The China Trade Deal expectations continue to be the most important driver of US stock indices in 2019. Bullish Trump tweets and robust rhetoric from Chinese leaders had buoyed investors more than recent dovish Fed commentary. Having already priced in an accommodative Fed and high odds of a deal with China on trade, stocks were at risk of a February correction ahead of the March 1st deadline. An ambiguous comment that Trump and Chinese leader Xi do not have plans to meet before the US tariffs on China begin has scared investors in stocks and Oil back to the sidelines. Exec Spec readers know we had targeted a mid-January and early February top that would lead to a February correction. It’s certainly possible that new comments about positive trade progress will send Stocks right back to new highs, but for the short term, we have entered an expected correction mode.

These charts have been our ongoing outlook of price action for the major stock indices with time and price windows for expected inflation points. At this juncture, we expect any correction will be limited to roughly 3 to 8% in most indices. An SP above 2730 and a Dow over 25,300 would indicate that any February market correction is finished and another leg to new 2019 highs would be likely. 

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Oil prices, as usual, have been well correlated with the stock market as a barometer of the US economy. Like stocks, we have targeted the February 4th to 6th time frame for a top followed by a corrective pause under $52/barrel. Should Oil move back above $54 to $ 55, stocks will gain a new tailwind for further gains.

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Despite signs of a pullback today in Stocks, Oil and many commodities, we remain constructive as we project into the Summer. One of the missing ingredients for heating up all of these markets further is an inflationary fall in the US Dollar. There is still room for modest gains in the Dollar in February, especially if no framework for a China trade deal is successful. However, for the Emerging Markets, Oil, Stocks, and most commodities to confirm upside breakouts, we will need a falling US Dollar, breaking support under the important 93 to 95 support zone basis the March US Dollar Index. 

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A decent corporate earnings season and a Fed indicating it will not raise rates are supportive factors, but these more predictable outcomes are playing second fiddle to the odds of a US and China trade deal. Our guess continues to be that a framework for a deal will be close enough by March 1st for Trump to delay massive new tariffs until a face to face meeting with China’s President Xi Jinping. With a recessionary Europe, slowing China and nervous US investors ready to punish any policy mistakes, Trump and Xi will pay dearly if they fail to close a deal. Once a deal is deemed virtually certain, the US Dollar should fall in a risk-off phase with Emerging Markets, junk bonds and commodities being among the biggest beneficiaries.