There was no attack on North Korea over the weekend and the MOAB attack in Afghanistan has already been forgotten.
Thank goodness for a 24-hour news cycle. Critical headlines from 48-72 hours ago have already been forgotten by the new set of headlines making news today. The geopolitical headlines that caused the weekend event risk have faded and the market is shifting its focus towards the new problems ahead.
North Korea launched a missile that exploded almost immediately after liftoff. Little Kim has egg on his face again but that is not his worst problem. China has stopped accepting their coal exports and returned a week's worth of ships without unloading them. There are rumors the U.S., China and others will begin a new series of crippling economic sanctions including banning the Korean airline, halting oil deliveries and further shutting the country out of the financial markets.
President Trump and China's President Xi Jinping seem to have come to some agreements on North Korea and the country could be very close to disaster. North Korea received 90% of its oil from China. If China wanted to exert extreme pressure on NK, they would only have to halt oil shipments and the country would come to a grinding halt. That may be the next move for the global powers as North Korea is scratched off the problem list.
The next problem for the markets is the normal decline after tax day. The April 15th deadline has been changed to Tuesday the 18th. That means cash extraction from the market to pay the bill could last all week. That is a minor drain and normally causes some weak declines. After Friday's geopolitical crash, there could be a short covering relief rally on Monday but I would not count on it. The charts are very bearish.
The biggest hurdle for the market is now the fourth week of April when lawmakers come back from the Easter recess and have only 5 days to hammer out a funding bill and increase the debt ceiling. There is almost zero chance of this happening without some serious drama and a potential government shutdown. The bill has to be passed by midnight on the 28th or there will be a partial government shutdown on the 29th.
Obviously, lawmakers can prolong the agony by passing several short term continuing resolutions of 5 to 10 days to keep the government running while they hammer out a deal but that is less than desirable and the headlines surrounding the negotiations are going to be market negative.
The Dow and S&P closed at 2-month lows on Thursday and despite the reasons for the declines, the charts are still bearish. How much they can recover before the next headline brawl is unknown.
There is no way to interpret this chart in a positive manner. It is bearish and the eventual target is 2,250. Direction can always change but we would need a catalyst to produce that change. All the catalysts on the calendar are potentially negative.
The Dow closed at a two-month low and the obvious target is 19,750. A lot of things could prevent that like a quick resolution to the budget issue and a flurry of positive Q1 earnings. But it may be difficult to reverse course. A rebound is very possible but resistance if strong and the cloud of uncertainty is growing.
The Nasdaq barely avoided breaking below support at 5,800 with many of the previously bullish large caps currently in a decline. The bloom is off the rose and investors are ramping up their profit taking. When the tax bill comes due, some of those profits have to be taken.
The S&P-600 small cap index closed at a 4-month low and below critical support at 820. It was not far enough to signal a major breakdown but it is very close. Any further declines could trigger significant selling.
The earnings calendar heats up this week with Netflix kicking off the parade on Monday. There are nine Dow components reporting. IBM and GS on Tuesday have the best chance of causing a big Dow move.
The economic calendar is mixed with a couple of home sales reports and the Philly Fed Manufacturing Survey. The most important event will be the French elections next Sunday. If the far left and far right candidates both finish in the top two positions, the country and the EU could be thrown into turmoil. Both have plans that would severely disrupt the current economic environment. This could be another Brexit like moment.
Futures are down slightly at -2.50 despite a stronger than expected Chinese GDP over the weekend. A 2 point decline is nothing and it suggests a lack of interest in Monday's market more than anything else. Investors will have a lot on their mind over the next couple weeks and rushing into new positions is probably not high on the list.
I am recommending we keep a low profile and keep our fingers crossed we are not stopped out on half the portfolio if the funding battle goes bad. That event could give us the buying opportunity we have been looking for over the last six months. Until then, please be patient.
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