The Market Is Playing Defense Against Trump’s Trade Disputes

On Friday afternoon, news of talks with China about resolving the trade standoff pushed the SPY, DIA and IWM higher, but does this mean you should be bullish?

Will it change this trend?…

Early this year it became clear that President Trump wanted to negotiate with China on trade in a new way.

The markets did not approve, but most traders probably didn’t notice how negatively the market reacted then and continues to react now to “trade disputes.”

The stock market sold off in part because of a fear of trade wars in February and in June.

However, the more interesting market action is what followed these declines.

Below you will see charts that illuminate the mood of the market by looking at which areas of the market have recovered the strongest from the June and April sell-offs.

The charts represent the ‘cyclical’ sectors that would be considered to be favored in an environment of continued economic growth versus the average performance of ‘defensive’ sectors.

For more perspective, the S&P 500 (SPY) ETF and the average performance of bank and technology ETFs.

The sectors ETFs that are represented in the chart are as follows:
Cyclical: XLY, XLE, XLI, XLB
Defensive: XLP, XLV, XLU
Financial: XLF, KRE
Technology: SMH, XLK

As you can see in the chart below, since February defensive sectors have out-performed cyclical sectors.

Since June the bias toward defensive has become even more pronounced. As you can see in the chart below, defensive sectors have also out-performed the market-leading tech sectors!

This doesn’t have to suggest that the end of the bull market is near. Keep in mind the bulls are still buying.

However, one bearish implication would be that should the market begin a more substantial decline, the nervous bulls may be less inclined to buy the dip as they have in the past.

On the other hand, one bullish implication would be that if trade dispute tensions get resolved, there could be a bullish rotation out of these defensive sectors and into sectors that have a better chance of creating trends that are more likely to attract new money into the old bull market.