China Tariff Response – Market Sentiment vs The Value Investor

 

Overview:

 

China announced overnight that it intends to implement 50 billion dollars in additional tariffs, as the alleged trade war with the US heats up.  The market is reacting to the news in early hours with the Dow Jones, S&P, and Nasdaq all down pre-market open.  Is this just positioning for negotiations or is this the beginning of an overall trade war?  As investors, how do we position ourselves; is this a buying opportunity or the beginning of the end of the bull run?

 

There is a lot of drama in the market and many will over react.   When these events happen this is not a time to panic with the herd, but a time to relax, turn off the news, and look for opportunities in value companies.  This is a buying opportunity and not the time to sell.  Keep in mind the herd is always wrong at market tops and bottoms and this time will prove no different.

 

Many have a belief that valuations drive markets and though this is true to some extent, markets are often irrational, indicating that investor sentiment is the primary driver of market.  This could not be more evident then today as the markets react to China’s “proposed” tariff plan.  Nothing has changed fundamentally from a market standpoint, and as Kevin O’Leary stated on Monday, the trade war is a “nothing burger.”  I couldn’t agree more.

 

It is important to understand that China and the European Union (EU) have more to lose then the US in a trade war.  Currently, the trade deficit with China is around 500 billion dollars and around 150 billion dollars with the EU.  Both China and the EU have higher tariffs on US goods than the US has on either China or the EU.  In addition, China has a looming real estate crisis, and the EU is just recovering from flat GDP growth.  Neither party wants a trade war with the US.  Simply stated, an all out trade war would be devastating for the global economy, so it is likely all parties will talk tough, but come to the table and negotiate a deal that allows them to return home and claim to be winners.

 

Technical:

 

Currently the S&P PE is around 23.5, FPE around 16.1.  Though these figures are high historically, they do not take into account the effects of the current corporate tax cut.  This is also the first time that there were no dividend cuts in the S&P 500 for the 1st quarter.  The US and global economy continue to grow and the market’s reaction to the news could be a great buying opportunity for the value investor.

 

Technically from a broad perspective:

 

 

First support comes at the 23,540 or the 0.618 retrace from the August bullish swing.   This will likely be tested today.  From a broader term, the 22,383 area (0.382 retrace from the November 2016 low) is the zone we are looking for a reversal.  This would complete an ABC corrective cycle.  Current resistance is found at the 24,660 area or the 0.382 retrace of the previous bearish swing.

 

 

The S&P is heavily weighted in FAANG stocks.  They account for nearly 7% of the total weight of the index.  Because of their weighting, the S&P could see a further corrective pullback.

First support is in the 2514-2571 zone or the 0.382 retrace of the bullish swing from the Nov 16 and the 0.786 retrace of the previous bull move from September.  Major support and the area we are looking for a reversal is the 2386-2462 zones which are the 1.0 extension of wave A and the 0.618 retrace of the Nov 16 low.  Current resistance is found at the 2646-2672 levels or the 0.382 retrace of the wave A and the current bearish swing.  As long as 2553 holds these levels are valid.

 

 

The NASDAQ could see more of a pullback as the market rotates from tech to value.  Current support is found at the 6676 level which is the 0.618 retrace of the bullish swing from September.  Major support is found at the 6078-6337 zone, which is the 0.382 retrace from the November 16 low and the start of last summer’s bullish run.  Extreme support is found at the 5524 level or the 0.618 retrace of the bullish run from November 2016.  The first level of resistance is found at the 7127 level currently, with a broader resistance level found at the 7325.

 

This is not the time to panic.  The best thing any long term investor can do is just ride out the storm and do nothing.  There are numerous stocks such as IBM that I am looking to either add to my portfolio or add to my current position.  At this point in the market cycle, I am looking to add value companies to my portfolio and trim down the growth stocks like Google (which we recently sold out of).

 

There are four companies that report earnings today that are of interest Lennar homes, Acuity brands, CarMax and Ollie’s.  This will provide some preliminary insight into the construction market, the auto market, and discount retail.

 

Summary:

 

With the news of the pending China tariffs we are not seeing a rush to safe haven assets such as gold, bonds, or the yen.  Gold has retested the 1343 level but unless we see a high above 1357, we are not convinced this is a rush to safety.  In the next week or so, it is likely that we are going to see talks of a trade deal or an announcement of meetings.  This will calm market sentiment, and we can look for stocks to continue their rally making a final run to all time highs as we enter the late stage of the market cycle.   This is where fundamental research and finding value companies can offer great opportunity for those willing to go against the herd that is acting on emotions.

8 Responses
  1. Satertrading

    Thanks for a well-written and insightful market-wide overview. Just what I have been looking for. And today certainly materialized vastly different than the first hour would have led the herd to behave. Keep up the great work!

  2. Satertrading

    Well, now that the markets have been spooked again by another “possible” $100 bil of tariffs, let’s hope that Friday materializes like Wednesday did. And, honestly, I wish Trump would back off Amazon…truth is, if Trump was in Bezos’s Amazon shoes all these years, he probably would have done the same thing.

      1. Satertrading

        Yep, a kicker alright…in the groin. 103k vs an expected 193k. Ouch. But Feb was so astronomically high at 326k, it makes me wonder whether there was an issue with the cutoff of data…whether some March payroll was reported in February. Doesn’t help current sentiment, though, and you can be sure the main-stream media and others will craft it into an entire sky-is-falling narrative.

          1. Satertrading

            196.333 was the trailing 6-month average, but Feb ‘18 was a whopping 326K while Nov ‘17 was just a puny 14K. To me, it looks like timing of hiring for Feb-vs-March, especially in Retail and Construction. Feb was big for both – especially Construction – and I expect we will “normalize” a bit in April.

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