Temporary Insanity Or Reasonable Response?

US equities put in an excellent performance with all key US benchmarks up nicely with the shortened week.  The Dow Industrials (INDU) ended up +1% while both growth and small cap stocks led by NASDAQ 100 (QQQ) the Russell 2000 (IWM) were each up over +2.5 % for the week.

The huge question is whether the big rally in global equites this week was out of step with the looming trade war? Maybe. To borrow a quote from John Maynard Keynes “The market can remain irrational longer than you can remain solvent” which sheds appropriate light on the matter. If indeed the trade war breaks out and escalates, corporate earnings and global equities will certainly get hit.

Currently market valuations are already very rich (forward looking PE just under 17 in the US). The other key thing to note is that the companies that are expected to drive the  majority of future growth are exactly the ones that rely most on global trade and are highly sensitive to tariffs. Hence, the only conclusion is either the market is currently irrational, or the trade war won’t happen.

Summary

  • The first salvos in the tariffs/trade war are hitting Chinese equities the hardest ( -9.7% over past 3 months, compared to the S&P500 which is up +4.48%)
  • Risk On indicators gained ground this week
  • Market internals improved along with sentiment as volatility dropped by breaking down under key moving averages
  • Big cap Dow stocks that are most sensitive to a trade war remain under pressure
  • Semiconductors improved phase
  • Speculative Biotech plays are coming alive, which is positive for the overall market
  • Some institutional buying showed up this week for US equities
  • Russia and Mexico (highlighted here last week) both roared
  • Also noteworthy is the outperformance of the Israeli stock market when measured over the past 3 months (+ 7.96%) which was the strongest of all the country ETF’s

Considering the markets propensity for irrational exuberance or temporary insanity, the ability to read the tape and stay flexible is even more critical with the Geo-Political world order shifting rapidly.

Good Trading!