Mid-week market update: The stock market’s relief rally arrived this week when the
WSJ reported over the weekend that Trump’s “Liberation Day” reciprocal tariffs due to be announced on April 2 will be narrowly focused. The S&P 500 rallied to regain its 200 dma. The index pulled back below the 200 dma when
Bloomberg reported that “Trump Prepares Auto Tariff Announcement as Soon as Wednesday”, though the upside price gap from Monday remains unfilled.
Despite today’s downside reversal, recent trends are emerging that indicate a change in the tone of price action.
Bulls regain control
Notwithstanding today’s weakness, we can see the change in tone by the relative performance of defensive sectors, which all turned down when the S&P 500 turned up. This is a sign that the bulls have regained control of the tape.
Fund flows are supportive of higher stock prices in the short run. UBS projects that pension funds and target funds could buy as much as $105 billion in U.S. equities into quarter-end, which represents the second highest source of rebalancing demand in the UBS’ historical fund flows data.
For a historical perspective of the potential upside from the latest rebound, JPMorgan’s trading desk published a note indicating that the S&P 500 has seen three-month gains (7 of 7 times since 1950) following a 10% correction that happened within a month of all-time highs.
I pointed out last weekend that the rebound in price momentum was continuing in the U.S. market, but the jury was still out on the global momentum trade. The latest update confirms the rebound in momentum. The fast money crowd is reversing the stampede from U.S. tech into China tech, and U.S. financial sector into European financials (bottom two panels). This is further evidence of a rebound in risk appetite for U.S. equities.
Trade war risks
To be sure, the market reaction to the auto tariff announcement shows that trade war risks are still present. The trade war factor has been rising steadily into the April 2 announcement date.
A
MarketWatch report cited a number of reasons why Trump’s tariff bark may be worse than his bite. If the U.S. is targeting tariffs on a reciprocal basis, the gap in trade-weighted tariff levels (green bars) aren’t significantly between the U.S. and its major trading partners. However, a policy focus on the gap in average tariffs (blue bars), while higher, will be perceived as unfair and spark retaliation and a trade war.
MarketWatch also highlighted a report by Trade Alert showing that Trump may be losing leverage in trade negotiations: “The U.S. share of world imports has fallen to about 13.5% from 19.6% in 2000”. While the full loss of access to the U.S. market may seem catastrophic to many countries on a short-term basis, over 100 countries can fully recover by 2030.
That said, option trading desks are reporting little or no volatility premiums on and around the April 2 reciprocal tariff announcement date. This may be a sign of excess complacency going into the announcement.
My inner trader is holding his long position in the S&P 500. The usual disclaimers apply to my trading positions.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.
Disclosure: Long SPXL
