Stocks Open Up On Trump Statement

The stock market rose at the beginning of Wednesday’s trading session because the statement about technology investment wasn’t as draconian as expected. The President released plans to strengthen use of the Committee on Foreign Investment in the U.S. There was no specific 25% Chinese ownership block like mentioned in the Wall Street Journal story. Trump’s statement didn’t even mention China, just like Mnuchin said in his tweet. You can think of a block as an action that would have been a major change, while this move to strengthen CFIUS is a small change in the protectionist direction.

The House version of the bill to strengthen CFIUS puts more stringent reviews on investments from China, North Korea, Iran, Russia, and Venezuela. Reviews aren’t as bad as blanket restrictions. Plus, investors think a group of professionals deciding on restrictions is better than the White House deciding on them. This tactic where the White House didn’t go as far as the market feared is either a grand plan to get the market to accept changes or simply the White House seeing what it can get away with and backing down when stocks fall. In other words, the White House is over promising and then under-delivering, playing the expectations game, or is trying to push as hard as it can without causing stocks to fall.

Major Reversal Possibly Because Of Rebalancing

The S&P 500 was up about 0.82% early in the trading session on this trade news, but then it had major reversal which caused it to close down 0.86%. From the peak of the day to the close S&P 500 fell 1.67%. The CNN Fear and Greed index is now at 36 which signals fear. This indicates investors should buy any further declines. The Russell 2000 was down 1.68% on the day and the Nasdaq was down 1.68%. Some market commentators are saying the market fell because of rebalancing which occurs at the end of the quarter. That probably doesn’t satisfy the bulls who were hopeful that the market could regain the losses from Monday since the negative catalyst investors feared ended up being less of an issue than expected.

Since rebalancing was blamed for the losses, it’s worth taking a close look at the sector performance breakdown. The most noteworthy aspect of the sector by sector performance is that the XLF, which is the financial sector ETF, has been down 13 straight days which is a new record. The sector was down 1.24% on Wednesday and is now down 6.13% since June 8th. The scariest aspect is that the ETF is down below the correction lows. This is the lowest price seen since November 2017. It’s a very bad signal for the financials to be rolling over like this. This reminds me of the 2015-2016 decline where the index fell 18.66%. It’s now down 12.63% from the peak.

Heading into today, over the past month, the top three performing sectors have been (in order) consumer staples, consumer discretionary, and utilities. We don’t want to see utilities and consumer staples leading the pack. However, that’s what occurred on Wednesday as the utilities were up 0.58% and the consumer staples were only down 0.26%.

The worst performing sector was technology which fell 1.45%. It seems like rebalancing should hurt tech because it has had a good year. You wouldn’t expect the financials to be hurt by rebalancing because they have been down so much. You would buy financials to get their percentage to a certain level in your portfolio. Finally, the energy sector was the best performer on the day as it was up 1.34%.

Treasuries, Oil, & The Dollar

As I mentioned in a previous article, the financial sector has recently been correlated with the yield curve. The point I made in that article was if the financials follow the curve for the next few months, the sector will be in a bear market quickly. As you can see from the chart below, the flattening in the curve has been relentless in the past few weeks. On Wednesday, the 10 year treasury fell 3.65 basis points. This brought it to 2.8401% which is the lowest level since May 29th. This declining yield makes sense since it was a risk off day. The 2 year yield fell 2.89 basis points, bringing it to 2.5040%. The latest difference between the two yields is 33 basis points. The banks are selling off because of the yield curve and fears economic growth will peak. I think the selling is wildly overdone although reaching a new record high this year will be difficult.

(Click on image to enlarge)

The energy sector was up the most because oil was up big. WTI was up 3.2% to $72.76. It hit its highest close since November 2014. We’re back at the point where we must watch for any weakness in the consumer because of higher gas prices and expect better industrial production reports along with higher earnings from the energy sector. The price of oil rose because U.S. commercial inventories fell by 9.9 million barrels when analysts only expected inventories to fall 2.6 million barrels. In a previous article, I mentioned how volatile oil is when making the point that you can’t say the risk is stable.

The dollar has increased sharply in the past two days as the index is now at $95.26 which is the highest point since July 2017. It has likely rallied because of the risk off trade in the past two days.

Conclusion

I was expecting a slight pull back when the S&P 500 broke the March high, but this has been sharper than I expected. Now the market is oversold and due for a bounce, especially considering the relatively good news on trade. It seems very likely that the effects of the tariffs will start showing up this summer which means the pressure to make a deal will mount. The difference between a deal with China being made and one not occurring is the difference between the S&P 500 rising 10% for the year and breaking even in my opinion.