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Another tariff tantrum

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Just when we were saying that the news out of D.C. was quiet, we got another round of trade war bombs and stocks do what they do when we get them.... they fall. The Dow lost 220-points and I guess it could have been worse since that's about where the pre-open futures were pointing, so the loss was priced in early, and we traded near or above that level for most of the day.

Daily TSP Funds Return

Small caps have been the place to hide during these tariff tantrums but yesterday they went down with the ship, but realistically we saw losses of less than 1% across the board and that was on the tail of a 3% rally that preceded the decline. The exception yesterday were the Transportation stocks which were down 2%, but that was American Airlines earnings related and not a reaction to trade.

If investors were dismissing the trade war, or think it has been priced in already, this new 200-page list of tariffs that was released may be a wake up call going forward. If that is the case I would have expected stocks to fall more than they did yesterday, but I guess there's still time for that to happen if this actually sets in at the end of August and doesn't turn out to be just another scare tactic.

The semiconductors sectors one that has been reacting more negatively to this than other sectors, so the Philadelphia Semiconductor Index may be something to keep an eye on. It was down 2.6% yesterday.

Another thing that is being greatly impacted by the trade war is the price of copper which continues to go straight down.
This may be more of a concern with China's economy rather than the U.S., because their demand for copper if the trade war continues may be decreased.

We start to get some bank earnings by the end of the week and that could be interesting since Financial have tried to rally but have struggled. This may also have more to do with interest rates and yields than tariffs.

And, as earnings season kicks into higher gear in the weeks that follow, it will be tug-o-war between beats and rallies in some stocks versus sell-the-good-news reactions to others, and perhaps they will cancel each other out. Earnings should be good but of course individual company's guidance, which could be tariff driven, may be the main catalyst going forward.

The S&P 500 / C-fund pulled back yet again from that 2800 level but you can see that the lows have been getting higher along the way. A dip back to fill that open gap near 2765 would keep investors from having to look over their shoulder had we seen a breakout before it got filled. So, another dip today that fills that gap may be the technical move the bulls need to see before we see new highs again. The question is whether earnings season throws a wrench in that theory. Bottom line: 2700 must hold and eventually 2800 must break, or everything changes.

The small caps (S-fund) did fill their open gap yesterday after the pullback from the double top - which is normal. Pullbacks from double tops don't have to be extreme, although they can be. We just expect some profit taking when stocks hit levels that were hit before, then failed. Investors like the feeling of being able to sell at the highs, where they missed the first time. But once that's done, the buying tends to resume.

The Dow Transportation Index has now given back all of Monday's big gains but as I mentioned, it wasn't really tariff related, but rather earnings related as airlines stocks started to guide lower on higher oil prices.

The Financials pulled back again but they were relatively stronger than the other indices and held at the 200-day EMA, which seems to be a very important levels as bank earnings start to roll in this week.

The EAFE Index (I-fund) took it on the chin as the dollar rallied sharply and the tariff talk continues to put pressure on the overseas markets. It closed back below the 200-day EMA. Not good.

The German DAX failed at the 50 and 200-day EMAs and being one of the more important economies in Europe, this is troubling for the I-fund.

The AGG (Bonds / F-fund) ticked up a bit but not as much as we might expect with stocks down heavily. Overhead resistance and open gaps below make me think that bonds will eventually head down again, but I've been wrong here before.

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Thanks for reading. We'll see you back here tomorrow.

Tom Crowley

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