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Wednesday, July 11, 2018

Market Alert - The Close

After four sessions of starting higher and moving higher, the indices took another tack. The Tuesday evening announcement of $200B more in proposed tariffs started stocks lower. Some indices moved lower from the start, some recovered some of the lost ground. None closed positive.

SP500 -19.82, -0.71%
NASDAQ -42.59, -0.55%
DJ30 -219.21, -0.88%
SP400 -0.83%
RUTX -0.71%
SOX -2.59%

VOLUME: NYSE -1.5%, NASDAQ +1.75%. No major selling and NASDAQ did rise off the session lows on its miniscule volume rise.

ADVANCE/DECLINE: NYSE -2.5:1, NASDAQ -1.9:1. Nothing that major here.

Technically the situation is this: NASDAQ, RUTX, SP400 have tested the prior highs. They made somewhat lengthy uninterrupted moves to get there. They are now fading off the move to those prior highs to test. This test reveals either 1) a test of near support where they reload to try for a breakout move, or 2) a double top formed and these indices are going to sell deeper than near support.

You could even throw SP500 in that group as it has reached the March peak and the June peak and is fading back from that level as well, also after a week of upside.

DJ30 was down but not hard. It gapped lower and sold to the 50 day MA's, but volume remained well below average, and this is a good test point after four straight upside sessions. Not bad. Still like our DIA calls.

SOX is having more of a struggle. After gapping over the 50 day MA's Tuesday, SOX gapped below them Wednesday. It is out there on its own right now, and afterhours AVGO announced an acquisition of CA and was down 20 clicks; that won't help SOX Thursday.


Trade: The US is proposing 10% tariffs on $200B worth of Chinese exports to the US with the possibility of a full $500B of goods being subject to tariffs. What did China expect? It met the US initial tariffs with 'instant' tariffs of its own and then tried to get the EU to form an alliance against the US, all the while denying it steals IP from US companies through its 'partnerships' as well as outright theft from cyber hacks and attacks. It was one of those 'wait for it' moments after China responded to the US the way it did.

PPI: 3.2% year/year, the highest since November 2011.

Some serious price increases. With a GDP last at 2%, even if it is 4% Q2, this is not the right direction. Supply should alleviate pricing pressures. If that is not happening, then supply needs more freedom to meet demand. That is the only way to avoid price increases. A massive recession can do that as well, but the first action in a recession is price increases as supply collapses.

Yield Curve: how does it fit in?

NOW, consider the yield curve, the 2% Q1 growth, and the producer price surge. Could this be an indication that, despite the 'great economy' the Fed talks about, that a recession is grumbling around? I know, sounds crazy, but I am simply looking at what is happening and positing possibilities.

NATO News: At what was supposed to be a casual early meeting of NATO members, President Trump called out Germany for buying a large percentage of its natural gas from Russia, enriching Russia by billions while seeking the help of NATO for protection against Russia. Trump went on to state that Germany was 'captive to Russia' as a result.

And there was more. Trump noted that while Germany pays billions to Russia for gas, the US was losing billions in its trade with Germany and EU allies -- where is the equity in a situation where Germany wants the US to help protect it from Russia while Germany pays Russia billions for Germany's energy and at the same time sticks the US with large tariffs on US goods yet howls when the US threatens to treat Germany in a similar manner of Germany won't agree to NO tariffs?

The irony dripped off the words. Of course, the powers that be, the media, etc. self-flagellated over these words, unable to believe their ears that the US President could use such pedestrian language. The nerve. Actually putting into simple words the truth. We need nuance, winks, nods -- and of course, nothing being done.

As a personal observation, how can Germany and the EU complain about US overtures to Russia given this situation? There is an old saying in the law about coming to the table with unclean hands. In other words, you cannot come to court and ask that the other side act with probity if you have not acted with such yourself.

We picked up some ATVI and HUYA as they made very good moves in a weak market. Took some gain on CRM per the plan, letting half continue higher. ISRG hit the initial target but it is showing good volume and we are letting it ride a bit higher on this good volume before we pull the trigger on some gain.

The trade issues are always on the horizon and as shown the past week, even when a 'crisis' comes as with the Friday institution of tariffs and 'instant' responses with no resulting earthquake and the market breaths a sigh of relief, the bad news can come right back and whack the market as on Wednesday.

Even so, some stocks worked very well. ATVI, HUYA as noted. CRM, V, DIS, MYGN, VRSN. It was not a storm of downside only. Moreover, many stocks that were lower are putting in good tests: TREX, TTWO, UIS, ROKU, FB, NFLX. It was not all dead weight pulling the indices lower.

Once again, however, the indices have to show they can make the moves, and frankly that is normal action. As discussed, the leaders hit the prior highs after good runs of a week or more and are now testing that move. They will either hold at or around near support and rebound to try a breakout or they will sell further. With the still solid leaders we see, they definitely can make the move. Of course there is the Fed, and there is trade, and there is summer . . .

Have a great evening!
Jon Johnson, Chief Market Strategist

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