Market 'fragility' anticipated for September's second half unfolds, while it is pretty clear what happens next relies initially on trade negotiations (or lack of), and then Midterm Elections. That, aside what it portends for Pres. Trump, may have lots to do with the perception of future trade policies and actually whether or not the reform and trend of lower regulation persists for years. Regardless of political views; that's where Midterms come in.  

Thus, if you recall that our super-bullishness 'if Trump won' was predicated in 2016, on how much business wanted his economic agenda, do imagine how much business will freak, if it looks light that agenda may be reversed. Now, this has nothing to do with his persona (many Republics are beside themselves and afraid of losses in November because of it in-fact); nor his social manners or stance on many issues (or perceived biases). They are strictly related to tax and regulatory issues, and even there some disdain a portion of the regulatory moves (such as regarding the environment).  

The point is however that this market would not be here if not for Trump's win; and be prepared for what happens if things turn in another direction. I realize it may not be so. For-instance, his 'Order' for all text messages of a slew of people related to the Russia Investigation might turn things around if they make it clear he was shanghaied (no pun on the China dealings) on that issue; but again let's see.  

Meanwhile this focus we have had on 'trade' is correct; but since media is now well-aware of the dual-postures of the two countries on the issues; a further discussion of China's 'resolve' not to give in that some believe, will not be needed for now. A respected member of this Service has decades of experience dealing with Chinese issues (he is in Asia presently) and I'm grateful for the permission to share his views; but they boil-down to China not trusting or yielding to President Trump. (Again, since many have today tossed this topic around, we won't expand upon it, at least not tonight.)  

All that need be said, is that if China retaliates and Trump doubles-down in respect to this evening's tariff implementation, the market won't like it. For us, our purpose is not to debate the merits of pressing China; or whether or not there is legitimacy in their stance, or whether or not disputes related to IP (Intellectual Property) should continue to just be sorted legally or not. Our purpose is to assess the probably response of the U.S. stock market. And in that regard, we have already said failure would not be good. Hence the 'trigger' catalyst for a decline.  

And we have said should the parties to all of this make some sort of deal, then any relief rally will be sharp but not sustainable. I suspect 'holding the promise of negotiations' as some sort of market savior is a 'hook' for now; since all it would do is get us a rebound ahead of (macro) Midterm risks.  

One of the big issues behind everything is rarely noticed: confidence. Not, of course, of relatively high Consumer Confidence; but political confidence that has been on the decline ever since the 'bloating of the big banks' as a 'solution' promoted by the central bankers and others a decade ago.  

Yes, on this 10th Anniversary of our projected 'Epic Debacle' (from May of 2007 I looked for a derivatives-based disaster), we glean one thing few will talk about: and that's how Government (rightly or wrongly) focused most of their financial salvage operations on saving the banks, not average citizen debacles, as too many were at-risk of loosing homes and more. Yes there were efforts to address this; but the central effort was to save the banks.  

It was argued that you needed to save the institutions more than people. I won't debate that a decade later (even Hank Paulson and George Bush at the time 'hoped' the banks would use funding to bail-out people; but failed to require that, and generally bankers did not).  

I will say, despite having, as long-time members know, warned since 2006, that people needed to get out of, not into, real estate; and that the 'Greater Fool Theory' was in full-bloom with property then flying off-the-shelves with insanely risky deals..it was still a responsibility of banks (and Government) to help the people, one can argue, not just banks as a foremost task.  

  Since then more Americans became aware that the Fed is independent of course; from Government. But perhaps not independent of the banks who originally were behind it. That's an old argument I won't delve into; but one might consider that aside gerrymandering (redistricting) and decade-long moves by the Tea Party and so on to gain power; there is a sense polls in fact support, that 'confidence in Government' is far lower over these years. (And again, this explains some of the populist trends that unfolded with a belief that Government and the Fed were not working 'for the people'; right or wrongly, that was a growing perception that gave rise to a lot of this.)

Present Day 

A Greater Fool Theory has been at-work in FANG and other pricey stocks for several months now; with many of the Summer rebounds essentially a secondary test of the indicated parabolic thrust high back in January 2018. On my return from Europe a week ago I reminded everyone of my forecast for September's first half to be relatively stable; with the back-half not just down; but perhaps 'bleak', with risks of a sizeable decline unfolding.  

Of course there are arguments as to why China should or should not 'bow' to US demands; and the inverse. And of course the Emerging Markets are still in 'Submerging Market' mode outlined all year long. What's unclear in various ways, and with varying perspectives on China's 'resolve', whether or not it's justified, and whether a 'trade deal' (if one occurs) changes that.  

In an analytical sense I think most miss a point: get a fair deal and you'll extend the market's move; but then run right into the Midterm Election risk, which isn't clear either. Fail to get a deal and clearly it's a 'catalyst' as we'd already discussed. The importance can't be underestimated and not just in consideration of 'supply chain' issues and so on. Neither can the 'fragility' of the overall market, at these extended levels.  

In-sum: the debated issues are pertinent; while the market is fully valued in so many areas, almost regardless of how the known challenges sort out. Most FANG and other stocks we warned of (Google, Apple and Amazon a few of them, plus Netflix and so on) topped, tested and are declining.  

That's why 'risk appetite' is reduced, as it would be at these levels, with or without the negotiation struggle and tensions with China or others. A stock market having moved to levels reflecting the eased regulatory environment (of course not agreeing with all the changes; but again the market liked it), and the tax cuts (more so than 'reforms'), is exposed to risk regardless.  

Bottom line: the conclusion is that a new China 'agreement' would be a relief, but not a bit boost to the Averages at these already-extended levels. A failure could, for sure, be cited as a 'trigger' for a decline. A correction is due either way; it's just a question of how it evolves. For many stocks it's really ongoing, masked by the Averages while underlying rotation requires a closer look. It's our Sept. back-half we warned of. Caveat Emptor.