What a week last week was. And what a week we’re looking forward to.
If nothing else, last week’s rally was unexpected on the heels of the previous week’s nasty selloff – culminating in a more than 600 point drop two Fridays ago.
But futures last Monday reversed their pre-open tanking and led the way from the open through the week.
Trade talk, as mixed as it was, moved stocks higher last week.
What seemed unexpected about that is the fact that President Trump said the Chinese called and wanted to get back to the table. Too bad for the President the Chinese news agencies reported there was no call.
So, what happened that lifted stocks, and will it continue?
Place Your Bets on the Trade War Outcome
The S&P 500 had its best week since June, rising 2.8%, and the Dow gained a surprising 774 points, or 3%. Even the Nasdaq Composite, which has been the most volatile of the big three benchmarks, rose 2.7%.
Earnings and fundamentals aside, equity markets are moving on trade talks with China, and in the absence of talks, indications of when there’ll be talks or some kind of outcome.
It was the latter that moved stocks higher last week. The anticipation (or rather, betting) that talks would resume, that there would be movement towards talks and, if nothing else, some incremental agreements toward a resolution of the complicated dispute.
In other words, the betting is binary in terms of the trade talks.
If you believe talks will result in some, any resolution, if even it’s just partial steps along some long and winding road, you buy stocks. You bet from the long side.
Behind that you have the comfort of good fundamentals which look to be further complemented by upcoming Fed cuts, at least according to Fed Funds futures.
If you believe talks are going nowhere, or worse, tariffs will increase and retaliation will escalate the whole dance into a death march, you bet on stocks going down.
And behind those bets is the not so comforting prospect of a recession looming, at least according to the inverted yield curve.
Yep, that’s how the trading’s been going. It’s been going according to how traders position themselves on trade.
Not that they all take one side or the other. Most traders trade both ways, because that’s what traders do.
It’s that up and down, in and out trading that’s swelling volatility and making it hard to make long term investment decisions.
The proof of that is, in spite of last week’s positivity (even if on very thin volume), the Dow was down 1.7% for the month, the S&P was down 1.8%, and the Nasdaq Composite – the most volatile of the big three – was down 2.6%.
As I’m writing this at 7 a.m. Tuesday morning, futures are down big and the VIX is up big.
So, make your bets accordingly.
That is according to what you think the big traders making their up and down bets are going to do.
YES, I’m saying if you’re trading follow the crowd and hope for some momentum, either way, whichever way the crowd goes, up or down, because that’s what’s moving markets.
You long term investors, take heed that meaningful capital waves one way or another aren’t happening. There’s very little long-term decision-making going on.
Investors are just watching, and are going to adjust their portfolios accordingly.
But make no mistake about it, there’s a lot of money waiting to be put into the market, if it breaks higher on real, positive trade news and on the crazy bond market calming down and getting a grip on reality.
So, be careful out there, and especially mindful of volatility.