There are times when the market closes lower but sends a clear buy signal – Friday was one of those sessions.  Major indices opened lower as the U.S. Trade Representative outlined the first tariff salvo against unfair China trade practices. 

Ironically, the market put in a bottom when news broke that China was issuing $50.0 billion in retaliatory tariffs on U.S. goods.   The Dow Jones Industrial Average, which has the greatest profit exposure from a prolonged trade skirmish with China, rebounded almost 200 points from the low of the session.

The Dow Jones Industrial Average continues to lag other equity indices, which reflects a stronger dollar, slowing global economic growth, and some trade anxiety. However, the companies in the Dow have been around for more than 100 years on average, and the vast majority will get back on track.

The technical buy signal came in at 25,335.  From there, I think we could see the index pick up momentum and race back to its all-time high.

The return of the consumer has been the big theme for the past several months, and it continues this week:

• Consumer Discretionary (XLY): +2.0
• Consumer Staples (XLP): +1.4%

Pricing Power

Earlier last week, we saw a monster retail sales report, followed by the June Consumer Sentiment number that came in much stronger than expected. Moreover, the survey saw a record number of households that now point to “recent income gains,” which means those long-awaited wage gains could be coming in strong.  Businesses are seeing this and have begun to raise prices. The ability to raise prices and not lose volume is a huge buy signal.

Remember when Netflix (NFLX) announced it was increasing its prices last October, and experts said the stock would suffer?  The shares are up 104% this year. Amazon’s (AMZN) new price increases went into effect last month, and the stock hasn’t missed a beat.  Also, Etsy Inc. (ETSY) shares, were up 28% last week after announcing price increases.

Meanwhile, value investors keep bidding up consumer staple names, where fundamental challenges remain. A lot of these stocks are cheap and pay hefty dividends. I’m looking for these trends to continue.  However, I’m working on a special update on three consumer names that I think have a major upside from here (available today).

Trade War

China is going to open their markets and curb the theft of intellectual property. That’s my call, and it was the call of the market on Friday. The key missed by all media is the way new U.S. tariffs are being phased in, which allows more negotiation and a greater sense of urgency.

The items covered under Section 301, aimed at China’s goal of technology dominance, are still under review.  All one has to do is understand the notion of cutting off a giant Chinese tech company from American computer chips, that sent it to the precipice of bankruptcy overnight. I’m sure China doesn’t want to risk what happened to ZTE Corporation happen to the rest of its tech sector.

What About the Farmers?

China continues to target soybeans, one of our largest export products, which impacts folks in Trump Country.  But there are serious problems with soybeans, milk, and orange juice as prices have declined for a long time.  I would like to see all this newfound concern by mass media and others to segue into solutions on how to turn those prices around.

Soybean Prices

• $17.58: Aug 2012
• $8.68: Feb 2018
• $10.78: Mar 2018

By inauguration, soybean prices were down 40% from an all-time high back in August 2012.

 

There wasn’t a lot of economic data out on Friday, and nothing that moved the market; however, three Federal Reserve Open Market Committee (FOMC) members gave speeches throughout the day (two after the close), that could impact trading today.

Today’s Session

The market is under pressure this morning with conventional wisdom suggesting it’s all about trade wars, but I’m not sure that’s the only reason for early morning pressure.  That being said, you know I like when rallies, even stealth rallies, are challenged.

Comments

D. Trump negotiations starts by manufacturing negotiation give away. Negotiation is a give and take, not having anything to give, you do not have the leverage to succeed. Unfortunately the anti-trump refuse to understand or are showing their inability to negotiate. Lots of the inability has been present for longtime by the so call diplomats. Talk is free. D. Trump does not produce hot air, the difference between a diplomate and a business man. PHILIPPE M LANDRAS on 6/18/2018 11:18:37 AM

Charles, ever notice when China retaliates, raises tariffs on USA goods, the Chinese mrkts are closed?? Hmm. Almost like they are shorting stocks, with announcements of tariffs, waiting for them to drop, then buying bargains cheaper, & when they (china) concede to Pres Trump, those same shorted mrkts take off with China owning cornering even more !! Coincidence?? Ed on 6/18/2018 2:38:02 PM

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