This Won't Help the 'Trade War'
Government 'shutdown' fears return... This won't help the 'trade war'... A Dow Theory warning... Gold breaks out... Dr. Richard Smith wants your help...
As if the market didn't have enough to worry about...
Now we can add fears of a federal government shutdown to the list.
In short, several parts of the government are set to run out of funding effective 12:01 a.m. this Saturday.
As recently as this morning, it appeared the government was set to extend this deadline a few more months, after the U.S. Senate agreed to a "stopgap" bill that would fund the government through February 8. However, the celebration was short-lived. As the Wall Street Journal reported...
President Trump told House Republicans on Thursday that he won't sign the spending bill passed by the Senate because it lacks funding for the border wall, House Speaker Paul Ryan said, complicating the path to keeping the government open past Friday.
In brief remarks to reporters after House Republicans met with Mr. Trump for more than an hour Thursday afternoon, Mr. Ryan said that he would "work with members" to come up with a new solution. Earlier Thursday, House Republicans in a closed-door meeting had balked at passing the Senate bill without border wall funds.
"We want to keep the government open," said Mr. Ryan, a Wisconsin Republican.
House Majority Leader Kevin McCarthy (R., Calif.) said Mr. Trump told the GOP lawmakers that the Senate's spending bill was "just kicking a can down the road." On Tuesday, Mr. Trump had indicated that he wanted to avoid a shutdown, even if Congress didn't meet his demand for wall funding.
Now, we believe these fears are likely overblown...
In fact, as we noted the last time they surfaced early this year, history shows worrying about a government shutdown is typically a huge waste of time. From the January 18 Digest...
According to data from LPL Financial, the government has shut down 18 different times since 1976. And on average, the S&P 500 has fallen just 0.6% during each.
That's right... for all the hysteria associated with these events, the market typically falls less than 1%. In fact, during the last shutdown in October 2013, the market actually rallied 3%.
History is clear: Events like these have practically no lasting effect on the market.
Still, given the ongoing "trade war" with China, recent signs of stress in the credit markets, and new worries about the global economy (more on this in a moment), this news could certainly add to what has already been a volatile few months.
Speaking of the trade war, regular readers know we believe a true resolution is unlikely anytime soon...
In short, despite positive rhetoric that both the U.S. and China want to make a deal, recent actions from both sides have suggested otherwise.
That was certainly the case this morning when news broke that the U.S. government was set to formally accuse China of state-sponsored "hacking." From a separate Journal report...
The U.S. Justice Department unsealed criminal charges Thursday against two Chinese nationals allegedly tied to a campaign to steal sensitive information from technology-service providers around the world and several U.S. government agencies, including the Navy.
"No country should be able to flout the rule of law – so we're going to keep calling out this behavior for what it is: illegal, unethical and unfair," FBI Director Chris Wray said at a press conference announcing the charges after they were unsealed in federal court in Manhattan.
Thursday's indictments draw direct links between the alleged hackers and China's Ministry of State Security. They also allege that Chinese authorities approved of and directed the campaign. The Wall Street Journal first reported on the expected charges in October.
Now, before you write to us accusing us of supporting the Chinese government, let us be clear: We're not questioning the validity of these accusations. From our understanding, China is almost certainly guilty.
However, the protection of intellectual property is one of the biggest points of contention in the trade battle. Does levying criminal charges – in lieu of negotiations – make an amicable agreement more or less likely?
Yesterday, we mentioned the recent warning from global shipping giant FedEx (FDX)...
But FedEx isn't alone... As you may know, it's one of 20 companies – including other shippers, truckers, airlines, and railroads – that makes up the Dow Jones Transportation Average. And this index, alongside its sister index, the Dow Jones Industrial Average, is now sending a warning, too.
If you've been with us for long, you've likely heard us mention "Dow Theory," one of the earliest forms of technical analysis.
Dow Theory is based on the writings of Wall Street Journal founder Charles Dow and was later popularized by legendary newsletter writer Richard Russell. It compares the performance of the Dow Industrials to the Dow Transports to judge the market's long-term trend. In simple terms, the thinking goes something like this...
If the companies that make goods (industrials) and the companies that ship those good (transports) are both doing well, the economy as a whole is probably healthy. If one or both of these groups begin to struggle, it's a sign that something is amiss. And if both of these groups are struggling, the economy could be in trouble.
Unfortunately, the latter scenario is what we're seeing today...
As the following chart shows, both the Dow Industrials and Dow Transports have broken down below their previous lows. According to the tenets of Dow Theory, the market's main trend has now turned from up to down...
Now, we should note that many folks argue that Dow Theory is no longer as useful as it once was. After all, manufacturing makes up a far smaller portion of the economy today than it did when this theory was created.
And as always, we'll remind you that it's never wise to give too much weight to any single indicator alone. But alongside the other warning signs we've been following in recent months, it's one more good reason to remain cautious.
Not all the news is so somber, however...
For the past several months, we've been highlighting the bullish case for gold.
In short, for the first time in nearly three years, all the necessary requirements for a massive rally have fallen into place. And while it may not feel like it, gold has been moving higher.
Since its bottom in mid-August, gold has quietly rallied more than 6%. And as you can see, as of today, it has now broken back above its 200-day moving average for the first time since falling below it early this year...
This is a positive sign... and further evidence that a new rally is now underway.
One last thing before we sign off today...
By now, most readers should be familiar with our friend Dr. Richard Smith.
Richard, of course, is the founder of the excellent TradeStops software that has now helped more than 50,000 individual investors make more money, while taking less risk, in the stock market.
We know many Digest readers are among them. But if you're not yet a TradeStops subscriber, Richard would like to hear from you.
You see, he's collecting case studies for a special new project. And he's looking to select around 15 readers who are willing to share a few details about their portfolios.
If you've been active in the markets for the last five to 10 years and you're interested in helping him out, Richard could potentially show you tens – maybe even hundreds – of thousands of dollars' worth of gains you've missed out on.
And if you're selected, you may even get the chance to sit down with him and review your results in person (plus a handful of other perks we can't share here).
But again, he's just looking for 15 people. So if you're interested, simply send an email to tdsevent@stansberryresearch.com, tell him why you should be selected, and a member of his team will contact you soon.
New 52-week highs (as of 12/19/18): short positions in Chevron (CVX) and SPDR S&P 500 Fund (SPY).
If the mailbag is any indication, folks are getting worried. We've received a number of e-mails this week asking if Steve Sjuggerud's "Melt Up" thesis is still intact. However, while we at the Digest have become much more cautious on the market over the past couple months, Steve and his team of analysts tell us their bullish outlook has not changed.
Still, because they know many readers are concerned, they've agreed to share a full update on the Melt Up in tomorrow's Digest. In the meantime, feel free to send your questions and concerns to feedback@stansberryresearch.com.
Regards,
Justin Brill
Baltimore, Maryland
December 20, 2018