Commenting on today’s trading and the S&P 500 among other indices going above its 200-day moving averages Gorilla Trades strategist Ken Berman said:
Today’s announcement regarding the delayed tariffs on some important consumer products caught a lot of investors by surprise and that led to an epic reversal in risk assets and safe-havens alike. While we got used to swift changes in investor sentiment, today’s development really came out of the blue. Yesterday’s scary-looking dip was erased in less than an hour, and all of a sudden, the recent record highs don’t seem unreachable.
Following yesterday’s broad sell-off, today, the intraday charts of the major indices were almost the perfect mirror images of Monday’s ones. All of the key risk-on sector finished with gains, and once again, tech stocks and consumer goods performed relatively well. Financials remained weak despite the rebound in Treasury yields, and industrials continued to lag behind, in line with the economic trends. Short-dated yields hit their highest levels in over a week, while the other main safe-haven assets, such as gold and the Japanese yen also hit one-week lows.
Even though today’s announcement doesn’t mean that the U.S. and China got closer to a trade deal, this flexibility is promising for September, when the high-level talks are scheduled to resume. The decision rather means that the Trump administration is worried about the inflationary effects of the tariffs, especially ahead of the holiday season, when imports from China peak. Today’s higher-than-expected core Consumer Price Index (CPI) proved that the consumer economy is still strong, and the 10% tariff on the key consumer items could even prevent the rate cuts that the President expects from the Federal Reserve.
Today’s rebound in risk assets is even more impressive in light of yesterday’s market crash in Argentina that had the potential to wreak havoc globally. Emerging markets were relatively stable today, with only minimal contagion, and thanks to the easing trade tensions the yuan even appreciated, getting close to the key 7 level against the dollar. While it’s early to say that we avoided another 2018-type sell-off in the most vulnerable emerging markets, should Chinese assets stabilize, the outlook for stocks would improve substantially.
We will have a relatively quiet day in terms of economic releases tomorrow, ahead of Thursday’s data dump, The Chinese retail sales and industrial production reports could have a major impact in pre-market trading, as investors are very sensitive to Chinese developments these days, while the weekly crude oil inventory data will highlight the morning session. The energy sector experienced wild swings due to the trade tensions in recent weeks, and just today, the price of oil surged higher by 4%, hitting a two-week high, and the sector will likely remain active tomorrow as well.
While the recent days were highly volatile on Wall Street with several shifts in investor sentiment, the technical picture has been little changed, since the major indices have been trading in range. The rising long-term trend is still in no danger, as the benchmarks are well above their rising 200-day moving averages of 7,567 for the Nasdaq, 2,795 for the S&P 500, and 25,583 for the Dow. Thanks to today’s rally the indices are also close to their still rising 50-day moving averages of 2,943 for the S&P 500, 8,022 for the Nasdaq, and 26,601 for the Dow.
The wild swings in the Volatility Index (VIX) well describe the emotional rollercoaster of the past two weeks. Amazingly, the fear gauge covered at least a 10% trading range for ten sessions in a row, as investors tried to price in the effects of the escalating trade war. Despite today’s rally in stocks and the 15% drop in the index, the VIX is still above both its 50- and 200-day moving averages, being well above the range that it spent the past couple of months. Although we can’t conclude that the pullback is over yet, the fact the VIX is back below 20 again is a positive sign for bulls. Stay tuned!
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