The 15th episode of my weekly podcast show where I discuss what is happening in investment markets and what to look out for. Each show lasts between 10-15 minutes and is aimed at DIY investors (including novices) seeking contemporary analysis to help them understand how investment markets work. This week I also explain how Donald Trump is controlling the stock market.
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Transcript - Episode 15 of Damien's Midweek Markets
Hello and welcome to this week's episode of Damien's midweek markets which is the show where I talk about what's been going on in the investment market and what might happen in the coming week or so.
This week has been pretty exciting. The market was calm for a while, so if you look at the VIX (the fear gauge of the market), you can see that it was unusually low and had been subdued down below that level of 12 to 13. If you remember, I always talk about 15 being the figure to keep an eye on because if it's above 15 then it's normally a negative for stocks. If it remains below 15 it is positive for stocks.
As it was so calm we had the Fed backtracking, going dovish and getting back in the market and the earnings season was largely positive. I did talk last week about the potential outcome of a double top, that wasn't to say it would happen, but this week the market has pulled back more so than it has done in recent weeks and we actually had the worst day since the start of the year, where we had this incredible rally in stock markets.
I was only recently talking about the possibility of a double top and I'm not saying we've got one but the markets have pulled back and we are seeing quite a lot of red screens on a lot of the indices. So what happened? Well, Donald Trump happened! Donald Trump tweeted on Sunday that the trade deal with China had hit a roadblock. He took to Twitter, writing about the Chinese, which caused alarm, as everybody had priced in the fact we were going to have a trade truce.
A lot of this rally has been about the Fed and central bank's being particularly accommodative and having the markets back, but another major part of course was the assumption that
America and China would have a trade truce very soon and even a signing ceremony. A lot of that has come from Donald Trump and his advisors because they've been spouting off on social
media saying that a trade deal was very close, it turns out however that it probably isn't and things are a lot worse than they have been.
This week we've seesawed between Donald Trump accusing the Chinese government and authorities of backtracking and China have done the same with Donald Trump all of which means that it looks like we're further from a trade truce than perhaps we ever have been.
So why did Donald Trump do this? Given the market has pulled back and any mention on twitter would perhaps always be a negative thing, you have to wonder why he did it. One school of thought is that he did it to try and strengthen his own hand, so if you're going to walk away from a talk then in some ways, that might actually strengthen your hand. The Chinese, whose economy has been suffering as a result of some of these trade tariffs might actually be more inclined to try and keep things going, but the other school of thought is that if you look back at Donald Trump, he has a tendency to start going on the offensive when markets are high.
You can see that we hit an all-time high last week, meaning markets are buoyant; what better
time to unleash a tweet or a tirade on the Chinese and to be aggressive in the trade talks to get a better deal than when the markets high. He knows the markets are going to be pulled back. If we go back to 2018, just after Donald Trump announced all of the tax cuts and the market was
rallying, he got aggressive again on trade and we had a pullback in markets.
Then at the end of 2018 when the market was weak, we saw Donald Trump extend the hand of friendship towards the Chinese and we had that meeting where it looked like we were going to have a final truce by the end of March / April (which hasn't actually happened). Now the markets are higher again, Donald Trump knows that the market is going to pull back, and so what better time to get tough on trade.
Next year, Donald Trump is hoping to be re-elected and so he will need not only the economy to be strong but also stock market, as even though the stock market isn't a direct measure of the economy if people are feeling good, they are more likely to re-elect him. So one theory is that from Trump's point of view, now is the ideal time, another theory is that Donald Trump has just completely lost the plot.
So are we at a double top? Is the market going to keep pulling back? It is too early to say, but last week I talked about key levels on the S&P 500; one of them was 2,890 and when we pulled back initially, the first couple of days we saw a pretty significant pullback from what we've seen in recent months. It was over 1% at one point when the futures started trading on Monday morning (after Trump had made those tweets), but the stock market, when it went live on Monday actually filled a lot of that gap and it showed a lot of resilience. If anything, it was quite a bullish sign because even though Donald Trump seemed to be pulling the plug on the market, the market was still rebounding. Buy the dip worked again.
As the week has gone on and it seems more likely that Donald Trump was going to actually impose tariffs on Friday, the market has become a little bit more concerned and we slowly ground down. It has not been a crazy sell-off, but we've started to break down below that key 2,890 level, which is the level at which people start to question the uptrend in stock markets.
We're still in an uptrend at the moment, but keep watching. The next touching point is the 50 day moving average, which is around about 2,850 / 2,860, if we break through that then we could be heading towards 2,800, below that we're looking at around 2,780 where we're getting towards the 200 day moving average. If the market falls down through those levels, that would be a negative sign, but conversely if we start to pick up again and we head towards new all-time highs again, that would be a bullish sign. We could see figures getting up through the 2,950 / 2,960 level and then even heading towards 3000.
So, it's too early to say what the market is going to do and it is a case of sit back, watch and wait to see what happens because there is a lot of volatility right now. If you look at other markets; I talked recently about the German DAX and how that's been a kind of a clue, it's been a market that has confirmed the bullish nature of stocks generally because of the correlation we've had historically between the DAX and the US stock market. We have seen that it has started to pull back quite significantly and it is back towards that 12,000 level, so keep an eye on that. If we break below 12,000, it's not a positive sign.
So everything was awesome, but like all things in investing you've got to keep an eye on the flip side of any narrative that's out there; the consensus. There is always a likelihood that we could have the down side, even if it was unlikely in itself and the least likely outcome. The other issue that we might have and perhaps something that people may not have been paying attention to are the IPOs that are happening.
'Beyond Meat' is a company that did an IPO in America and they provide meat-free products . They had an IPO last week, and when they launched on the stock market, the stock price doubled in one day. If that doesn't sound like a market with a lot of froth in it and we're in the last stages of a bull market, then I'm not sure what does. It doesn't confirm that we are, but it does add to that sense that we could be nearer topping markets and it's just another one of those things to bear in mind. The other IPO to be aware of is Uber who are listing on the stock market on Friday and it is such a big event that it's one to watch. In itself, it is almost like a risk event, because just like when we had the dot-com era's and other similar times, at stock market highs, when you get that together with exuberance in stocks and new stocks, it can be a little bit worrisome.
So at the moment, we've got Trump kicking off; that's the big event that everyone's looking at and wondering what is going to happen with the trade war. Also keep in mind however and keep an eye on what happens with these IPOs because if they're successful, that could be good; if they're not, then it may zap investor enthusiasm.
So that is it for this week, don't forget to look at the 50k investment portfolio that I run on my 80 20 Investor service. At the moment I'm quite defensive, so this pullback has been very good because in relative terms, I'm outperforming. If you follow a process the key thing is not to get carried away by headlines. Don't forget, you can get a free trial if you sign up at 80 20 Investor. As always, you can email me with any questions and my email address is [email protected]. You can follow us on Instagram and of course on Twitter via the links below.
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