China Deal Drives Big Action But Finding an Entry Point Is a Challenge
The markets jumped on news of a tariff cut with China but putting money to work is no easy task right now.
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Markets jumped higher on Monday morning following news of a significant cut in tariffs on China.
It is only a temporary cut that will last 90 days while negotiations continue, but it illustrates that both sides are anxious to resume trade and avoid the negative economic repercussions of what was essentially a trade blockade.
The most important consequence of this deal is that it forces economists and the Fed to back off their predictions that tariffs will be an economic disaster that will trigger stagflation. Although interest rates were higher on Monday, that is most likely due to the increased likelihood of strong economic growth rather than worries about higher inflation.
Despite this progress, there are still plenty of skeptics who believe that it is already too late to stop the economic slowdown that has been gaining traction for months. Many Trump critics still refuse to believe that his trade and tariff plans are going to work as intended. We will see what happens. The market reaction to this news flow is clearly positive, but the bears have been stubborn in their belief that the economy is going to slow.
The charts of the major indices are all very strong, with gaps created on the spike higher on the open. This creates some short-term overbought conditions, which make entry points extremely difficult. There was some hesitation to chase strength on Monday, and a few stocks ended up the day at their highs. One exception was the Magnificent Seven MAGS. The Magnificent Seven is where the big money goes when it wants to put on risk quickly. It is easy to dump many millions into these stocks when you want to put cash to work right away.
This action is great for existing positions that you have been holding, but it creates a dilemma if you are trying to put new money to work. It is important to stay disciplined and not buy because you are suffering from fear of missing out, but if you aren’t willing to pay up, then you are going to have a hard time putting money to work.
What typically occurs is that a very large group of prospective buyers develops, and they will jump in on very minor pullbacks. This helps to keep things sticky to the upside, and if enough time passes, then the overbought conditions become less severe. It can be hard to be patient when the indices are up 3% and you are sitting with a pile of idle cash.
The House of Representatives has released a rough draft of Trump’s big beautiful bill on taxes, and there will be much debate over this in the weeks ahead. The bill increases the debt ceiling by $4 trillion, and overall spending isn’t much reduced, especially with the revised SALT rules. This bill may be part of the reason that bonds are struggling with rising interest rates.
Have a good evening. I’ll see you tomorrow.
At the time of publication, DePorre had no positions in any securities mentioned.
