Tactical Trading Position

When I see these types of tweets, I scratch my head. If the process of tariffs is to inflict enough discomfort to the global economic system to bring China to the negotiating table to address the issues of intellectual property theft and true fair-trading practices (i.e. addressing dumping, government subsidies, open markets etc.) then I suppose we can tolerate the uncertainty. If the objective is to resolve these underlying issues with the ultimate goal of freer and fairer trade, then the ends will probably justify the means.

But when I read this, I can’t help but get the feeling that our trade policy actions have moved beyond a negotiating tactic and into actual fiscal policy. To think that the US will be better off with tariffs in place and that we will somehow get rich from it and create jobs is reckless.

Then take his comments prior to leaving for Buenos Aires and the G20 summit, “Then, just before taking off for Argentina, President Trump told reporters at the White House that while China was interested in striking a deal, "I don't know if I want to do it" and "I like the deal we have now".” – BBC News.

Huh?

Surely, he and his advisors can’t truly believe this is prudent policy, right? We have made our concerns apparent in previous writings (see Thoughts on Trade Policy) and have little historical evidence that this gambit, if initiated as our new trade policy, will have its desired effect.

Let’s just hope this is another part of his “negotiating” process. Perhaps he wants other world leaders to read this and scratch their heads.

As of Friday morning, the market has been holding up well since the rally earlier in the week and there seems to be a few positive talking points being leaked from the summit.

Tactical Trading Stance

We are data-dependent at this point as how we are going to approach our investment thesis for 2019. That said, we are taking a purely tactical trading stance into year-end to protect our gains for the year and possibly participate in a year-end rally. We have raised cash ahead of the G20 Summit. Should any bit of progress be made over the weekend we believe it could act as a catalyst to jump start the Santa Claus rally of 2018. We’ll position ourselves should that happen. As of now the situation is too binary for us to commit to additional equity exposure.

We are seeing some encouraging signals technically to support a rally from here. The encouraging signals are in the form of bullish divergences everywhere. This was something similar to what we saw in the beginning of 2016 in what turned out to be a good call (see Rally Time...Stocks go higher for the remainder of 1Q16).

We noted the many bullish divergences in the piece written on February 16, 2016. Here is the chart that we referenced back then and the S&P 500 went on to rally nearly 15% over the next few months.

This is what we’re seeing currently. Bullish divergences everywhere.

We’ll see what happens over the weekend.

Joseph S. Kalinowski, CFA