This Critical Sector Is Breaking Down
Stocks rally on positive trade news (again)... Is the White House 'crying wolf' again?... This critical sector is breaking down... 'If the bull market is going to get back on solid footing, financials will likely need to participate'... Don't miss out on Doc's newest service...
It's becoming a familiar pattern...
After selling off sharply into the close on Tuesday, U.S. markets opened solidly in the green this morning. Today's rally followed yet another positive trade announcement from the White House last night.
In an exclusive interview with news service Reuters, President Donald Trump said he would "intervene" in the government's criminal case against Huawei CFO Meng Wanzhou if it would help secure a new trade deal with China. As Reuters reported...
Already fraught, relations between the United States and China have been further complicated by the arrest of Meng, 46. She faces U.S. accusations she misled multinational banks about Huawei's control of a company operating in Iran, putting the banks at risk of violating U.S. sanctions and incurring severe penalties, court documents said.
If extradited to the United States, Meng would face charges of conspiracy to defraud multiple financial institutions. A Canadian court on Tuesday granted Meng bail while she awaits an extradition hearing...
Trump said Meng could potentially be released. "Well, it's possible that a lot of different things could happen. It's also possible it will be a part of negotiations. But we'll speak to the Justice Department, we'll speak to them, we'll get a lot of people involved," he said.
Earlier this week, we noted the timing of the arrest was peculiar. It certainly wasn't likely to improve relations between the two countries.
Rather, given that the U.S. government had been aware of these alleged crimes for several years, it appeared to be a deliberate attempt to encourage China to make a deal. Last night's interview all but confirms it.
The president said that trade talks had resumed...
He said a new round of negotiations with the Chinese government was "underway by telephone," and that progress had already been made. More from Reuters...
[President Trump] said the Chinese government was once again buying large quantities of U.S. soybeans, a reversal after China in July imposed tariffs on U.S. supplies of the oilseed in retaliation for U.S. duties on Chinese goods.
"I just heard today that they're buying tremendous amounts of soybeans. They are starting, just starting now," Trump said.
Unfortunately, commodity traders contacted by Reuters said they have seen no evidence that China has resumed soybean purchases to date.
For the president's sake, we hope that isn't the case. If White House officials continue to "cry wolf," sooner or later the markets will stop listening.
In the meantime, regular Digest readers know we've become more cautious on stocks of late...
While we're still willing to give this long bull market the benefit of the doubt for the moment, we've been tracking a number of signals that suggest trouble is brewing.
In this morning's edition of DailyWealth Trader, our colleagues Ben Morris and Drew McConnell shared another. As they wrote...
Imagine trying to tread water with 13% of your body weight strapped to your ankles. Maybe you could do it... but for how long?
That's the question we're asking ourselves today as we look at the benchmark S&P 500 Index...
Financial businesses play key roles in the economy. And with a 13% weighting in the S&P 500, they're critical to the health of the stock market, too.
As they explained, the broad market has been able to keep its 'head above water' so far...
The S&P 500 remains above both its October and February lows to date. However, financials have been weighing it down. And as they explained, it could ultimately be the one sector that "makes or breaks" the bull market going forward. More from Ben and Drew...
More than any other sector of the market, financial businesses have their hands in the flow of money. Banks hold it, invest it, and lend it. Credit-card companies help you spend it. Brokerages help you invest it. And insurance companies pool and manage financial risk.
The flow of money is the economy. So the performance of the financial sector is closely tied to the performance of the overall economy.
Over the past month, shares of financial companies have fallen 10%... more than any other sector. They hit a fresh 52-week low yesterday and are now trading 19% off their January highs. It's the largest sector showing this degree of weakness...
You can see this weakness in the chart of the S&P Financials Sector Index, which has recently fallen to new yearly lows below two important trendlines. As they explained...
The 200-day moving average (200-DMA) is the average of an asset's closing prices for the prior 200 trading days (about 10 months). We use it to gauge the long-term trend. The 50-day moving average (50-DMA) is the same thing for the prior 50 days of price action. We use it to gauge the intermediate-term trend.
The chart below shows the S&P 500 Financials Sector Index and its moving averages. As you can see, it is trading below both of its falling moving averages...
In short, the financial sector is in a clear downtrend today...
And until (or unless) this improves, they believe the broad market is likely to continue to struggle...
Over the past week, the stock market has attempted to rally. But the rallies haven't held.
The weakness in financial stocks is one of the big reasons why. The factors weighing on these businesses are heavy. Interest rate spreads are tight and long-term rates are rising.
If the bull market is going to get back on solid footing, financials will likely need to participate. So keep an eye on this important sector.
And until these trends change, we suggest you avoid bullish trades on financial stocks.
One last note...
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In today's mailbag: More great feedback on Doc's brand-new Advanced Options advisory, and a question about gold. As always, send your comments and questions to feedback@stansberryresearch.com.
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"Where is the best place to buy gold and how?" – Paid-up subscriber Frank M.
Brill comment: This is one of the most common questions we get in the Digest. As we frequently remind readers, if you're in the market for physical gold and silver bullion, you need to keep two things in mind.
First, gold and silver are simply commodities, so it makes no sense to overpay. You want to pay the lowest premiums over the "spot price" of the metals that you can.
However, there are some unscrupulous dealers out there. So be sure to do your homework and find a reputable, well-reviewed dealer you can trust.
If you aren't sure where to start, we recommend talking to the folks at Camino Coin or Gainesville Coins. And if you're also interested in buying collectible gold or silver coins, you can't go wrong with Van Simmons at David Hall Rare Coins.
As always, we remind you we receive no compensation for recommending these dealers. They just have a long history of treating Stansberry Research subscribers and colleagues well.
Regards,
Justin Brill
Baltimore, Maryland
December 12, 2018