Trade Swoon - Is The Market Ready?

Is This A Correction?

Trade Swoon - This has been a spectacular year for stocks, but even in big up years, there are usually corrections. 2017 was a rare example where there weren’t many declines and none became corrections. It’s possible that the correction I predicted to occur in May is here. 

S&P 500 is down about 2.5% from its record peak. While that’s not much, the trade war with China keeps getting worse each day as it appears China changed its deal at the last moment. I’m not sure why China did this, but it’s not a huge surprise.

Most believed China was a risk to go against the agreement. I thought that was a risk, but I didn’t think China would change its stance before the agreement was even struck. China might be looking forward to the next presidential election. Why give concessions to Trump, if a new leader could be in change in less than 2 years? 

However, China should keep in mind that the Democrats agree with Trump. Senate minority leader Chuck Schumer tweeted his support of Trump versus China recently. Trade and intellectual property rights are long term issues that are tough to solve. 

Trade Swoon - This could weigh on the market for a long time.

On Thursday, the S&P 500 fell 0.3%, the Nasdaq fell 0.41%, and the Russell 2000 fell 0.31%. If the Dow falls more than the Russell 2000, it means there are trade war fears. The Dow fell 0.51%, supporting the narrative that trade was the catalyst for this decline. Weirdly, the VIX fell 1.55% to 19.10. The VIX usually rises when stocks fall, but it can fall if it is elevated and stocks only fall modestly like they did on Thursday. The CNN Fear and Greed index fell from 42 to 40.

The best sectors on Thursday were real estate and energy which increased 0.33% and 0.07%. As you can see from the chart above, they are the most oversold sectors. The SOXX ETF recovered from its big decline in the morning, but it still fell 1.10%. 

Semiconductors are down 6.85% since April 24th. The industry had rallied 48.75% from December to that high in April even though demand has been weak. Traders are banking on a global economic recovery which hasn’t occurred yet. To be clear, I think it’s possible a recovery occurs in the next 12 months, but I think the market got ahead of itself.

The worst 2 sectors were materials and technology which fell 0.8% and 0.68%. Tech stocks don’t like the trade war. To answer the question in the subheading of this section, the market isn’t in a correction yet as half of S&P 500 stocks are still above their 50 day moving average. 

When all but one or two sectors have most of their stocks below their 50 day moving average, I will call this a correction. Another definition is a decline in the S&P 500 of at least 5%.

Trade Swoon - Tariffs Are Enacted

Trade Swoon - The tariff rate on $200 billion worth of Chinese goods was raised from 10% to 25% on Friday. Any kind of tough talk implies both sides are still posturing and aren’t working on a deal. The meetings on Wednesday and Thursday didn’t go well. 

It appears China changed its stance a few days prior to the meetings. Maybe they wanted to negotiate from this new stance at these meetings. After America instituted its tariffs on Chinese goods, China released a statement where it promised to react in kind.  

Tariffs only go into effect once goods reach America which means a boat sending goods to America won’t be tariffed for 21 days. Goods shipped by plane will be immediately taxed. This doesn’t matter much in my opinion because the negotiations aren’t going well. I highly doubt there will be a deal done in 21 days. I can’t predict if negotiations will improve, but it doesn’t look like they will. 

China is about to tariff American goods, it appears. It’s like if a person punched someone in the face and the person who was punched is getting ready to react. You wouldn’t anticipate a truce at that point in the scuffle.

Latest Earnings & Uber IPO

In the very short term, I was wrong about Lyft as its stock increased 4.29% on Thursday after it beat revenue estimates, but posted an enormous loss. The fact that it rose shows us how oversold it was and that speculators are still aggressive. 

Uber is set to do its IPO at $45 per share which will give it a market cap of $82 billion. I think the stock will pop high on Friday because it went in the low end of its range which was from $44 to $50. This company was smart to price it towards the low end to avoid a big decline like Lyft had. 

Trade Swoon - The higher IPOs are priced, the more money is raised.

However, if the stock crashes at the onset, it doesn’t set the stage for a successful run of being a public company.

These charts below show Booking Holdings’ numbers from its Q1 earnings report. It used to be called Priceline which is why that is the title of the graphs. 

As you can see, revenues fell and bookings growth decelerated. However, adjusted for Easter and currency effects, revenue growth was 8%, so this wasn’t a disaster. The firm’s non-GAAP EPS of $11.17 missed estimates by 10 cents and revenues of $2.84 billion missed estimates by $90 million. The stock was up 4.09% after hours. The stock is up partially because it has cratered 8.04% since April 23rd.

On Wednesday Disney reported Q2 earnings. Even though EPS was $1.61, which beat estimates by 3 cents, and revenues were $14.92 billion, which beat estimates for $14.36 billion, the firm’s stock fell 1.04% on Thursday. 

It probably declined because heading into this report, it was up 23.88% year to date. Operating losses more than doubled as it invested in EPSN+, Disney+, and Hulu. Disney+’s subscriber growth will drive this stock in 2020. 

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