What Trump’s China Handshake Means for the Market

Here’s what President Trump tweeted on Monday:

He was referring to a handshake deal brokered with Chinese President Xi Jinping during the G20 Summit in Buenos Aires over the weekend.

On Sunday, Trump tweeted: “China has agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%.” And he called the informal agreement “one of the largest deals ever made.”

Word from the Chinese media differed, though. They said that a tariff deal is conditional on the two countries resolving key issues within 90 days.  

Regardless, markets soared on the news.

On Monday, the S&P 500 and Nasdaq opened up 1.5% and 2% higher, respectively. And that’s on top of last week’s 4% gains.

Multinationals did even better: Airplane manufacturer Boeing jumped 6% immediately after the news… Heavy-machinery maker Caterpillar spiked 4%… And chipmaker Micron Technology rose 4%.

Those are large one-day moves for companies of that size.

(However, these moves reversed on Tuesday… Caterpillar and Micron traded below their pre-trade agreement announcement closes last Friday.)

Trump’s announcement will be a big win for Wall Street… if a trade deal is actually signed. Free trade is good for business, especially for large U.S. multinationals.

But an official trade agreement still isn’t on the books yet. And the markets just signaled they’re uncertain if that will happen. So before we can buy the rumor, we need to watch for one important thing this week.

We’ll get to that in a moment. But first…

Trade War Theory: Post-Midterms

Regular Daily readers know that we’ve expected President Trump to make some trade deals before the end of the year. We first brought you our theory in July 2018.

At the time, we said the president’s master plan is to work out trade deals with his adversaries ahead of the fall midterm elections. The goal was to help the Republican Party retain control of Congress by showing a strong economy.

This summer, Trump struck trade deals with Canada, Mexico, and the European Union.  However, it wasn’t enough to help the GOP hold onto the House, as it lost more than 40 seats—though his party did expand its advantage in the Senate.

Our point was that Trump would try to get some deals through (he did)… not that those deals would necessarily result in a complete GOP victory. (But as we pointed out above, the party did add a few seats in the Senate.)

The market appeared to like those initial trade deals, rising 8% from mid-July to October. Then, uncertainty over the midterm elections, negative investor sentiment, and fears of trade wars and rising interest rates set in—sinking the market 11%.

But with the midterms now behind him, Trump is turning his sights to his own re-election in 2020. A divided Congress will make it harder for him to pass any kind of economic stimulus, which could hinder his chances to win the White House again.

So the easiest (and maybe only) way for Trump to stimulate the economy between now and then is through bilateral trade deals.

Now, I know the Chinese trade deal isn’t official yet. Trump said that he agreed with Xi to pause tariff hikes for 90 days. Much remains to be seen. But it’s a start… and the market signaled on Monday that it would like Trump to strike a deal.

What to Look for Next…

To see what’s going to happen next, we should look at how the market reacts during the rest of the week to Trump’s announcement of a China trade deal.

We won’t be able to do anything today because the markets are closed to honor former President George H.W. Bush, who passed away last week. But pay close attention to the price action on Thursday and Friday.

If investors resume buying shares, that could signal the current market correction is over. But if investors sell further and drive the price back below the market’s 200-day moving average, it’s a signal that we’re still in correction mode.

Pay attention to the investor reaction the rest of the week… And let the market tell you which way it wants to go.

Regards,

Nick Rokke
Analyst, The Palm Beach Daily

P.S. After watching Tuesday’s market action, I’m leaning towards thinking the market is still correcting. The S&P 500 fell about 3% and is back below the important 200-day moving average. Continue to be careful.

CHART WATCH

Nick’s Note: When it comes to reading stock charts, few are better than longtime PBRG friend and master trader Jeff Clark. In today’s Chart Watch, Jeff shows us why it’s time to add some oil exposure to your portfolio…

Oil Looks Set to Rally

By Jeff Clark, editor, Delta Report

The Bullish Percent Index for the energy sector (BPENER) triggered a buy signal last week. So it’s time to buy oil stocks.

A bullish percent index (BPI) shows the percentage of stocks in a given sector that are trading with bullish technical patterns. It’s a simple way to measure overbought and oversold conditions.

Since it’s a percentage, a BPI can range anywhere from zero to 100. Sectors are generally considered overbought when the BPI rallies above 70… and oversold when the BPI drops below 30.

A BPI generates a “sell signal” when it reaches overbought levels and then turns lower. And “buy signals” occur when a BPI turns higher from oversold levels. The more overbought or oversold the BPI is when a signal occurs, the stronger the signal.

So it looks to me like energy stocks are set up for one heck of a rally.

Take a look at the BPENER chart below…

BPENER dipped as low as 3 last week. In other words, only 3% of the stocks in the energy sector were trading with bullish technical patterns. That’s not too surprising, since the price of oil has fallen 30% over the past two months. The average energy stock is down 25% or more over that same time frame.

BPENER turned higher last week. And that gives us a new buy signal.

So today, there’s a high-odds chance that oil will rally. Consider betting on the Energy Select Sector SPDR ETF (XLE) to profit on this move.

Jeff Clark

P.S. There’s one more thing I want to put on your radar…

Tomorrow, I’m putting on a live presentation about a brand-new Mastermind trading project I’m taking on. I’ve never done anything like this before. And to my knowledge, I don’t know anyone else who has.

But we’re heading into what I think will be an amazing year for traders. And I want you to be prepared for it.

So I’m showing you my cards. Heck, I’m even going to make a live trade in my own account—on camera. And I’ll offer up a few trading ideas I have my eyes on right now that may trigger in the days ahead.

Click here to get all the details

MAILBAG

Alpha Edge subscribers had plenty of applause for editor Teeka Tiwari and his top analyst, William Mikula, on a recent Microsoft trade with a 9.5% return on capital for a 45-day holding period. That’s an annualized return of around 77%…

From Richard C.: I was a lucky recipient of the Microsoft “holiday gift,” as my put was exercised. I did a quick calculation, and my total return was a whopping 92% since my original put premium was a little higher than the floor price you quoted in your buy alert. Anyway, I’ll reinvest and look forward to more great deals.

From David W.: Hello, Big T and William. The Microsoft options trade was fun! I sold on October 15 and covered on November 8. Four days later, I saw an opportunity to repeat the trade by shorting one put, which I covered before the market closed on the November 23 expiration date. NICE!

I’m doing these options trades with single contracts for two reasons. First, I’m new at it, and second, my cash position is limited.

From John N.: I put about $3,000 into this trade. My profit is $95.59 in one week for a 3.35% rate of return. Annualized, that’s nearly 30%. I’ll take that gain on investment any day of the week. I’ll probably utilize the funds to purchase Jason Bodner’s latest recommendation. Thanks, Big T and William!

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Posted in Palm Beach Daily