Initially it was all about trade and something that could be corrected. Now it is a cold war. The number of factors complicating the conflict with China seem to be increasing by the day. China has stiffened their posture towards the US and are making demands that will not be met. They have gone offensive with their nationalism push and recommending citizens not buy American products. They are preempting regular TV with documentary specials about China fighting the US in the Korean war. They are talking about halting imports of US oil and LNG worth billions every year.

The bluster is increasing on both sides and it is highly likely there will be another round of tariffs against the remaining $300 billion in Chinese imported goods. That will be followed by another round of retaliation from China.

The trade war has turned into a cold war and that war is heating up. Both presidents must maintain a strong posture to avoid looking weak to their constituents. That is more so in the case of Trump because Chinese citizens are prevented from knowing about the trade war by the country's strong censorship.

Meanwhile the equity market continues to erode. The Dow's five week losing streak is notable, but the 4% decline is not. This is a normal bull market correction process and until the decline surpasses 5%, institutional investors will not panic.

There are multiple critical levels this weekend. The Russell 2000 must hold 1,495-1,500 or sentiment will turn more bearish. The Nasdaq Composite needs to hold Friday's closing level and not decline any further. The intraday dip on Thursday to 7,525 was a potential disaster but the market recovered at the close. Initial support is 7,600-7,635 and that is being tested currently. The Nasdaq 100 has a similar level at 7,300 that must hold. The level on the S&P is 2,800 and that was tested on the 13th and again on Thursday.

Note the indicators on the bottom. All are fully in bearish mode. This suggests the market direction will remain bearish.

The A/D line on the S&P has flatlined for the last month. That means buyers and sellers are equally matched but that normally works in favor of the bears. The buyers get tired of buying dips that fail to rebound into a breakout, but the bears are perfectly happy to continue shorting resistance.

The small cap A/D is collapsing. Fund managers have given up on small caps for the summer and without the sudden appearance of a trade agreement with China, the small caps are likely to continue losing buyers.

The Nasdaq A/D is similar to the small caps. The chip wreck and big declines in several big cap techs has poisoned sentiment for the tech sector. The increase in tariffs is negative for tech stocks.

The FANG stocks plus Apple are really weighing on the Nasdaq and tech sentiment. Google continues to lead the decline and now the other three FANG stocks are following Google lower. Apple has lost more than $100 billion in market cap in May.

This is the same chart with Apple in place of Amazon. Note the sharp decline in black to match Google's drop.

This is a very telling chart with the Semiconductor Index plunging from extreme outperformance to under performance and leading the Nasdaq lower. The $SOX has lost 39% since late April.

The triple top formation on the Dow has held and a break of current support at 25,200 targets 24,000 to 23,500.

The day to day headline volatility is supporting the VIX at 15-16 but it is very possible we will see 20 again soon. The next negative headline that tops the prior headlines could be a game changer.

I continue to recommend a cautious position. Buying the dips only works for very short-term trades and there is nothing on the horizon that supports a new bull market. As the say, "the path of least resistance is down." Cash is a position and you cannot lose money while you are in cash. We need a new event to change the trend. That could happen at any minute if the right tweet appears but for now the presidents are both trying to out "stubborn" the other. That is not a recipe for rising equities.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email