Mark expects the market to change directions after yesterdays nearly 3% Stock Market rout that was caused by a brace of factors from tariffs to a potential bond market crash. Using his 35 years of experience and his VOLUME REVERSAL ™ methodology Mark gives us a thorough analysis of this violent collapse and expected rally – R. Zurrer for Money Talks
Stocks showed a substantial move to the downside during trading on Thursday, with the major averages adding to the modest losses posted in the previous session. If you didn’t know, astrologically Mercury went retrograde and won’t go direct until April 15. Google it. Meanwhile, the ‘Ides of March’ and the Vernal Equinox often signals a change in market direction. The major averages ended the session near their worst levels of the day. The Dow plunged 724.42 points or 2.9 percent to 23,957.89, the Nasdaq tumbled 178.61 points or 2.4 percent to 7,166.68 points or 2.4 percent to 7,166.68 and the S&P 500 plummeted 68.24 points or 2.5 percent to 2,643.69. The sell-off on Wall Street supposedly reflected concerns about the impact of a potential trade war after President Donald Trump announced tariffs on at least $50 billion worth of Chinese imports, an absurdity about such a small amount as compared with the overall trade deficit with China. Instead, our sources say a potential bond crash may be the real reason.
Technically, I had mentioned that the 24,400 to 25,400 range was to be watched and lo and behold we broke it to the downside! Today’s actions completed a 5-wave decline off the highs, taking the Nasdaq 100 from 7200 to 6682, a loss of more than 500 points in a very short period of time. The S&P 500 went from over 2800 to 2642, 158 points. At this point, when you have key support near and short term oversold, with an extreme negative tick near the close of minus 1419 the chances of at least a bounce may be imminent, but we’ll see what happens tomorrow! We are definitely oversold at this point. Looking out a few days/weeks at the SPX, a return to SPX 2533 appears to be the markets objective. Short term support is at the 2632 and 2594 pivots, with resistance at 2656 and 2731 (See chart below).
Before the newly announced tariffs take effect, the Office of the US Trade Representative will release a list of more than 1,000 possible tariff lines, technical codes that apply to a particular good. There will then be a 30-day comment period during which companies and industry groups can raise objections to certain goods being included in the tariffs. During this time there will also be a public hearing on the tariffs. After the comment period, the USTR will determine which goods the tariffs will apply to and release those findings. So, it could be well into May or June before the tariffs are fully implemented. The restrictions on trade will most likely push up prices on imports of Chinese goods. For businesses that use the imports in their end products, the tariffs will most likely drive up costs and lead to increased prices or cuts in other areas of business.
The House of Representatives approved a $1.3 trillion spending bill to avert a government shutdown and fund federal agencies through Sept. 30. The Republican-led chamber backed the measure 256-167, sending it to the Senate ahead of a midnight Friday deadline. But 90 of the 238 House Republicans voted against it. Coupled with recently enacted tax cuts, the bill is projected to lead to budget deficits of more than $800 billion for this year. Conservatives balked at the deficit spending. Democrats complained that in the rush to pass the bill, few if any lawmakers had time to read through the 2,232-page tome to see what it actually contained. The bill was unveiled late on Wednesday.
Trump is frustrated over trade imbalances and the theft of intellectual property by China. His proposed tariffs aren’t likely to remedy the situation, and could make it worse. China’s Commerce Ministry issued a statement saying, “China will not sit idly to see its legitimate rights damaged and must take all necessary measures to resolutely defend its legitimate rights.” Reports suggest China will impose tariffs on US exports of the major agricultural products sorghum, soybeans, and hogs. More than half of the soybeans and sorghum exported by the US goes to China.
China is a major market for US agricultural products, cars, machinery, and other products. In 2016, China was the third largest market for US exports. Conversely, more than 41% of clothing and 72% of footwear sold in the US are made in China. Analysts believe that not only will US and Chinese businesses and consumers suffer from dampened demand and higher prices of goods, but other countries will experience collateral damage. US-China bilateral trade investment ties are integrated with global supply chains. So, a US-China trade war is necessarily going to have an effect on companies and consumers in other countries. And US-China relations are not good right now. The tariffs could encourage domestic Chinese sentiment to turn against the US. The announcement comes after the passage of a law allowing top US officials to visit Taiwan, a measure that China strongly opposes. Beijing views the self-ruled island as a “rogue province” that belongs to China. Truth is, we don’t know all the implications. We could have an all-out trade war, or the complexity of the global supply chain might limit the fallout. One thing seems highly probable – higher prices for consumer goods. Tariffs are essentially a tax. And while the Trump administration recently passed a tax break, the biggest beneficiaries were corporations. Tariffs will hit consumers squarely in the pocketbook. No surprise that Walmart and Target were each down 1.2% today. Boeing fell more than 5 percent. China has specifically threatened the US. aircraft maker if Trump raised levies. In 2016, the Communist Party newspaper said its Boeing orders, among them a $38 billion package announced when China’s president visited, could be replaced with Europe’s Airbus. Banks and insurers sold off as well. A slump in Treasury yields as investors sought havens weighed on the sector’s earnings prospects. JPMorgan Chase lost 4.2 percent. China’s Global Times — which has links to the ruling Communist Party – this week accused the U.S. of “dumping” soybeans, raising concern that the crop will be among the first items China targets. Currency depreciation could be one channel through which authorities in Beijing aim to increase the competitiveness of their products. The dollar rose 0.5 percent relative to the Chinese offshore yuan. China’s holdings of American bonds, notes and bills have already dipped to a six-month low as of January.
On the U.S. economic front:
A report released by the Labor Department showed a modest uptick in first-time claims for U.S. unemployment benefits in the week ended March 17th. The report said initial jobless claims edged up to 229,000, an increase of 3,000 from the previous week’s unrevised level of 226,000. Economists had expected jobless claims to dip to 225,000. A separate report released by the Conference Board showed a bigger than expected increase by its index of leading U.S. economic indicators. The Conference Board said its leading economic index climbed by 0.6 percent following a 0.8 percent increase in January. Economists had expected the index to rise by 0.3 percent.
Steel stocks turned in some of the market’s worst performances on the day, resulting in a 6.2 percent drop by the NYSE Arca Steel Index. Considerable weakness was also visible among financial stocks, with the KBW Bank Index and the NYSE Arca Broker/Dealer Index slumping by 4.1 percent and 3.6 percent, respectively. Oil service, pharmaceutical, transportation, and chemical stocks also moved notably lower amid broad based weakness on Wall Street.
In the bond market, treasuries showed a significant rebound following the drop seen in the previous session. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, slid by 7.5 basis points to 2.832 percent.
Economic Reports
February Durable Goods Orders to be released at 8:30 AM EST on Friday are expected to increase 1.6% versus a drop of 3.7% in January. Excluding Transportation Orders, February Durable Goods Orders are expected to increase 0.5% versus a decline of 0.3% in January.
Canadian February Consumer Price Index to be released at 8:30 AM EST on Friday is expected to increase 0.5% versus a gain of 0.7% in January.
Canadian January Retail Sales to be released at 8:30 AM EST on Friday are expected increase 1.3% versus a drop of 0.8% in December.
February New Home Sales to be released at 10:00 AM EST on Friday are expected to increase to 620,000 units from 593,000 units in January.
