Last Night's Log Entry

2/7/19

The market fell apart today when Larry Kudlow suggested that the U.S. and China are essentially nowhere near a trade deal. This is yet another instance where Trump and another adviser or two (in this case Mnuchin), literally hours before Kudlow’s comment, touted great progress and a deal in the near-term offing – only to see the resulting rally quashed by conflicting signals coming literally from someone on the same team.

An hour or so after Kudlow’s comment this morning, Trump confirmed that he won’t be meeting with Xi before the negotiation deadline on 3/2, as promised the day before. Apparently, a meeting this month with Kim Jong Un takes precedence.

Asian markets (the ones not shuttered due to the Lunar New Year) are selling off as I type, along with the Aussie dollar.

Clearly, based on the technicals, traders were anticipating a deal soon and were preparing (after I suspect a period of sideways consolidation) to bid the S&P through the 200-dma with some momentum – existing short interest, still low sentiment and high cash balances were also setting the stage for such a move.

At this point, however, without an offsetting message in the next day or so – which would virtually have to be an announcement that the previously immovable deadline has been moved – momentum will reverse, and the S&P will be testing lower levels of potential support, then, at the near-term extreme, the December 24^th low.

Such a move from these levels would likely inspire (scare the players into) a new round of optimistic rhetoric around a trade deal.

Another potential headwind is the rumored pending executive order barring U.S. tech firms from doing business with one or more select Chinese equipment manufacturers. While that’ll add to the angst, it’s been expected for awhile. The timing, however, is downright curious, or, let’s say, remarkable!

Not sure what the end game is here for the administration. Seems like whenever the market rallies, Trump feels emboldened to shake things up. Don't know how many more rounds of such action can be followed by rallies on offsetting positive commentary. Ultimately we’re talking a boy-who-cries-wolf  scenario; which would mean that nothing short of a signed, sealed and delivered deal would allow the bulls to come back in force; as long as conditions hold up in the meantime, they will.

Longer term: If the Administration keeps this conflict alive too long, general conditions will deteriorate in accelerated fashion, risking the possibility that even the ending of the trade war will not avert the next bear market. The political risk of such a scenario is so huge that it remains unlikely. That assumes that Trump’s advisors have the ability to properly assess general conditions. Kudlow and Mnuchin should…