Caveat emptor! 

Caveat emptor!   Traders took a cue from Asian and European markets yesterday and started the session with an eye to the sky.  With earnings season beginning this week investors put aside trade war fears to contemplate what is expected to be another positive quarter of earnings.  As I have espoused on many occasions, the short term market outlook is still quite positive and markets would be higher were it not for the ongoing trade war and yesterday’s price action supports that thesis.  The shining stars are the small caps, principally represented on the Russell 2000 Index, which have really been  pulling their larger cap cousins out of the funk of the last three months.  The Russell 2000 fell just short of closing on its all time high and resistance of 1708 yesterday, which remains its short term objective (see chart 7 in my chartbook). Recall that small cap stocks are somewhat insulated from geopolitical and trade risk making them an ideal investment relative to larger, globally oriented companies and investors have been favoring them given the political and trade environment of recent months.  The S&P500 put in a positive session yesterday closing right around its high of the session and above its key Fibonacci resistance line at 2773 (see chart 4 in my chartbook).  The S&P500 chart is currently in a constructive setup with positive mid term momentum and momentum trend (orange line in bottom panel is mid term momentum and blue line is the momentum trend).  The S&P will gun for a close above a strong resistance point of 2791 and will be driven by the large cap growth heavies that dominate the index (blue horizontal lines on top panel).  The Dow Jones Industrial Average had a strong session closing just below its daily high placing it in a very positive position above its 24560 Fibonacci line, which will now serve as support (see chart 6 in my chartbook).  Though yesterday’s close was positive from a technical perspective, the Dow needs to cover some more ground before it can be labeled as constructive.  The Dow Jones Industrials have little if any insulation from global trade issues and geopolitical risk and its success (or failure) will be impacted by the upcoming earnings season.  The dollar has been under continued pressure helping to put a bid under many commodities further helping equity markets in their quest for new highs.  Bond yields and the VIX index suggest that traders are in a wait-and-see pattern, which is typical for the start of earnings season.  Now for the caveat.

Despite recently positive moves in equities it is important to remain focused on the mid and longer-term prospects for the economy and, ultimately, investments.  You may remember Henry Clay from your high school history class.  If you don’t, I will remind you.  He was a congressman and senator in the mid 1800’s and is best known, or remembered for his contribution to the American System, which was an economic movement designed to strengthen the country in a time of chaos and discord.  After the war of 1812, Britain flooded US markets with cheaper goods causing prices of domestically produced goods to drop precipitously.  It was a time in US history where the country was divided not only by political differences, but also economic.  The South and West of the US were dominated by agriculture and were reliant on not only domestic consumption of their commodities but also on their export.  The South also relied heavily on imported industrial products.  The North was an emerging industrial region which was largely driven by factory production and cheap imports were impeding success.  Clay and his cohorts believed and advocated for an American System, which advocated for an American-only policy levying high tariffs on imports and investing in an American banking system designed to facilitate investment throughout the country.  The plan initially called for 25%  tariffs (passed in 1816) on foreign commodities and ultimately resulted in what would be remembered as the Tariff of Abominations (passed in 1824), which would increase tariffs to as much as 50% on some imports.  Even though the tariffs were passed to protect the nation, they were ultimately a failure as they served to further split the nation.  The South was strongly opposed to the tariffs as their reliance on imported industrial products caused growers’ costs to increase.  If you remember basic economics (and my stories about beer cans, Harley Davidsons, and Toyota Camrys), rational companies will increase prices if their costs go up and that is precisely what happened.  Putting that little history lesson in perspective, the American System was an early day America first policy designed to make America great.  It came at a time when the US was growing and had not even begun to tap into her resources both natural and industrial.  Today our domestic economy is highly reliant on global trade which enables it to continue to expand by taking advantage of resources found all over the globe.  One of the cornerstones of US economic growth and prosperity in the 20th century through today remains free trade.  Free trade enables domestic consumers to enjoy affordable goods and as we have learned from the past tariffs will only cause prices to go up.  With the first wave of tariffs and counter-tariffs taking effect this week we cannot expect to see any real impacts yet.  However the effects will come, and when they do they will impact corporate earnings and ultimately stock prices.  So, while, earnings are expected to grow at a respective 20% year-over-year we must remember that these are pre-trade war results.  So as equity markets make new highs late in this current economic expansion cycle we must take note that while short run markets may have some sizzle left, the mid and longer term markets will look quite different.  Now is not the time to jump on the all-equity-pedal-to-the-metal band wagon but rather to focus on investments that will be insulated from trade issues and ultimately economic contraction.  So whether you are a fan of history or not, the prescription going forward is to stay focused and diversify.  Please call me if you have any questions.

daily cheat rag 2018-07-10