Sunday, August 11, 2019

The Trade War With China Has Its Consequences

SGS  Market Timer Status:  NEUTRAL 
NEUTRAL as of the close of Friday Aug 9, 2019
SGS is a Long-Term (weeks to months) Timer
Why Market Timing Is A Must

Trump has been told that a recession is coming in 2020 and he would lose the presidential election unless "the 2020 recession" is averted.  He is also been told that the only way to avert the 2020 recession is for the Fed to start cutting rates "aggressively now".

The Fed has stated several times that the Fed was closely monitoring the trade dispute with China and its effects on the US economy.  Trump was disappointed on July 31 when the Fed cut rates by only 25 basis points and not 50 as he was demanding.  Someone probably told Trump that if he wanted his rate cuts, he'd better escalate the trade war with China.  So in the middle of trading day on August 1, the day after FOMC announcement, Trump tweeted that he was planning to impose a 10% tariff on all remaining Chinese goods starting on September 1.  That started the on-going sell-off since August 1.

Unfortunately, Trump does not understand that a trade war is always a lose-lose and dicey proposition.  For example, the Chinese government could start importing Iranian oil again which would probably cause a 10% to 20% correction in the price of crude oil.  That alone would send SPX down by at least by 5%.  Chinese could also let Renminbi depreciate significantly against the US dollar, causing a global currency war, which would push stock markets worldwide down between 20% to 30% in a very short time, perhaps a couple  of weeks to a month.  If that happens, the very recession that Trump is trying to avoid, would surely be upon us.

SGS declined last week confirming the sell-off.  On Friday SGS changed its status from LONG to NEUTRAL.

Support and resistance levels for SPX for this week are shown above.  Should the trade war escalates this coming week, I expect SPX to test its early June low around 2730.

My Plan

I was planning to open long positions last week but on Sunday (8/4) late at night Chinese warned that they might let Renminbi depreciate significantly against the Dollar.  That was the first shot in a possible global currency war.  That's a game changer in my opinion. 

I'm in cash and watching SGS.   Should SGS decline below -50, my plan is to open my first of two long positions in SDS.

SPX: S&P 500 Index    SMA: Simple Moving Average
DJI: Dow Jones Industrial Index    EMA: Exponential Moving Average
DJT: Dow Jones Transportation Index    PDL: Primary Downtrend Line
NAZ: NASDAQ Composite Index    PUL: Primary Uptrend Line
RUT: Russell 2000 Index    ASL: Active Support Line
OEX: S&P 100 Index    ARL: Active Resistance Line
NDX: NASDAQ 100 Index    DTL: Dynamic Trend Line   
TUL: Tentative Uptrend Line   TDL: Tentative Downtrend Line
TLR: Trend Line Resistance   TLS: Trend Line Support

Disclaimer: The views expressed are provided for informational purposes only and should not be construed in any way as investment advice or recommendation.  Furthermore, the opinions expressed may change without notice.