The second half of 2019 begins with an interesting mix of market cross-currents. On Friday, the indices, especially the Russell 2000 ETF (IWM) , closed strongly on a combination of index rebalancing, end-of-the-quarter window dressing and positive anticipation of the G-20 meeting.
Market players were feeling confident that the U.S. and China would resume trade talks -- which is exactly what happened at the G-20 meeting. Although that news is not a huge surprise, there are strong reactions across the board Monday morning with the indices higher, the dollar stronger, bonds weaker and precious metals down.
Unsurprisingly, the bears are scoffing at the trade news as nothing significant. They argue that the resumption of talks does not mean that a deal is going to occur anytime soon. In addition, there was more weak economic news out of Asia, as signs of economic slowing continue to expand.
The China PMI numbers came in lower than expected Sunday night, which market bulls take as an indication that China is under pressure to get a deal done sooner rather than later, and is helping to push indices higher this morning.
This trade news will cause much debate over what will happen next with the Fed. A big part of the recent dovishness has been driven by concerns of the economic toll of trade wars. If there is progress on trade, does that diminish the chances of a rate cut at the July meeting? Does the market care more about a trade agreement or rate cuts? Are the two mutually exclusive?
While the setup Monday morning looks favorable for a "sell the news" reaction, one of the issues that many of the bears have overlooked in recent years is that the news-driven computer algorithms tend to buy positive headlines even when they are anticipated. Good news results in more buying even when it isn't a big surprise.
This is confounding to the bears and sets up a dynamic where rather than a "sell the news" reaction there is a short squeeze and "fear of missing out," instead. This feeds on itself as those that were looking for the market to sell off on good news are suddenly forced to reposition to keep pace with the upside.
We have a classic example of this dynamic at the open Monday morning. Rather than sell off on news that was already priced in and was well anticipated, the indices are running higher and causing those that are poorly positioned to reassess their thinking.
We will see how well this gain holds as the day progresses. The bears will be looking for an intraday reversal and will be celebrating any give back, but this sort of action tends to create a supply of dip-buyers that are looking for entry points and will provide support. Technicians will be watching to see if the gap that is created at the open is filled.
My game plan is to make some sales of extended stocks into strength. I'll be looking for entry points in some new names but don't expect to find much right now. The Russell rebalancing on Friday has caused some confusion with the charts and they will need time to develop again.
