Fog of Trade War

After a weak close on Wednesday, a weak open on Thursday got enough stock traders to capitulate to form a short term bottom.  A clean break below SPX 2700 caused enough fear to keep the put call ratios high throughout the day yesterday.  It has now been 13 trading days since the peak of the rally on June 13, the day Jerome Powell gushed about the economy.  I have noticed in the past that many of these selloffs last 5, 13, and 22 days.  

The trade war fears are a bunch of hype, of course.  Hyperbole is never in short supply these days, where tweets move markets 15 SPX points in minutes.  Even if the tariffs get implemented, a $50B tax on imported goods is nothing compared to the fiscal stimulus that is coming down the pipe this year and next.  But like always, the markets tend to overreact to every headline because in the background, the Fed is slowly tightening and choking off the liquidity that this market needs to keep going higher.  This tightening makes it hard for stocks to shrug off very minor news and keeps the market range bound.  What matters is the monetary tightening, not some hyped up trade war, which hasn't even started, and probably will be a nothing burger if it does get started.  

But money is run by managers with short term thinking, without long term and deep analytical skills that you would find among those in other more technical fields.  Money managers are wrapped up in their own little fog of "trade war".  The fog is keeping their visibility low, and make them unable to see beyond the headlines into what really matters: the tightening.  

I expect a rally next week heading into the Trump China tariff date on July 6th.  I am sure Trump will do something to back off his tough talk on trade, because the market has been feeling the heat.  His report card is the stock market.  The Fed put strike price is much lower than the Trump put strike price, as Powell seems content to let the market sink or swim on its own.  

Any rallies should struggle to break through 2800 strong resistance, but we could have a false breakout above that level if Trump really throws in the towel and tries to pump up the market by delaying or canceling the $50B in tariffs.