Get Your Bear Suit on

Don’t you love how the narrative changes from month to month?

Back in the good old days…way back in January 2018, it was all about Trump’s tax cuts and the wonderful effect this would have on stock prices and the US economy.

But now, it’s all about trade wars. The market’s daily moves depend on Trump’s tweets about his trade stance, or on the response to that stance by China’s boss, Xi Jinping.

Yesterday, the Aussie market rallied strongly (as did US stocks overnight) thanks to conciliatory remarks on trade from China’s lifelong President/Dictator Xi, at the Boao Forum in Southern China.

From the Financial Review:

China’s president Xi Jinping has sought to defuse trade tensions with the United States by promising to lower import tariffs on vehicles, strengthen intellectual property protection and relax foreign ownership restrictions.

Unveiling a four-point plan he said would usher in the next phase of China’s “opening-up”, Mr Xi promised China would make good on previous commitments to modernise its economic system, broaden market access and increase imports.

However, many of the policy measures aimed at relaxing China’s tough foreign investment rules and encouraging more imports were flagged last year and did not contain a lot of new detail.

In other words, the speech contained no new information. China is saying one thing and doing another. Whatever reforms it decides to undertake, it will do on a timeframe that causes the least amount of disruption to its domestic economy and, most importantly, employment.

Above all else, a communist dictatorship needs social stability. Without it, everything else goes out the window. So to the extent that Xi will work with Trump, he will do so with the overriding objective of maintaining social stability and empowering China first, and appeasing the US second.

Political skill will be paramount here though. Trump has the ability to hurt China through the imposition of Tariffs. That could impact employment and undermine social stability. 

Of course, this would hurt the US too via retaliatory tariffs and reduced financial system liquidity. But a democracy such as the US is more resilient than China’s political structure, notwithstanding the fact that Trump has an eye on re-election and Xi doesn’t.

So expect the politics of trade to continue to ebb and flow. The market will react to the headlines first (as it did yesterday) and then absorb the political reality of the situation later.

And the political reality is that you have two economic giants wanting different outcomes from their trade relationship. Up until now, the US has been ok with trade abuses. As manager of the global reserve currency, the US has the advantage of its trade deficits getting recycled back into the economy. It’s what allows the US government to run a trillion dollar deficit at the end of the cycle, without being disciplined by higher interest rates.

Over the years, this has contributed to the financialisation of the US economy, and, in Trump’s eyes, the loss of a huge chunk of manufacturing employment. Now, he sees China stealing US technology and intellectual capital and wants to put a stop to it.

All this is to say that this trade war will continue for some time. It’s the theme of 2018. Trump and Xi will smile for the cameras, but it’s important that you watch what they do, and pay much less attention to what they say.

Most importantly, keep an eye on the underlying market trend. Given the Dow Jones Industrials is full of internationally exposed stocks, it makes sense to keep an eye on that as the bellwether stock index for trade war analysis.

What’s it saying right now?

The chart of the Dow, below, isn’t cause for optimism. After making a low in February, the Dow rebounded, before falling again. The index made a new low in March and is not attempting to rebound again. However, the moving averages (which are an indication of the medium term trend) are starting to turn down. It will be interesting to see if they act as a barrier to stocks advancing further from here.

The other thing to note is that the Dow is making ‘lower lows’ and ‘lower highs’, which is an indication of a downward trend.

The Dow is making ‘lower lows’ and ‘lower highs’, which is an indication of a downward trend. 11-04-2018 Source: BigCharts
[Click to enlarge]

In other words, the Dow could well be in the process of transitioning from a bull to a bear market. This process could still take months to play out, but the evidence so far is that this is what is unfolding.

So take the headlines over the ongoing trade biffo with a grain of salt. Instead, watch the underlying trend of the market. It tells you all you need to know. And right now, the Dow is telling you to get your bear suit on.


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

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