China suddenly downgraded their economic progressions and futures are down hard.
I wrote just a couple days ago that the events we do not expect are the ones that cause the biggest market declines. Today is an example. China's premier said they are lowering their GDP forecast for 2017 from 6.5-7.0% to just 6.5% and there was some softening of the conversation suggesting they might see even less than that. The president's speech warned of the impact of "de-globalization" and potential changes in tax laws and currencies. That was strike one for the market over the weekend.
Strike two came from a stern warning from China for the U.S. to stay out of the South China Sea or there would be repercussions. For China that is the equivalent of putting a chip on their shoulder and daring President Trump to knock it off. That is especially true when he and Mattis have both said China should be prevented from occupying those new islands they built.
Strike three came from North Korea. They launched four intercontinental ballistic missiles that landed in Japanese waters. Japan is really hostile about the suggestive attack that was planned to show they could attack Japan at will. The White House reportedly said they were considering military action against North Korea and a possible regime change to prevent them from successfully developing ICBMs with the capability of dropping nuclear weapons on the U.S. or other countries.
The S&P futures opened sharply lower and traded down more than 10 points for a while. They have softened to -8 as I type this.
These three strikes plus the Fed meeting and the debt ceiling expiration on the 15th could be the final blow to bullish sentiment and the market. We have seen markets overcome worse events but we have also seen markets crash on weaker events. It is all a factor of sentiment and prior market trends.
Markets like to climb a wall of worry because it creates both buyers and sellers. Markets rarely go straight up when there are no worries because everyone is a buyer and there are no sellers. When geopolitical events arise suddenly it forces investors to rethink their positions and the amount of profits they have at risk.
The S&P failed to rebound on Friday after falling from the new high on Wednesday. If we were to get a material dip the first support would be 2,360.
The Dow remains the most overbought index and there is a significant amount of profit that remains uncaptured in the Dow components. With more than half at new highs, we could see a dramatic pullback if sentiment suddenly shifted.
The Nasdaq lost some of its momentum and the candles from Wednesday's rally are clustered closer together than the candles on the Dow/S&P charts. The support at 5,800 should be relatively strong assuming we don't see a surge in cascade selling across the entire market.
The small cap indexes remain the weakest link and the S&P-600 has critical support at 846 and again at 820. If that 820 level were to break, we could see a major drop. There is a lot of white space on that chart under 820.
This is the last material week for the Q4 earnings cycle. The headlines will be made on Thursday with Sears, Staples and Ulta Beauty.
The economic calendar is headlined by the employment reports on Wed/Fri. Yellen said if the employment numbers do not show an unexpected decline, the Fed will be ready to raise rates in March.
The market ignored her statements but may become a little more uneasy the closer we get to March 15th and the actual rate hike statement. Even more troubling is the expiration of the debt ceiling suspension on March 15th. With republicans and democrats digging trenches and foxholes on the capitol lawn, there is little hope for a friendly resolution of this problem. This could be the final straw that breaks the market's back.
Regardless of where the S&P futures are at Monday's open, the real worry is the poisoning of sentiment, which is currently at 30-year highs. If we suddenly get a flurry of geopolitical events, the new president may feel compelled to act in order to prove his resolve. That could cause investor flight out of the equity markets.
I did add some watch list candidates this weekend just in case we do get a minor decline.
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