Bracing For China's "Counterpunch"

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Posted: May 29, 2019 10:49 AM
Bracing For China's "Counterpunch"

Source: AP Photo/Andy Wong

Tuesday was a brutal session, made even more painful because of the hopeful start that saw the Dow rally 131 points moments after the opening bell. Few took the early bait, and once buying stalled, selling began like a snowball and finished as a boulder. Selling in stocks mirrored buying in bonds as investors ignored the yield to focus on safety, resulting in a 19-month low yield for the ten year and inversion with 3-month bills.

Government Bond Yields

May 28, 2019 Close

Three Month Bills

2.356%

2-Year Bond

2.127%

10-Year Bond

2.264%

30-Year Bond

2.705%

 

The Message of the Market

Once again, market breadth was ugly, as new lows on the NASDAQ continued to mount. Sellers are more determined to get out, losing their cool more often than at any time this year.

Market Breadth

NYSE

NASDAQ

Advancers

995

1,141

Decliners

1,992

1,952

New Highs

126

79

New Lows

107

131

Up Volume

732.2 million

806.6 million

Down Volume

2.18 billion

1.38 billion

 

All but one S&P sector was down for the session with Communication Services eking out a gain, despite late-session selling. However, I do find it interesting the biggest losers were defensive sectors Utilities, Consumer Staples, and Health Care. Perhaps funds rotated into bonds, which means more investors are willing to ride out current weakness from the sidelines.

S&P 500 Index

 

-0.84%

Communication Services (XLC)

+0.44%

 

Consumer Discretionary (XLY)

 

-0.66%

Consumer Staples (XLP)

 

-1.63%

Energy (XLE)

 

-1.04%

Financials (XLF)

 

-1.15%

Health Care (XLV)

 

-1.43%

Industrials (XLI)

 

-0.92%

Materials (XLB)

 

-1.00%

Real Estate (XLRE)

 

-1.03%

Technology (XLK)

 

-0.29%

Utilities (XLU)

 

-1.64%

 

Key Support

The S&P 500 and the NASDAQ took out the May 13th lows, which is an ominous signal, and the Dow is only 23 points from failing to hold the lows of that session. Now, all eyes are on the 200-day moving averages. 

Bracing for China’s “Counterpunch”

“We are well armed to deliver counterpunch”

China’s next move in the trade battle has Wall Street wondering about worst-case scenarios, such as banning all Apple products and halting the exporting of rare earth materials. It remains to be seen how much of these scenarios will be built into individual stocks and the market. However, selling begets selling – and obviously, there is growing downside pressure.

Yesterday’s rally stalled when Jamie Dimon, CEO of JPMorgan & Chase (JPM), warned the U.S.-China fight is becoming a “real issue” that could deter investment. Yes, Dimon is ‘talking his book,’ even as he has acknowledged this is a fight long overdue.

The nuclear option would be a huge mistake for China, which would galvanize American support, even though it would certainly hurt the stock market and industries. It would also hasten the transition of supply chains to other locations.

Meanwhile, America is still trading, and the winners include just about every trading partner with the biggest gainer being Vietnam, which is positioned to propel from 12th in 2018 to 7th in 2019.

2018

Rank

Country

Imports

Change

1

China

$464,512

-13.9%

2

Mexico

$365,240

+5.4%

3

Canada

$307,653

-3.4%

4

Japan

$146,731

+2.9%

5

Germany

$127,415

+1.2%

6

South Korea

$87,960

+18.4%

7

United Kingdom

$62,150

+2.2%

8

Ireland

$57,986

+0.9%

9

Italy

$58,826

+7.5%

10

India

$62,617

+15.2%

11

France

$61,188

+16.5%

12

Vietnam

$68,995

+40.2%

 

Portfolio Approach

We didn’t put cash to work, and considered closing a couple of positions, but we held pat yesterday.

Communication Services

Consumer Discretionary

Consumer Staples

1

3

1

Energy

Financials

Healthcare

1

2

1

Industrial

Materials

Real Estate

2

3

0

Technology

Utilities

Cash

3

0

3

 

Today’s Session

The major indices are set to decline at the open building on yesterday’s losses.  The trade dispute continues to shake investors out of stocks and into bonds, and as such, the yields continue lower.  The 2-year U.S. Treasury yield is down another 5 basis points to 2.07%, while the benchmark 10-year is to down 2.23%.  The spread now between the ten year and 3-month bills (2.35%) is the largest it’s been since the financial crisis.