The residual impact from the disrupted G7 conference was minimal.
President Trump blew through the G7 conference like a wrecking ball and then left early to travel to Singapore for the Korean summit. The wreckage he left behind in Canada will take weeks to decipher. The remaining six countries are faced with an unconventional U.S. president that does not care for polite political negotiations that takes months to reach a decision and accomplishes nothing. They do not know how to deal with the bombast and total lack of political caution.
Trump is determined to end tariffs for American products. He said he wants "tariff free, barrier free, subsidy free trade." Anything else is "Fools Trade" and America is done being taken advantage of in the market place.
He blasted Canada for their 270% tariff on U.S. dairy products. He blasted the EU countries for things like tariffs on U.S. autos of 25% while our tariffs on their imported autos is a mere 4%. He wants all countries that trade with the U.S. to have zero tariffs and zero barriers.
The Canadian PM Justin Trudeau waited until Trump was on the plane headed for Singapore before he held a press conference denouncing President Trump's demands and promising to raise tariffs on U.S. products if the U.S. did the same for Canadian products. A twitter war erupted immediately.
Despite the disrupted G7 conference and the appearance of potential tit for tat tariffs from the other six nations, the futures are tame with a decline of only 1 point. Apparently, U.S. traders are not worried about the headlines and believe the eventual resolution will actually be lower tariffs all around. The U.S. is the 800-pound gorilla where everyone wants to sell their products. President Trump is going to make that painful unless it is a level playing field.
This is going to be a busy week. We have both price indexes, retail sales and the NFIB survey. Add in North Korean Summit, FOMC meeting and press conference and the ECB and BOJ monetary policy meetings and there will be a lot of headlines. The ECB is expected to consider tapering their QE purchases. The BOJ is under pressure to reduce stimulus to combat the surging U.S. economy and the impact on the Yen as well as to keep the Japanese economy from overheating.
The earnings cycle is fading. The only must watch company on the list is Adobe Systems (ADBE). On the S&P 498 companies have reported for Q1 with projected earnings growth of 26.6%. Revenue growth is projected to be 8.3% with 75.9% of companies beating estimates. Three S&P companies report this week. If you are good at math, you just figured out that 498 already reported plus 3 to report, equals 501. Adobe is reporting for Q2.
Despite the volatility and the decline in tech stocks on Thursday, it was a great week. The Dow broke out of its consolidation pattern and through multiple levels of resistance. The index gained 2.8% for the week and that is great regardless of what the other indexes are doing.
We did see some profit taking in the Nasdaq and Russell but it was minimal considering the recent gains. The Nasdaq still added 1.2% for the week and the Russell added 1.5%.
The S&P-500 gained 1.6% and closed at a 3-month high at 2,779. The big cap industrials are starting to ignore the tariff headlines and that is good news. The next set of headlines should be some kind of deal with China. Nobody actually expects the tariffs to last for long. When that news breaks, the big caps will have a lot of catching up to do.
The next hurdle for the S&P is 2,792 and then the record high close at 2,872. Should we see any further weakness the S&P needs to remain above 2,750 to keep the chart positive.
Once the Dow broke through the 100-day average at 24,803 and the round number resistance at 25,000 the shorts were squeezed and forced to cover. The index overcame the opening dip to -118 and weakness in Apple and Caterpillar to rise at the close. A break through the resistance at 25,400 should see another round of short covering. The challenge remains the tariff headlines. If there is another flare up it could dent the rally of even kill it depending on the severity. Support is well back at 24700-24800 and I hope we do not visit those levels again.
The Nasdaq closed at a new high on Wednesday then retreated on the expected profit taking on Thursday. Given the +363 point gain since the May 23rd lows, we were due for some retracement. The index is still overbought on a short-term basis but is still expected to move higher. I would view this dip as a buying opportunity.
The Russell 2000 dipped on Thursday and recovered some on Friday. The Russell is the most overextended of any of the indexes. It has gained 153 points since the May 1st low of 1,527 or +10% in five weeks. There was a week of consolidation in the middle and that relieved some of the pressure. However, it is still overbought. The index can go higher but it is probably on borrowed time before we have a decent bout of profit taking.
I expect the market to be neutral on Monday while we wait the showdown on the North Korean summit. I could be completely wrong but the market is growing tired of the tariff news and I believe they have seen this negotiation tactic numerous times in the last 18 months. The Korean event should not rock the market unless a fist fight develops in the conference room.
The heavy economic calendar will move the market a lot more than the other events. The Fed on Wednesday and ECB/BOJ will be the market movers. The market internals are strong and improving. I believe we should remain cautiously long until proven wrong.
Enter passively and exit aggressively!
Send Jim an email