Trump War and Uncertainty-Good for the markets?

Trump War and Uncertainty-Good for the markets?

Trump War creates Market Uncertainty

To put mildly, this volatility has not been easy to deal with. However, one has to understand that it is based on two factors: the first one is the “trade war effect’ and the second is the Fed. The Fed has already scaled back on its rhetoric and might even surprise the markets by doing nothing in December. Worries about a Trade war are mounting for two reasons; the media is creating a mountain from a molehill, and Trump is doing his level best to kill two birds with one stone. From a psychological perspective, this Trump war makes for a good long term opportunity.

The wildcard is Trump; well that is what he wants everyone to believe.  We know he loves to negotiate via uncertainty, so he is pushing the tempo up in regards to the trade deal.  The CFO of Huawei was arrested shortly after Trump stated that he and Xi had agreed to a deal.  He then scares an already nervous crowd by stating that China has until the 1st of March to work out a deal with the United States.  News based events employing fear as their main weapon to manipulate the masses is always a fake signal; the opposite outcome the media is pushing usually comes to fruition. Bear in mind also that no Bull Market has ended on a note of fear.

Trump War & Trump’s ego

We also know that Trump has an ego the size of Mount Everest and this is a very favourable asset from a mass psychology perspective. It informs us that he does not want to be held responsible for crashing the markets.  In effect, Trump is attempting to kill two birds with one stone. By creating these wild swings, he makes it harder for the Fed to raise rates and at the same time, he is informing the Chinese government that he is ready to play hardball.

Powell will not want to be remembered as the Fed head that sunk this market, so given the current situation; he has two options. Option one he decides to raise rates but goes on to inform the public that this will be the last rate hike for a while. Option two rates are not raised, and the Fed takes on a dovish stance. Either outcome is bullish, but outcome two is more bullish as the markets will be caught off guard.

Without a shred of doubt, we can state that there will be at least one correction that drives the Dow lower by 3500-5000 points before this bull market is over.  Market update June 2, 2017.

Panic or Purchase

From high to low the Dow has shed roughly 3100 points.  So to some degree, it has satisfied the minimum criteria — the one back-breaking correction that almost every bull market experiences appears from nowhere and ends just as suddenly. It starts when things look okay, and fear is used to trigger a massive reaction. Remember what we just stated, bull markets end on a note of euphoria, not fear.  One need look no further than the recent Bitcoin Bubble.

Depending on how the Fed plays its hand it could extend the life of this bull market, but that is something we will address at a later date.

If we combine the Feb 2018 correction with the current one, one could argue that in less than 12 months the Dow has shed some 6000 points. Investors are sitting on more and more cash, and history illustrates that a market has never crashed when this is the case. Volatility is making the crowd feel like the end of the world is nigh, when it is not.

Market Volatility is rising

As V readings rose, we issued warnings that Market volatility levels would rise. V readings are now at an incredibly high level; readings rose another 40 points since the last update. They are just 10 points shy of 7000. They are trading almost 2500 points above the overbought zone; insanely overbought would be putting it mildly. Translation, higher volatility levels should be expected and embraced as long as the trend is bullish.

The monthly chart of the Dow Utilities

A monthly close above 144 will turn former resistance into a zone of support. IDU has just put in a new 52 week high, and a monthly close above 144 will be the first signal that the Dow is likely to trade a lot higher than 27,500.  Note that the Utilities have not traded in the extremely overbought ranges since 2012.

The Dow utilities are literally begging for a reason to trade in the extreme to insanely overbought ranges for an extended period. If this comes to pass, then our high targets of Dow 30K issued roughly 18 months ago, might be conservative. For now, let’s focus on 27,000 and 27,500.

Market Trends

Unless the trend changes course (and there are no signs of that right now), we have to follow the least traversed and least loved path. V readings are in the stratosphere, so the ride up will initially be volatile, and when the dust eventually settles down, the markets will advance two steps and retreat only half a step.  Keep in mind that Trump is the “Master of Disaster” or most aptly put the master at creating the illusion of a disaster.

He has been very vocal against Jerome Powell’s stance of raising interest rates, and he wants to deliver on one of his big campaign promises of forming a trade agreement with China that is fair to the US.  He is taking a gamble, by trying to kill two birds with one stone, but so far it seems to be working;  the Fed is no longer pushing a hawkish agenda, and there is a good chance that the Chinese might cave in also.

Bull markets end on a note of joy; this market topped on a note of anxiety; fear and not Joy is driving the pullback. If this market tanks, it would be the first time since the tulip mania that a bull market has ended on a note of fear.

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Long Term Trends & Bull Market Bear Market Nonsense   (Jan 16)

Bull & Bear Market 2019: which one will prevail  (Jan 14)

Stock Market Crash-Media Lies And Ignorant Experts  (Jan 11)

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Bitcoin Crash: Is Bitcoin Bull Dead Forever (Jan 1)