Weekend Strategy Review June 17, 2018
Posted by OMS at June 17th, 2018
The markets finished the week on the downside. The Dow was down over 280 points early Friday after the government announced that the U.S. will impose a 25 percent tariff on 818 Chinese imports worth about $34 billion. In response, the Chinese State Council’s commission on tariffs and customs said it would place a 25 percent tariff on agriculture products, automobiles and ‘aquatic products’ (fish?). The tariffs will take effect on 6 July. So, just when it appeared that everything in the markets was going great, we now have a developing trade war with China. Great!
Late in the day, the Dow rallied to recover all but 85 points of its loses, closing at 25,090. It was down 101 points for the week. The technology laden NASDAQ finished down 15 points on Friday, but up 101 points for the week.
Friday’s decline turned the DMI on the Dow negative. It also took my VTI-volume indicator out of the Trend Mode and turned the volume portion of the indicator negative. So overall, the indicator is neural. The same indicator on the NASDAQ remains positive and in the Trend Mode.
From a pattern perspective, it still appears that the markets are entering a corrective stage. The pullback is likely either wave 2 down within Wave 3 up or Wave 2 down within Major Wave 5 up. Either way, the markets should resume their rally once the correction completes. I continue to view any pullback as a buying opportunity. BTW, 6 July is still several weeks away, so hopefully, cooler heads will prevail, and something will be worked out with China to keep the tariffs on both sides from being implemented. We don’t need a trade war with a country that buys the Treasury Bonds we print to run our government. Social Security, Medicare, and our military all depend on the continuing sale of U.S. Treasury Bonds. There is no separate ‘Social Security’ fund or Medicare pot. These massive programs, just like all government programs, are funded by income taxes and the new money generated from the sale of Treasury Bonds. Without them, the current U.S. deficit, which rose 66 percent in May to $147 Billion, will skyrocket even higher. It’s one of the reasons I’m long term bullish on gold.
But getting back to China, the President has stated the reason he is imposing the tariffs is to reduce the size of the trade deficit with China from an estimated $370 billion to $200 billion by 2020. On the surface, this appears to be a worthy goal. But the $370 Billion deficit is not what it appears. That’s because it does not account for value-added. When the value-added content of Chinese exports is considered, the U.S. deficit with China is only about $185 Billion. To give you an example of how misleading and complicated this trade deficit issue is, just consider Apple’s iPhone. When China exports the iPhone, it must count the full $500 price towards its trade with the U.S. But China only adds about $15 to $30 to the iPhones value. Most of the phone is made by Samsung in Korea (about $150). The rest is made by Apple in the U.S. So, you can immediately see that the trade deficit numbers are distorted by the ‘rules’ on how exports are counted. They’re stupid, out of date, and DO NOT reflect the actual trade deficits. With the November elections right around the corner, it makes me wonder if all the noise over the deficits is more political posturing than anything else. And if it’s just political posturing, hopefully this will all go away in a few weeks and we can get on with the next phase of the Wave 5 up rally.
The reason I’m still thinking ‘rally’ is because after Friday’s decline, the Sector Ratio INCREASD to 21-3 positive. Clearly the Sector Ratio is NOT seeing a trade war.
The Strong Sector List continues to be led Healthcare, Consumer Products, Retail, Computers, FoodDrugs, Media, and Semiconductors. The Weakest Sectors are Household Products, Leisure, and CapGoods. With most of the major indexes still in the Up-Trend Mode, I continue to look for opportunities to Buy and HOLD stocks and ETFs in the strongest sectors. As long as the Sector Ratio maintains its positive bias, Buying and HOLDING stocks continues to be my primary strategy.
Gold and the miners took a big hit on Friday. GLD finished down 2.04 points at 121.34. My combination VTI-volume indicator, which had just turned positive on Thursday, reversed on Friday and is back on a neutral signal. The pullback in gold also bounced UDN from the Dean’s List and caused UUP to appear. So, with the Dollar (UUP) showing strength again, it appears that the potential rally in gold that was looking so good on the charts will have to wait for the trade issue to be resolved. BTW, the VTI-volume indicator on silver (SLV) also moved back to a neutral signal.
Have a great weekend.
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