she will step down, which is not unexpected and is seeing a positive reaction as it may help to bring the contentious and confusing Brexit issue to an eventual conclusion. Brexit has been a mess for so long now that the market seems to have little reaction to it.
Oil suffered its worst day of the year on Thursday and will be watched closely again Friday. The narrative of a slowing economy is taking a toll on commodities and it will be of great concern if that starts to build. Goldman Sachs (GS) says it is time to put money to work in commodities which will be a major boost to the overall market if is correct.
While there are a variety of headlines this morning to consider, the key will be the price action. A bounce after the pounding Thursday isn't a surprise. What will be a surprise is if the market can put together a very quick and easy bounce again. Bounces are more likely to be sold when the last one failed and that is the case we have now.
As I discussed, the big technical level is 2800 on the S&P 500. It wasn't fully tested Thursday and a late bounce gave us some breathing room, but if it comes into play again the odds of it holding are now lower.
Currently this is still trading range action, albeit one with a negative bias. How well Friday's morning's bounce holds will be an important clue as to whether we need to worry about that 2800 level sooner or later.
China continues to issue statements about its ability and will to withstand intense economic pressure to make a trade deal with the U.S. There are few signs that progress will be made in the near term. The market is relieved to hear Trump say Huawei will be considered as part of a deal but there are no indications that anything is really being done at this point.
We'll see how willing market players are to chase a bounce in front of a long weekend. With no real progress on trade it may not last for long.