Sell Signal

Posted By Darren Winters on May 28, 2019


Sell Signal

The “sell signal” could strengthen and if so that would make the risk off trade the play going forward.

The threshold point where risk assets are under pressure for long enough to trigger an algo sell signal could soon be approaching

Capital flows into defensive positions could be the next win trade, central bank permitting.

Stock prices are meandering around resistance price levels but with fundamentals flashing red the sell signal is becoming stronger

Sell signal

The bearish reality might not have been factored into stock prices.

US-China trade negotiations have hit a brick wall with no trade deal now being the sober reality.

The mother of all trade wars is now deadhead with the two great economic powers inflicting tit for tat trade sanctions, tariffs, and quotas on each other’s economy.

It’s a trade war the Trump administration believes it can win, the battleground is target rich and the US is fighting on upper ground. US goods exports to China in 2018 were $120.3 billion, down 7.4%. Meanwhile, US imports from China totaled $539.5 billion in 2018 up 59.7% from 2008.

Put simply, the US can inflict more collateral damage to China’s economy than vice versa.

So the first to blink is likely to be China. But there is a big unknown in all this.

Will China capitulate to US trade terms of the all or nothing deal, or will the mother of all trade wars end up with history being the future? We could also be on the cusp of another World War.

US-China bad blood is going to be a headwind on the already fragile global economy which in itself could be enough to generate a sell signal

All indications are pointing to China and the US digging in for a long hard fight. Moreover, the full-blown effects of a US-China trade war have yet to be seen in the economy.

The Organization for Economic Cooperation and Development warns an escalation would hurt the US economy and damage the rest of the world, shaving 0.7% from global growth by the year 2021. That’s roughly $600 billion.

OECD’s latest report cites widening trade barriers with other trading blocs which is turning up the cell signal. OECD sees the potential for new trade barriers between the US and the European Union and Brexit-related uncertainties, as well.

A sell signal is also emanating from a string of analysts

“If talks stall, no deal is agreed upon and the US imposes 25% tariffs on the remaining $300 billion of imports from China, we see the global economy heading towards recession” Morgan Stanley’s analysts wrote.

The trade war has already hurt confidence on Main Street, reports Bank of America analysts.

A protracted trade war “could have a meaningful impact on consumer spending,” said the Bank of America report.

US retailers latest profit warnings could be interpreted as a sell signal

Home Depot (HD) and Walmart (WMT) have said tariffs will lead to higher prices on some items. The Footwear Distributors and Retailers of America, a trade association, said an escalation in tariffs on shoes would be “catastrophic.” Roughly 72% of all footwear sold in the US in 2017 was made in China, according to another industry trade group.

The US administration is jamming the sell signal

The US economy is big and strong enough to absorb any hit from Chinese retaliation, according to the Trump administration, who is also urging US manufacturers to make their products in America to avoid the tariffs.

Overestimated earnings could also provide a sell signal

Market expectations could be too optimistic going into the end of 2019 and next year, bearing in mind that the global economy is slowing faster than many anticipated. A raft of top executives are from FedEx to BMW are warning about the global economy.

Executives at FedEx, BMW, UBS, and others are describing bleak macroeconomic conditions, which they say are weighing on business.

The head of UBS says it was “one of the worst first-quarter environments in recent history,” while FedEx cites slowing international conditions and weaker global trade growth trends.

Fitch Ratings also “aggressively” cut its 2019 global forecast this week. But the firm’s economics team stopped short of calling a global recession.

Weakening global macroeconomic conditions could amplify the sell signal going forward

Weakening global economic conditions is likely to gather momentum as the latest rounds of tariffs, which take effect June 1st, begin to impact the economy in the final quarter of 2019.

But if risk assets look set for a crash at what point would the Fed step in to jam the sell signal?

The fed’s normalization policy has temporarily ended with funds rate at 2.5% and 4.2 trillion dollars of assets on its balance sheet.

But how normal is it for the Fed to keep rates so low with such high assets values on its balance sheet?

One likely scenario is that the Trump administration’s trade war could lead to runway stagflation the Fed could then respond by raising the Fed fund rates again. But with markets, so financialised that could trigger another December 2018 style mini stock market crash.

So the current global macroeconomic conditions suggest that the Fed might decide to adopt an accommodating policy as more tightening would make the sell signal deafening.

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