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James Hyerczyk
Stock Market Uncertainty

The major U.S. equity indexes may have hit record highs again on Monday, but the pullback from those highs suggests the buying was a little tentative and perhaps, longs have started trimming positions amid mixed signals around the progress of the U.S.-China trade talks. Wall Street’s main indexes eased from record levels after a report stoked fears about a resolution to the trade dispute between the two economic powerhouses.

In the cash market on Monday, the benchmark S&P 500 Index settled at 3122.03, up 1.57 or +0.05%. The blue chip Dow Jones Industrial Average finished at 28036.22, up 31.33 or +0.12% and the technology-based NASDAQ Composite closed at 8549.94, up 9.11 or +0.11%.

Price Action Drivers

The week started with investors optimistic after Chinese state media said over the weekend the United States and China had held “constructive” trade talks, days after White House economic adviser Larry Kudlow said they were getting close to a trade deal.

However, after reaching record highs, the major averages failed to post significant gains after CNBC’s Eunice Yoon reported, citing a government source, that Chinese officials are pessimistic about the prospect of a U.S.-China trade deal. China is troubled by President Donald Trump saying recently the U.S. would not roll back tariffs as they thought both sides had agreed to do so in principle, Yoon reported.

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Are Investors Being Set-up for a Big Fall?

Optimists will tell you the U.S. stock market has shown remarkable resiliency. Pessimists will point out that the U.S. and China aren’t any closer to a trade deal than they were in May. Furthermore, corporate earnings have not improved and economic news has “weakened”. Additionally, how much of the rally has been fueled by “cheap money” after the Fed’s three rate cuts since July?

Ilya Feygin, senior strategist at WallachBeth Capital, noted stocks might be getting a boost thanks to investors’ fear or missing out on the current rally. That’s hardly a major reason to invest at record highs.

“The market has been driven in recent weeks by people getting back their S&P and Dow exposure,” he said. “We saw about $9.5 billion in net inflows into U.S. equity ETFs, and we’ve had a low of weeks like that lately. A lot of people were caught cautious and have been forced to put money to work at higher levels.”

Uncertainty Brewing

Have you noticed that positive news is always attached to a name such as Trump, Kudlow, Ross, Lighthizer, Mnuchin and Chinese Vice Premier Liu He. But negative comments, like last week’s “snag” and yesterday’s worries over the rollback of tariffs, come mostly from an “unnamed source”, or a “government source” or “people close to the negotiations.”

I don’t know what this means, but I do believe it’s enough to create uncertainty. And when there is uncertainty, investors take profits, trim positions, and basically start to sell.

Furthermore, the low level of volatility suggests investors have become complacent. And this usually precedes a steep break.

Quote of the Day

“This is a market that’s going to live or die by the tone around trade,” said Art Hogan, chief market strategist at National Securities in New York.

“There is some good news that’s baked into this market, so when we get bad news (it’s) going to roll over.”

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