A Slowing China Is Old News to the Market

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Nothing, and I mean nothing, catches the market by surprise.

You must come to this understanding, if you want to trade markets successfully.

The news you read in the press is old news to the market.

When you see it once, then you’ll see it all the time.

If you want another example, just look at the earnings updates this week from Caterpillar and Nvidia.

Firstly to Caterpillar. Shares in heavy equipment maker plummeted Monday, when it reported its biggest miss in years.

Likewise, shares in Nvidia plunged on lowered revenue guidance.

Let’s bring up their respective weekly charts…

MoneyMorning 30-01-19

Source: Optuma

[Click to open in a new window]

Both charts have been trending down for months now. Both stocks were unlikely to post good fourth quarter earnings. You already knew this in advance. This is old news to the market.

And there’s a link between the two earnings reports. Both companies cut revenue forecasts based on slowing sales in China.

China is slowing. The weight of money was telling you that. You didn’t need to read some analysts report.

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A lot riding on the US–China trade talks later this week

That means there’s a lot riding on the US–China trade talks later this week. The talks this week are the first face-to-face discussions since the G20 summit in Buenos Aires in December. It’s the biggest thing for markets right now.

So we watch with interest, how events play out this week.

The major US indexes plunged on the poor earnings updates from both Caterpillar and Nvidia. You’d expect the market to tank on news of a slowing China.

Which it did.

But here’s the thing.

From a charting viewpoint, see how the market held up and closed strongly.

All the US indexes, the Dow and the S&P 500 closed strongly, but here’s the daily chart of the NASDAQ Composite index for example. Check it out:

MoneyMorning 30-01-19

Source: Optuma

[Click to open in a new window]

In spite of some really awful numbers from Caterpillar and Nvidia, the US market held reasonably strong. You might’ve expected the market to go into freefall over a slowing China.

It didn’t happen.

It suggests a couple of things.

We’ve already seen a large correction from late last year.

Where the market sits right now has already priced in a lot of the slowing China story.

It also suggests, the market is not looking at the news of today, but what the news might be three to six months from now.

Like I said, a lot riding on trade talks this week. The wildcard in all this, is a potential trade deal. What might that do for a slowing Chinese economy?

The market is optimistic

The market seems to be optimistic both parties can sit down and work out something. Even if it’s only to stop an escalation of tariffs, from 10% to 25%, set to go into effect March 2.

Stocks have reacted strongly from the lows around Christmas. The NASDAQ composite went up 16% from its low. That’s a huge gain in just over a month.

There’s a few things that point to Christmas being the low in markets.

Keep in mind the US economy is in reasonable shape.

Corporate earnings growth is the strongest it’s been since 2010.

US unemployment is the lowest it’s been in almost 50 years. In fact, the US job numbers from last month were massive.

The figure came in at 312,000 jobs added for the month. It was a blowout and smashed all the gloomy forecasts. The expected number was only for 176,000 jobs. Not only that, a total of 58,000 jobs were added to the prior months of October and November.

But there’s something else to highlight from last month’s report. Unemployment rose slightly.

That’s because of the high number of job leavers. These are people who quit their jobs and left their positions voluntarily. It suggests workers have confidence to quit a job and the conviction they’ll find a new better one just around the corner.

None of all that spells trouble in the year ahead. I’m not sure how some analysts can call an imminent collapse ahead. Not with this sort of jobs growth going on!

And despite all the clamour about stocks being overvalued, the P/E ratio of the S&P 500 is now trading near its historical average. If you look at the data going back just the last 30 years, shares are undervalued!

Despite the lousy results from Caterpillar and Nvidia, two heavyweights, the market held strong.

It suggests there might still be legs in this bull market yet.

A lot is riding on the resumption of trade talks this week, let’s wait and see what unfolds.

But don’t completely disregard the notion that stocks could go higher in 2019.


Terence Duffy,
Chartist, Phil Anderson’s Time Trader

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About Terence Duffy

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance,…

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