The market made fresh new all-time highs on Friday, and the Santa Claus rally finally materialized. However, traders are so euphoric right now and they are solely focused on chasing returns… what they don’t realize is the fact there are landmines that could blow the market up very soon.
When everyone and their brother are buying stocks… it tells me the market may be topping out. One of the biggest catalysts I see on the table right now is the potential re-escalation of the U.S. — China trade war.
Remember the last time the trade war headlines hit the market? Traders panicked as the market plummeted significantly back in August.
Sure, we may be out of the water for now with trade war headlines… but we all know The Art of the Deal, and Trump may have a trick or two up his sleeve. This could potentially cause the next big market selloff.
You probably saw all the headlines about the “phase one” trade deal between the two major economies. However, if you read between the lines… it doesn’t look like the headlines will end any time soon.
The U.S. still has hefty demands that the deal didn’t meet, and there are concerns as to whether Trump feels he has the upper hand. We all know he doesn’t like to lose… and he could bring up the issue again, especially with the ongoing impeachment.
For one-and-a-half years, there’s been back and forth between the U.S. and China. Most recently, Trump canceled the tariff hikes on Chinese goods that were scheduled on December 15. Not only that, but it cut the tariff on $120B worth of Chinese imports in half.
For China, it took a step back and forwent its retaliation to hike tariffs on $50B worth of U.S. agricultural products for the next two years.
It seems as if every time they come to terms… Trump catches China off-guard and comes up with new tariffs, or looks to escalate the trade war.
You’re probably wondering, Jason, so what exactly do I have to worry about the trade war?
Two Massive Trade War Catalysts Set To Hit The Market
The U.S. demanded China stops manipulating its currency. The whole idea behind China’s currency manipulation is to reduce the trade deficit with China.
We’ve seen them do it before… and they could do it again. Little do they know that manipulating their currency will not help them. In fact, it’s actually self-destructive. Not only will it cause wealthy Chinese individuals to pull cash from the country… it’ll look to invest in safe securities like U.S. Treasury Bonds.
In turn, this sparks potential selloffs in the U.S. equities market, which ultimately spills over to other major economies.
Right now, U.S. law has three criteria when it comes to finding the currency manipulators in the market.
- The selling of domestic currency and buying foreign exchange.
- Current account surplus of more than 3% of gross domestic product (GDP).
- The trade surplus with the U.S. of more than $20B.
Currently, China only meets the third condition and is not considered a currency manipulator. However, this could change very soon. We all know the power of Trump’s words… and if he labels the country as a currency manipulator, we could see a massive correction.
Second, China has been stealing U.S. intellectual property (IP) for years. Not only that, but technology transfers and subsidies to State-Owned Enterprises (SOEs) have become a big problem.
The U.S. could file a complaint to the World Trade Organization (WTO) if it believes one of its trade partners are not playing by the rules. Trump has filed only two cases against China, and previously… the U.S. won more than 90% of its cases brought to the WTO.
If that indeed does happen, the market’s euphoria will turn into panic.
These aren’t the only catalysts on the table right now… there’s also the ongoing issue with the Fed keeping interest rates at extremely low levels, quarterly earnings in January, and so much more.
Right now, I’m noticing one indicator that points to a massive pullback.
If you look at the daily chart on the tech-tracking ETF, QQQ, you’ll notice it’s been on an absolute tear. The reason? Passive funds have just been buying index funds to participate in the rally.
However, since these funds don’t actively trade… when s#%* hits the fan, they will be forced to dump. If you look at the Relative Strength Index (RSI), QQQ is at overbought levels, and this is typically when we see pullbacks.
The same thing is going on in the SPDR S&P 500 ETF (SPY).
Now is the time to be very afraid and position yourself to make money when the market pulls back. If you don’t have a strategy in place to profit when the market crashes, then click here to see how Smoke Signals could help you bulletproof your trading account.