Trade Wars Are Really Good For The Stock Market

If you read most of the analysis being published over the last two days, you would almost assume that the S&P500 should be crashing or be in a bear market. Yet, we are only 4% off the all-time highs struck early this year in the S&P, whereas the Nasdaq and Russell have made new higher highs this summer.

In fact, if you had read the analysis put out over the last two days when further tariffs went into effect, you would have to assume that Friday should have been a major down day in the US markets. This is just an excerpt from a bearish author’s recent article on the US market:

“Virtually all of the market headlines this week centered around the Friday imposition of tariffs by the U.S. on $34 billion in Chinese goods and the immediate reciprocation from Beijing. The duties kicked in at one minute after midnight and marked the most serious escalation yet in the burgeoning global trade war.”

In total, this past Friday saw further tariffs that affect a combined 100 billion worth of trade between the world's two largest economies. So, what did the stock market do on Friday? We rallied 1%.

I was sitting at my computer screen chuckling on Friday. If you would apply the analysis we see so often about the news of the day “causing” what happened in the stock market, then we should have seen many articles entitled “Escalation Of Trade Wars Caused Market To Rally.” Yet, have any of you seen such articles? I sure have not.

Therein lies the intellectual dishonesty of most of what you read about financial markets. I can assure you that if Friday was a 1% down day, every article would have laid blame to the trade wars escalation as the clear cause of the down day on Friday. But, when the market action does not match the headlines, what do we see in the narrative of the day? Silence.

Folks, markets go up and down. This is simply a fact. They are non-linear in nature, and there are always periods of progression and regression. To use the news or other similar perspectives to assign exogenous reasons as to why the market did what it did is an exercise in futility, and will often leave you scratching your head on days like Friday. And, those that commonly assign exogenous reasons as to why the market does what it does are noticeably absent from the discussion on days like Friday.

I am sure many of you are now thinking to yourselves, “come on, Avi. The market clearly reacted to the good news in the jobs report.” Yet, you would be missing the point. On any given day, you can almost always find good news about the market and bad news about the market. So, is it really helpful to anyone to point to any news which simply coincides with the market action of the day? I think not.

So, with the US stock market rallying 1% on a day when we experienced a serious escalation of a worldwide trade war, I have presented to you an intellectually honest article title above (smile). At some point, I hope many of you discard your simplistic perspectives about the market, no matter how well wrapped they may be in colorful articles and well “reasoned” opinions. To put it simply, you must begin to understand that markets are driven by mass sentiment, and not by perceived exogenous events.

If you would like to understand this perspective a bit better, the feel free to read just a couple of the articles I have written on this topic:

• Sentiment Speaks: Here Is Next Week's News In Advance - How Will You Trade It?
   

• Sentiment Speaks: Sentiment 'Trumps' Fundamentals And News

For those that want an even more detailed explanation of this perspective, with significant historical support, I strongly suggest and highly recommend Robert Prechter’s recent book entitled The Socionomic Theory of Finance. It will open your eyes as to what truly drives financial markets.

As far as the coming week, support is now at 2730-35SPX. As long as we remain over that support, I am looking for the market to continue to attack the 2800SPX region next.

Moreover, the next major test for this market will likely come in August. Once this current rally completes in the coming weeks, the depth of the pullback I expect to see later this summer will tell us several very important things about the market. First, the depth of the pullback will allow us to project how high over 3000 the market will rally before we top out. And, second, the depth of the pullback will tell us when the market will top out.

For those that may not remember, I am looking for a 20-30% correction to begin once the market completes this phase of its long-term rally over 3000SPX. That will likely begin in 2019, (and maybe even as early as the end of 2018, depending on what happens in August).

Lastly, I am quite certain that someone will be posting a snide comment below about our analysis methodology and how “squiggly lines cannot predict the market.” Well, considering how well we have been able to predict this market over the last number of years despite all the bearish fundamentals you have read about which were supposed to have crashed this market long ago (Brexit, Frexit, Grexit, rise in interest rates, cessation of QE, terrorist attacks, Crimea, Trump, Syrian missile attack, North Korea, record hurricane damage in Houston, Florida, and Puerto Rico, trade wars, etc.), I would say that those “squiggly lines” certainly have the much better track record.

See charts illustrating the wave counts on the S&P 500.

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