From both a technical and a fundamental perspective, the stock market looks poised right now to break one way or the other. The short-term moves are being driven by headlines about trade, but the longer-term trends are being set by something else. Investors will learn a lot more about that something else over the next couple of days, but only if they can tear themselves away from the headlines.
I have said in the past that in the long run it pays to focus more on charts and data than words and tweets, and that is especially true this week.
The weekend was spent celebrating the fact that a deal has been reached that will avoid the imposition of a new round of tariffs on Mexico. Then, this morning, we hear of a “secret provision” in the deal that once again raises the specter of import taxes on the Southern border.
That demonstrates the futility of trying to trade based on the news, and forces you to look elsewhere for clues.
Let’s start with price action. The chart suggests that a decisive move is imminent, even if it doesn’t really tell us in what direction. The S&P 500 is where it was at the end of August last year, having tried to break out to the topside and hit new highs a couple of times, and just as often having looked for a while as if it was going to collapse.
The most recent recovery took us back above the high of the last bounce nearly a month ago, breaking what was starting to look like an emerging downward Elliott Wave pattern. So, if we are at a neutral point right now, which is the most likely direction for the next move?
Over the last few weeks, we have learned that no matter what is being said by politicians, the main driver of stocks is going to be what the Fed does next about interest rates. Traders have been prepared to ignore the Mexico threats and push the market higher, based on some dovish words from FOMC members that not only make further rate hikes less likely, but even make a cut look possible. Even a weak jobs number on Friday caused a strong rally, based on the assumption that weakness in the U.S. economy would prompt such a cut.
We should not forget, however, that that is only possible if inflationary pressure remains weak, so the PPI and CPI data that will be released on Tuesday and Wednesday respectively should be the main focus this week. If they show that the tariffs already in place are putting upward pressure on prices, a rate cut at this month’s FOMC meeting is much more likely and the stock market will push to new highs.
As ridiculous as it seems that the threat of a recession and/or evidence of inflation may drive stocks higher, it is a sign of the times in which we live. A decade of ultra-low interest rates has shown that they can be an effective tool for stimulating the economy and that in the current environment that can be achieved without causing runaway inflation. It is debatable whether that can be the case forever, but for now, bad economic news will be seen as good for the market and Tuesday and Wednesday could bring that news.