Stocks Fall On Worries About Phase 1 Of the Trade Deal

Finally, A Small Decline

The stock market finally had a significant down day. It wasn’t a huge down day, but the streak of days without back to back losses ended. S&P 500 was down 0.38%. Somehow VIX was down 8 basis points as it fell to 12.38.  So its streak of being below 15 continued. 

There have been 31 trading days since the S&P 500 last gapped down 0.5% which is the longest streak since last October when a streak of 47 days ended. Even still, this decline is nice to see as it makes the market slightly less overbought. 14 day RSI likely fell. 

CNN fear and greed index fell 6 points to 74 which is greed not extreme greed. This index had been falling for many days, so it’s already way off its peak of 91. S&P 500 is also slightly closer to its 200 day moving average. This is all good news for the health of the market. What’s not good news is why stocks fell, which I will get to later in this article.

As you can see from the chart above, the percentage of bullish advisors was 57.2% and there were 17.1% bears. Bull bear spread was 40.1% which is relatively high, but not near the insanity of January 2018. Recently, I predicted sentiment for individual investors would become more bullish. Let's see if that's the case when the AAII website updates tomorrow.

As you can see from the chart below, returns when investors are very bullish and a high percentage of stocks are above their 200 day moving average aren’t terrible. It gets you 1.71% in 3 months. That’s only slightly less than when investors are bearish and stocks are mostly below their 200 day moving average. 

It’s notable that after the January 2018 sentiment peak, the S&P 500 fell about 10%. Sentiment was less bullish last fall, but that led to a 20% decline. That’s because stocks react to other catalysts besides just sentiment.

We've seen sentiment washout after a 5% decline. Investors react to headlines or get caught too long and become bearish very quickly. A 5% decline this fall might be enough to clear away the excessive optimism. Finally, keep in mind that the box on the top left is meaningless because it has only happened 45 times. It’s hard to see investors very bullish with most stocks below their 200 day moving average. Investors react to price action for better or for worse.

Stocks Fell On Worries About Trade

According to the editor in chief of the Chinese and English editions of the Global Times, “Few Chinese believe that China and the US can reach a deal soon. Given current poor China policy of the US, people tend to believe the significance of a trade deal, if reached, will be limited. China wants a deal but is prepared for the worst-case scenario, a prolonged trade war.” 

According to CNBC’s Washington correspondent 4 people close to the negotiations stated phase 1 talks are in trouble. One source stated China is asking for a disproportionate number of tariffs to be rolled back. Another blamed the trouble with talks on what America is willing to give back. Finally, a third thinks the December tariffs will be eliminated or delayed unless President Trump changes his mind.

Latest news on trade sent stocks slightly lower on Wednesday, but that’s not nearly how much stocks would fall if phase 1 of the trade deal doesn’t get done soon. The same issues keep coming up. Reports on how negotiations are going keep changing, but not much has gotten done in the past 2 years. 

Each week we get closer to the 2020 election which changes the dynamics in favor of China. Mostly because President Trump might not be in office for much longer if he doesn't get re-elected. Goldman Sachs believes we’ve seen the worst of the economic impacts from the trade war. But that will be incorrect if the President’s recent threats of new tariffs are acted upon. Everything is still up in the air. The market is too confident that everything will get done smoothly without new tariffs being issued.  

Target Reports Great Earnings

Target stock exploded 14.06% on its great earnings report which is a great signal for the health of the consumer. Its stock has gapped up at least 5% on all 4 of its quarterly reports this year. Unfortunately, Kohl’s and J.C. Penney gave bad signals. Home Depot didn’t give out a bad signal; it just had internal issues. 

Specifically, Target reported $1.36 in EPS which beat estimates by 17 cents. Revenues were $18.67 billion which beat estimates by $180 million. Same store sales growth was 4.5% instead of 3.6%. As you can see from the chart below, that’s up from last quarter.

The firm’s traffic growth was 3.1% and the average transaction value was up 1.4%. Target raised its full year EPS guidance from $5.90-$6.20 to $6.25-$6.45. This is above estimates for $6.18. Your stock will go up big if the low end of your guidance range is better than the consensus. Online sales growth was 31%. 

Yes, it’s clear Target is taking share from rivals. Especially with its great online strategy, new small store format in cities, refreshed stores, and in house brand launches such as its grocery line. But you don’t see such high same store sales growth if the consumer isn’t doing well. Backdrop is here for a strong holiday shopping season despite what consumer comfort and RedBook sales growth show.  

Conclusion

The stock market is still overbought, but it’s slightly less so with the small decline in stocks in the past 2 days. Bad news is reports show negotiations on phase 1 of the trade deal have hit more than a snag. There might not be anything done this year. 

If the December tariffs are delayed for a few more weeks to get something done, the stock market would take it in stride. If the negotiations fail (causing new tariffs to be issued) like they have before in the past 2 years, stocks can fall as much as 10%. 

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