Introduction

The Trump administration announced the possibility of $200 billion in new tariffs and the market faltered. The news was not a major surprise, and the market responded in kind; the indices sold off but not hard. Earnings season is still at hand, and there is high hope earnings growth will be strong. The new tariffs may come into effect later this summer, after a review process, earnings season is now.

Global indices fell in response to the new tariff announcement. Trump says he'll tack a 10% fee onto $200 billion in Chinese goods and the Chinese response was not favorable. Xi says he'll not back down and will add his tariffs although China is not able to hit back quite as hard. The trade imbalance with the US puts on us a stronger footing regarding tariffs so China may retaliate with other measures meant to impede US business including but not limited to delaying approvals, rigorous inspections and blocking shipments. Global equities markets fell -1.0% to -1.75% led by the Shang Hai in Asia and the French CAC in Europe.

Market Statistics

Futures trading was negative right from the start. The Dow was indicated down by more than -200 points, the S&P 500 about -20. The good news is that those were the lows of the session, the trade edged higher after the news was digested, but the rebound was minimal. The open was negative but not crazy with sellers. The S&P 500 began the day with a loss near -0.50% and hovered near that level all day. The index is still well above support and set up to rally on earnings, provided earnings are good, and the outlook is positive.

Economic Calendar

The Economy

The Producer Price Index rose by 0.3% in June, a tenth hotter than expected but well below the 0.5% registered in May. The big news is the YOY comparison at 3.4%, the largest YOY increase in nearly seven years. At the core level, PPI also increased by 0.3% but is up a much cooler 2.7% YOY. Most of the increase in prices was due to higher prices for services, prices for goods were virtually unchanged. The data shows a steady increase in inflation, but at a slower rate suggesting the FOMC rate hiking timeline is doing its job. Tomorrow we'll get the CPI data, could be a whole different picture.


Wholesale Inventories jumped a larger than expected 0.6% in May and are up a strong 5.9% over the past twelve months. The good news is that sales are also up strongly, 11.8% YOY, resulting in a net decline in the Inventory-to-Sales ratio. The figures show low levels of inventory relative to the pace of sales suggesting high demand for goods, a net positive for the economy.


The Dollar Index

The Dollar Index rose on today's inflation data and may continue to rise tomorrow with the release of CPI data. The CPI is expected to hold steady at 0.2% from the last month and could easily top that number, an event that would lend strength to the dollar. A move up in the DXY may find resistance at the $95 level, a move above that would be bullish. The risk is Europe, there is a raft of CPI data from EU member nations as well as all-EU Industrial Production figures, and the minutes from the ECB meeting; any of which could strengthen the euro and offset strength in the dollar.


The Gold Index

Gold prices fell under the pressure of a stronger dollar and are heading back to retest recent support. The spot price fell a little more than -1.0% to create a long red candle moving down toward $1,240. The $1,240 is a target for strong support, so this level may hold. The indicators are rolling into a potentially bearish crossover, but neither are showing strength yet. A break below $1,240 would be bearish and could take the metal down to $1,205. This move could be sparked by tomorrow's CPI if it is strong enough.


Wow, volatility strikes the Gold Miners ETF GDX. The ETF fell -2.65% on a -01.0% fall in gold prices to create a long red candle breaking the midpoint support line of the short and long-term trading ranges, to move below the long and short-term moving averages. The indicators are mixed but consistent with downward movement within a range, so a test of the $21.75 is likely. If gold prices continue to fall the ETF may move down to $21.50 and $21.00. If not a bounce within the range is likely, resistance is at $22.50 and just below $23.00.


The Oil Index

Oil prices fell nearly -5.0% on a double-shot of bearish news. The first is that OPEC production increased substantially in June, primarily attributed to Saudi Arabia, and ahead of market expectation. The second is the reopening of Libyan oil terminals. Both reports add to an already high level of supply and have alleviated the fear of major global supply disruption. WTI created a long red candle moving down to break out of a near-term consolidation. The price is heading down toward the short term EMA and may break through to retest $68 or $66. The caveat is that I expect to see, based on the extreme peak in MACD, another swing in prices to retest the recent highs.


The Oil Index made a small gap lower, created a long red candle and closed with a loss near -2.70%. The indicators are rolling over in confirmation of resistance within a consolidation range and may take the index lower in the near term. Support is near 1,500, a break below which could be bearish. Longer term, oil prices are likely to remain supported between $60 and $65, levels where the sector will be able to produce decent earnings, so the rally in the energy sector may not be over.


In The News, Story Stocks and Earnings

Pfizer announced a restructuring that is expected to lead to a spin-off. Beginning January 1st, 2019 the new operating units will be Innovative Medicines, Established Medicines, and Consumer Health Care. The CEO says restructuring will help the company grow in the coming years; analysts say the move will lead to the formation of three new companies. Shares of PFE fell about -0.50% on the news.


Papa John's made the news when Fortune magazine reported the founder John Schnatter made some offensive comments. According to the report, Schnatter made racist comments during a conference call practice. Papa John's does not dispute the news but does say they condemn racism. Shares of Papa John's were down more than -3.0% on the news and are trading at a 2.5 year low.


The VIX jumped more than10% on today's tariff news to open with a gap. The good news is that it sold off during the day to halve the loss to only 5.0%. The fear index moved up on a knee-jerk reaction to the news and has confirmed resistance at the short-term moving average. The indicators are pointing lower and suggest a decline in fear is still underway. A move lower may go as low as 11.50 in the near term.


The Indices

The indices fell on trade war fears, again, and again they showed resilience. Today's declines were, for the most part, small and above support. The stand-out is the Dow Jones Transportation Average with a loss of -1.79%. The transports created a long red candle moving down to test support at the long-term moving average. Support held although the indicators are mixed. Momentum is bullish but stochastic suggests another test of support could come. A move lower may go as low as 10,200, a move up would confirm the long-term trend.


The S&P 500 posted the second largest decline at -0.71%. The broad market index created a small red candle moving down from Tuesday's peak to test for support. The index is well above strong support targets at the moving averages and trend-lines, so a deeper move is possible but not expected. The indicators are bullish and pointing higher in line with the long-term trend, so a move up is more likely than not.


The Dow Jones Industrial Average posted the third largest decline at -0.70%. The blue chips created a small red candle with visible lower shadow confirming support above the short-term moving average. The caveat is that resistance is a long-term uptrend line that must be broken. The indicators are bullish and suggest a move up is coming so I think resistance will be surpassed. A move would be bullish and trend-following with a target at 25,250 in the near-term.


The NASDAQ Composite posted the smallest loss at only -0.40%. The tech-heavy index opened with a loss and, after a brief dip, only moved higher from there. The index is supported by the indicators which are both bullish and moving higher, consistent with rising prices. A move up would be bullish and trend-following with resistance possible at the all-time high.


The indices sold off on fear, but the move was without conviction. Yes, the new tariff announcement is a bad sign of things to come but those things, if they come to pass, are still a month or more away. In the meantime, the market will focus on what is expected to be a robust earnings season and that season starts on Friday. Reports from JP Morgan, Wells Fargo, and Citigroup, are due on Friday and will have an impact on the days trading. I remain firmly bullish for the long term, cautiously bullish for the near term.

Until then, remember the trend!

Thomas Hughes