Stocks fell hard last week as renewed trade woes from both China and Mexico dragged the market lower. May 2019 was a brutal month for the market as the benchmark S&P 500 plunged nearly 7% from peak to trough. The tech-heavy Nasdaq Composite shed nearly 9% during this latest pullback. The Dow Jones Industrial Average & the small-cap Russell 2000 both slid 8% and 7%, respectively. Clearly, the selling is widespread and unless something changes quickly this pullback may quickly enter “correction” territory (defined by a decline of 10-19.9% from a recent high). The internals look awful and the market is now deeply oversold. I wouldn’t be surprised to see it bounce from here in the near future. 

Monday-Wednesday’s Action:

Stocks were closed on Monday for Memorial Day. On Tuesday, the market opened higher but closed lower after treasury yields and trade woes dragged the market lower. On Wednesday, the yield on the benchmark 10-year note slid to 2.26% which was the lowest level in 19 months. Remember, bond prices are inversely related to yields. So when bond prices rally, yields fall and vice versa. On Tuesday, stocks sliced below near-term support as a trifecta of negative news hurt the market. First, China fired back and used very harsh language and told the U.S., ‘Don’t say we didn’t warn you.’ That is considered very harsh language and led many to worry that the trade war will get worse. Secondly, Mueller gave a statement and said, ‘If we had had confidence that’ Trump ‘did not commit a crime, we would have said so.’ Trump reacted to the report by tweeting, “Nothing changes from the Mueller Report. There was insufficient evidence and therefore, in our Country, a person is innocent. The case is closed! Thank you.” The third piece of news that hurt stocks was that yields continued to weigh on investor confidence.

Thursday & Friday Action:

On Thursday, stocks fell after China said trade talks can’t continue until the U.S. addresses its ‘wrong actions.’ That spooked the market and sent futures down 250 points before the open. The market enjoyed an impressive rally for most of this year thanks in part to two major points: the Fed would shift back to an easy money stance and the U.S. China trade spat will be resolved. The former occurred and for the past few weeks, the second is in limbo. In other news, IHS Markit said U.S. manufacturing activity slid to a nine-year low. Stocks were slightly higher on Friday after Trump said Huawei could be included in a trade deal with China and that a trade deal could be reached very soon. Separately, U.S. durable goods fell -2.1% last month as exports swelled and inventories rose. In other news, Theresa May resigned as Prime Minister as Brexit pressure continues to rise. 

Market Outlook: Sideways Action

Stepping back, the market is pulling back as trade woes continue to hurt stocks. The market has soared all year based on two key points: optimism that a trade deal will be reached between the U.S. and China and the Federal Reserve reversed its stance and moved back into the easy money camp. Near-term resistance is the 50 DMA line then the recent high while near-term support is May’s low, March 2019’s low, the 200 DMA line and then 2018’s low. As always, keep your losses small and never argue with the tape.