After the “worst December since the Great Depression” equities have recovered from their extremely oversold levels. The S&P500 posted a ~ 8% gain during the month of January.
Since December 24 SPX has rallied almost 20% from 2350 back to 2800, with only 11 of the last 40 sessions closing lower than they opened.
2800-2817 on SPX marked a significant overhead resistance back in Oct and Nov as the index tested multiple times only to be sold off.
Trump Postpones Trade Deal Deadline:
On Sunday (Feb 24th) news broke that Trump would postpone the March 1st trade deal deadline for the planned increase of tariffs on Chinese imports. The Shanghai Composite closed up 5.60% on the news, by no means a normal trading day. Putting the main Chinese Market Index up ~18.8% YTD, back to June 2018 levels.
Meanwhile Mondays trading session for U.S equities was rather weak: The indexes opened up ~0.40-0.70% and then sold into the end of the day; SPX +0.12%, DJIA +0.23%, NASDAQ +0.36%
Seems weird that given the relative strength of U.S equities in the last two months they couldn’t catch much of a bid after the delay of the March 1st tariff bump.
Given that the markets have seemed to be trading very closely to the U.S-China trade headlines this price action could be quite telling. Did trump forfeit his bargaining chip? Will a superficial deal come through that China will eventually fade?
Here’s how I see it:
Markets are mainly concerned with a few main factors: slowing global growth and U.S-China trade negotiations being two significant ones. The news comes out that a deal may be near and Trump will postpone the tariff increases. Chinese equities rally 5.6%. US equities barely jump and close below open. What does it mean?
After almost a 20% gain in 2 months U.S equities are tipping more on the overbought side of the spectrum. 2800 on the S&P has proved to be the resistance to break, and we have just returned to test again.
When the Trade War first began, many didn’t quite agree with Trump but now that its on its way most participants see the need for China to drastically change its ways. Forced IP transfers and unfair special treatment to State Owned Enterprises vs foreign subsidiaries has become a dinner table issue with real world consequences.
With Trump so noticeably eager to please the markets he may be more inclined to bring a deal home asap, even if it means compromising on some fundamental trade concerns. Maybe markets are concerned that a superficial deal will only slow China, with an eventual relapse to its old Authoritarian ways?
As the S&P comes back to test its 2800 overhead resistance and indices tilt toward overbought; if you missed the last 20% gain you may have missed your chance. Only time will tell. A solid close above 2817 on the S&P500 is what you should be looking for.
Thanks for reading