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The Trade Wars Begin

While it sounds like an episode from Star Wars, this may not be fantasy. The trade talks between the US and China appear to be breaking down. At this point, both sides are talking new tariffs. And the speculation about just how quickly the world will come to an end has begun.

Putting political commentary aside, what does this mean for investors?

In a word: it’s bad.

Futures are getting hammered as markets appear poised to drop about 2% across the board. The 10-year treasury yield has also dropped as people seek safe-haven assets. Even the BigFoot database has dropped from over 82% long to around 75% long. So this is becoming more than just a squawking media cycle.

Support may be tough to find in this market. There’s been such a steady climb the last month that there are very few ‘stops’ on the way back down. The first noteworthy area the markets reversed is the intra-day low set back on March 27th at 2787.

Here are key support levels from there: 200-day moving average is at 2776. 100-day moving average is at 2749. And then there’s the March 8th low of 2722.

All of these levels imply a drop of over 3% for the week.

The only silver lining to this situation is that it could end. Should a deal be reached, markets would now view this as a VERY positive event that could push things to all-time highs in short order. Otherwise, the upward momentum is shot. We’re now looking at a sideways pattern where the markets have to find their footing, re-test a few times, and see if they can grind higher.

So yes, this news is damaging. Unless something happens today that gives the market a hard reversal — something that has this market finishing in the green today (which, frankly, is hard to rationalize given the current data) — there’s likely more damage to come.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Searching for Support

After another ugly week of down-side, reports all over the internet insist the futures are indicating a drop for the US stock markets today. Will it happen? Maybe.

Over the weekend stocks dropped in Europe, China, Japan and the like. US Futures were also down about 1% or so from Friday’s close. But futures have climbed back to about even overnight. This puts the markets in an interesting spot.

The 2630ish level was a big one as it markets the October and November low points for the SPX. The index has now visited this level 4 times. The prior three times markets found support and rallied. The fourth time was last Friday – and the markets closed at this level.

So, does the market rally from this point? Trade sideways? Or is there more downside?

From a technical perspective, it’s difficult to call. The short-term signal is for a bounce higher from here. Markets appear over-sold, and the news driving things down appears to be more about rumors than it does about economic data. If one wrong utterance about China and trade can take the markets down 100 SPX points, one has to wonder what a right utterance could do.

Longer term, the technical picture is concerning. It’s a tale of two big-picture events. Does the bull market regroup can go higher, or are we in for a more significant big-picture pull back (aka bear market)? And IF it were a bear, how far does it drop from here? On one hand, there’s a figure of about 27% decline. On the other, more than 40%.

The thing is, the economic data doesn’t support a 40% pull-back. It just doesn’t tell this story. Even if you can squiggle some lines on charts and talk about how this could happen, what economic reality must come to pass in order to generate such a mess?

Answer: who knows? We can all speculate. Perhaps it’s the failure of a major state pension plan. Perhaps it’s a full-blown trade war with China. Perhaps it’s a nuclear missile launch from North Korea. Whatever the black swan event, it’s not ‘known’ by the markets. So it’s tough to call it priced in.

At this point, the markets have priced in a lot of bad news. Multiples have fallen. Many stocks are in bear market territory. And, in many cases, if it weren’t for the cap-weighted nature of the indexes, you’d see that many of the non-mega-cap stocks have already gone through bear-like corrections.

This week should be interesting. If 2630 or so holds, it’s a good sign. If not, there’s little indication where the next level of support is. We will likely re-visit the February lows for the market. For the SPX, that’s another 100 points of downside from here (or just under 4%).

Get your Santa rally caps on. This market may need it.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different
types of investments involve varying degrees of risk, and there can be no assurance
that the future performance of any specific investment, investment strategy, or product
(including the investments and/or investment strategies recommended or undertaken by
BigFoot), or any non-investment related content, made reference to directly or indirectly
in this blog will be profitable, equal any corresponding indicated historical performance
level(s), be suitable for your portfolio or individual situation, or prove successful. Due
to various factors, including changing market conditions and/or applicable laws, the
content may no longer be reflective of current opinions or positions. Moreover, you
should not assume that any discussion or information contained in this blog serves as the
receipt of, or as a substitute for, personalized investment advice from BigFoot. To the
extent that a reader has any questions regarding the applicability of any specific issue
discussed above to his/her individual situation, he/she is encouraged to consult with the
professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified
public accounting firm and no portion of the blog content should be construed as legal
or accounting advice. A copy of the BigFoot’s current written disclosure statement
discussing our advisory services and fees is available for review upon request.