Last week, we expected the S&P 500 and other equity indices to have a quiet beginning this week with a bias to the upside. Yesterday certainly felt bullish with the S&P 500 futures having its highest print since March 13th.
However, we noted in our trading room yesterday that these markets felt too high to buy, and that traders were looking for pullbacks. They got their wish in the after hours, when the U.S. government announced $200 billion new tariffs on China, turning what was a quiet market into a 30-handle drop.
In the overnight session, Asian stock markets sold off with the Hang Seng down 1.78%. In Europe, the situation is no better with indices down across the board. What comes next is waiting for China’s reaction, with prior rhetoric from Chinese officials having had an aggressive tone.
This morning, Goldman Sachs' head of Forex research said things will get a lot worse before they get better when it comes to U.S. and Chinese trade tensions.
Traders have had plenty of other things to consider with earnings about to become the most prominent headline, but with equities having such a strong rally over the last week, it made sense for the market to be vulnerable to sell stops and profit-taking ahead of these earnings.
The question now becomes, do the dip buyers hold last night’s low, using it to fuel more buying to break above 2800, or will we see another failure at the top of the range?
Our view is to trade smaller right now, to let winners ride, and to be willing to trade either side of this market. Sure, these headline dips have been bought lately; however, we have also noted the pattern that equities sell off when they reach the top of the post-January range, and yesterday was the top of that range. Right now, we trade cautiously without conviction.
Today’s economic calendar features the 8:30 PPI number, but nothing on the U.S. schedule should be market-moving. Attention will be on the headline risk from the wires out of China.
- MBA Mortgage Applications 7:00 AM ET
- PPI-FD 8:30 AM ET
- Atlanta Fed Business Inflation Expectations 10:00 AM ET
- Wholesale Trade 10:00 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- 10-Yr Note Auction 1:00 PM ET
- John Williams Speaks 4:30 PM ET