The Nuclear Option?

Greetings from Mykonos, Greece. Since I am traveling with my wife and exploring the Greek Isles, I'm going to keep my commentary brief for the next couple weeks.

One of the benefits of traveling abroad is you are removed from the daily machinations of the markets, which sometimes makes it a bit easier to focus on the big picture. And while the following will likely wind up in the category entitled Captain Obvious, this market is clearly news-driven and focused on trade.

For some time now, traders have been assuming a trade deal between the U.S. and China would get done at some point soon. The narrative has been that neither side - or the global economy, for that matter - can afford a prolonged trade war. Once you factor in the economic data, the financial market reactions, and the politics involved, the conclusion has been the trade spat would end - sooner rather than later. And once the ink has dried on the deal, the assumption is that the global economy will experience a surge as folks make up for lost ground and get back to business as usual.

However, last week markets became concerned as the two countries appear to be deviating from the plan. President Trump's proclamation that China was backing away from the deal triggered tweets suggesting more tariffs would be forthcoming. In response, China started talking about what is commonly referred to as the "nuclear option" - as in China dumping treasuries.

The response by the markets might best be summed up with the words, "uh oh!" While no one "really" expects China to start dumping its massive pile of U.S. T-bonds, the threat alone does represent a sizable bargaining chip.

So there you have it. The U.S. is threatening to place tariffs on basically all Chinese goods and China has publicly introduced the so-called nuclear option. For the markets, this represents a stalemate - and the fear that the "tiff" might become prolonged.

So, for now, at least, the current news-driven market environment will likely continue. Speaking of which, my plan is to try and simply ignore any emotional market moves and be ready to put the small amount of dry powder I have to work into any further hysterics. But now it's time to head to the beach as the U.S. markets don't open for another 6 hours!

Weekly Market Model Review

Now let's turn to the weekly review of my favorite indicators and market models...

The State of My Favorite Big-Picture Market Models

The Primary Cycle board took a modest hit this week as my intermediate term trading model flipped from buy to sell. But with the board still in pretty good shape overall, investors who have been looking for "dip" to buy should recognize that we are now experiencing a pullback and act accordingly. 

This week's mean percentage score of my 6 favorite models pulled back for a third straight week to 72.2% from 81.1% last week (Prior readings: 83.9%, 84.7%, 74.6%, 58.0%, 49.5%, 47%) while the median slipped to 80% from 82.5% last week (Prior readings: 86.7%, 86.7%, 81.8%, 65.9%, 50%, 50%, 50%).

The State of the Trend

While the bulls will argue that the action was constructive last week, it is evident that the market remains news-driven and a bit fragile. However, I will also contend that the market appears to want to look on the bright side of the trade news at the present time. Thus, the argument can be made that stocks are pricing in a trade deal in the coming months.

The State of Internal Momentum

Some weakness continues to creep into the Momentum Board. This week saw another indicator flash red and the fact that 4 of the 7 now sport sell signals suggests that the bears may still have some energy left.

The State of the "Trade"

The message from the Early Warning board continues to improve as several indicators are starting to suggest that the bulls may be ready to attempt a rebound. However, given that this market remains driven largely by the news, the takeaway here is that the table is now set for the bulls - if they can get a positive headline or two.

The State of the Fundamental Backdrop

There were no overt changes to the Fundamentals board this week. However, it is worth noting that a couple of our economic composite models upticked last week. But the bottom line is the backdrop continues to support the continuation of the bull market once the current sloppy period has played out.