The new revelations on the trade war with China could linger for weeks. All we really know is that US negotiators, Mnuchin and Lighthizer, are headed to China this week to continue the talks held in the US the prior week. They are expected to last a couple days. Contrary to prior expectations we learned there is no schedules meeting between President Trump and President Xi. This suggests as Larry Kudlow said on Thursday, We have a "sizeable distance to go" before we have a deal with China. Mnuchin said talks have been "very productive" but there remains a "wide range of issues" to be worked out.

With no meeting of the presidents before the March 1st deadline to raise tariffs from 10% to 25% that means we are approaching a critical point in the negotiations.

In addition President Trump is said to be preparing to sign an order forbidding Chinese components in the 5G network in the USA. Negotiations are underway to get that same prohibition in Europe. This could be a very bad deal for Huawei and ZTE, China's largest networking companies.

Add to that the extradition attempt to transfer the CFO for Huawei from Canada to the US for fraud prosecution. She is the equivalent of corporate royalty in China and the daughter of the Huawei founder.

In the speak softly and carry a big stick world of politics, President has several big sticks to use to force China to the bargaining table but that does not mean it will happen in the near future. It could be months from now before they finally see the writing on the wall and capitulate.

Those revelations tanked the market and clouded the future. S&P futures opened positive by 3 points on Sunday evening but after a couple hours had sunk to -5. That is not a major decline, but it sets the tone for the overnight session.

We know the financial press will be these stories next week now that the pace of earnings is beginning to decline. As the March 1st tariff deadline approaches, those headlines are going to increase in number as will their weight on the market.

Even though the major indexes finished with a weekly gain it was miniscule and no reason to get excited. If anything, having the Dow stretch its winning streak to 7-weeks is just one more reason for investors to be cautious because you know there is a real bout of profit taking at some point in our future. It would have been more bullish to give back 200-300 points for the week and have investors believe it was a great buying opportunity.

The S&P traded below 2,700 on both of the last two days but recovered to close over that level. The index is stuck below the confluence of multiple resistance levels with the 200-day at 2,742 the biggest threat. Assuming a lack of bad news over the weekend we could see that level retested next week.

The Dow broke through the cluster of moving averages and was on its way to 25,800 when the weakness began. Now the index is using that prior resistance as support. This is about the right level to rest after trading below 25,000 intraday on Friday. The close was 123 points above the intraday lows and back above resistance. This would be a good spot to launch a new move higher.

The Nasdaq fell back into correction territory intraday and closed exactly on that 7,298 level. Amazon was the big drag on the index with a couple biotech companies leading the winners list. The tech sector rebounded with the chip stocks, but that rally has given up ground the last two days. With the majority of the big tech stocks already reported we are headed into the post earnings depression period.

The Russell posted a minor 4-point gain for the week, but it was a fight. The index traded on both sides of the 100-day average multiple times but lost the battle on Friday. This week and next is small cap earnings and there are rarely any market movers. This is a herd mentality. If they majority do well the index will rise.

For next week the NFIB small business sentiment survey will be on Tuesday. There was a sharp decline in Nov/Dec from the peak of 108.8 in August. Small business sentiment is impacted by the shutdown more than the tariffs. This is for January and the 35-day shutdown was in full swing so sentiment could have declined even further.

The consumer price index on Wednesday is the biggest report for the week because of the inflation component. Analysts are not expecting any rise so an unexpected rebound would be market negative if it appeared to be strong enough to wake the Fed and put them back in hike mode.

So far in this earnings cycle, 333 S&P companies have reported. Analysts are predicting 16.8% earnings growth for Q4 and 6.0% revenue growth. Some 71.5% of companies have beaten on earnings and 66.2% have beaten on revenue. There have been 42 negative preannouncements and only 15 positive guidance upgrades. The forward PE is 16.0 and 62 S&P companies will report this week.

Q1 earnings estimates have fallen to -0.1% earnings growth and 5.4% revenue growth. Seeing earnings decline on higher revenue means costs are rising.

Seeing the earnings forecast turn negative has not yet impacted the market materially. It was a factor in the Thr/Fri weakness but at only -0.1% it is not enough to force investors back to the sidelines. When we start seeing 2-3% decline forecasts, market sentiment will change.

We have two Dow components reporting this week with Cisco and Coke. There are multiple chip stocks reporting with Applied Materials and Nvidia leading the list. Nvidia has recovered nearly all the losses from the January 28th guidance warning but I would continue to avoid the stock until it moves back over $160.

Activision Blizzard needs to pull a rabbit out of their hat after announcing the breakup with Bunge. Shares are trading at a two year low after a four-year rally.

My emotion wants to say buy the dip, but my brain is telling me to be careful. We are heading into the February expiration cycle and many times this is a turning point for the market. Earnings are fading and investors are thinking about taking money out of the market to pay taxes. February is a weak month and normally it is the second half of the month that produces the losses.

With the potential fading for an end of February trade deal, the global economy slowing, Q1 earnings turning negative and a 10% rally since Christmas, there are plenty of reasons to be cautious in the weeks ahead.

Enter passively and exit aggressively!

Jim Brown

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