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With Tough Tariff Talk, Will Turbulence Clear Next Week?

03/02/2018 3:21 pm EST

Focus: MARKETS

Gene Inger

S&P, Technology, Economics & Geopolitical Analysis, IngerLetter.com

Going forward, it could enter a period of clear air turbulence, which means radar won’t show much ahead. And then you get a sudden downdraft which will be blamed on rates or any other backdrop pundits feel like citing. And that’s whether or not tariffs are imposed, says Gene Inger of The Inger Letter.

Combined catalyststhat constantly deflect both rallies and declines, are starting to wane, although there's no argument that these battle line skirmishes can persist for awhile until heavy turbulence returns. What we had on Thursday actually broke only the 100-day moving average, with an excessive focus on Trump and protectionism. 

chart 1

Do recall that is a reason he was elected: jobs and repatriation of work, manufacturing, and capital. Virtually all media freaked (even though the market was already declining for the last two days and heavily) and of course, the Street had an excuse to scapegoat Trump and tariffs.

That means that if the Dow Jones Industrial Average (DJI) drops another 500 points it might dissuade the president from implementing anything without negotiation (Art of the Deal after all) and you'd get a sharp rebound next week.

However, as the overall decline (third day down of 1000 points now for the Dow) has a genesis other than the president’s handy excuse they can pile-on, the ensuing rebound (if things go that way) would be another selling spot as well.

If the tariffs go ahead and get employed, well we’ll plunge lower as the market would eventually do anyway. It’s just a question of how fast. 

chart 2

At no time this year has there been much upside potential as at all times there have been lots of risks. In any event, the real kicker today was, of course, New York Fed President Bill Dudley talking of 4 rate hikes. Of course, that was completely ignored once the president spoke of tariffs.

So far the hits have been modest air-pockets (yes the 10% peak-trough S&P February projected break was moderate,  and the rebound within a defined proportional automatic rally outlined).

The point is that whether or not corrective actions are within the context of the forecast including the Spring rally effort (successful or not), turbulence will likely strike with a vengeance as time goes on.

And both the early February projected hit, and this week’s 1000 point Dow decline so far are not huge percentage drops. and tend to get rescued because of fund liquidity concerns.

chart 3

Going forward after a couple days, it could enter a period of clear air turbulence, which means radar won’t show much ahead. (Or if so most pundits will ignore signs that are already warning risks are the primary concern now, rather than upside opportunity.) And then again you get a sudden downdraft which will be blamed on rates or any other backdrop they feel like citing. And that’s whether or not tariffs are imposed. 

Powell’s Last Stand?

The Fed’s ability to enforce regulations is not compromised by views we hear from some who view Chairman Powell as surrounded by hostiles at the Little Big Horn, and likely to be pummeled no matter the Fed actions taken to do their job. Sure they waited too long to get-off so-called ultra-low emergency rate levels, and they have limited maneuvering room (just as Kaplan recently warned) should we get a premature slowdown.

chart 4

Those are really underlying issues in an extended market, where Street structural impediments to decline are starting to run out of steam. For instance, in the forecast roiling of the month just past, buyback efforts (active or announced) were unable to offset general liquidations.

Buybacks have been one of the catalysts to hold huge stocks up. That's the reason also why technology represents almost a quarter of entire value of the market while Apple (AAPL) alone represents 20% capitalization in the S&P 500 (SPX). Another catalyst has been the use of leverage, and we are not primarily referring to retail margin, but institutional heavy leverage in a sense to make their own game.

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