Morning Comment: Biggest Near-Term Risk? China.

There is no question that there are a lot of developments from around the globe that are fighting for the attention of the public (and investors) in the mainstream media. Whether it be the continuing Covid-19 crisis, the debate over the new fiscal relief package out of Congress, the Presidential election (and the upcoming VP decision from Mr. Biden), the re-opening of several professional sports leagues, etc....there is A LOT for the mainstream media to focus on.

However, we have been astonished at the lack of attention that the most recent developments out of Hong Kong are getting. Late last week, they announced that they have delayed their Legislative Council elections by at least a year. If anybody was wondering if China had successfully reached their goal of completely taking control of Hong Kong...this news took away any and all doubts. More importantly, it was further evidence that China continues to be very successful in their decision to push in a more aggressive manner to achieve their long-term goals in Taiwan, in the South China Sea, with their border with India and in Hong the rest of the world has been distracted by the global healthcare crisis.

We watched most of the Sunday morning talk shows...and this issue was not mentioned once (NOT ONCE) there is no question that it is not at the forefront of the minds of the mainstream media. However, based on what we’ve heard from Secretary of State Pompeo over the past several days, this issue IS on the minds of the Trump administration. Yes, they have already taken some can be seen with TikTok...but what if this issue boils-over to a greater degree over the coming weeks?

Despite the fact that many on the left would say that any ramping-up of tensions with China was a “wag the dog” ploy by President Trump at a time he has fallen well behind Vice President Biden in the polls (just three months before the election), most level-headed people would admit that what China actions have reached a point that DOES deserve a response from the U.S. and other countries (like the UK). In fact, if this was not an election year, we would argue that there would be a bi-partisan effort to put a lot more pressure on China for their actions in recent months.

What we’re saying is that many pundits are focusing on the wrong issues when they think about something that might disrupt the rally from the March lows. Some people are worried that if we don’t get a deal on a fiscal package soon, the stock market could/should feel some pain. Well, that’s true...especially since the market is pricing-in that they’ll get a deal done. However, it won’t take much of a decline in the stock market to get Congress to act. A 3%-5% decline (three months before the election) will give Congress plenty of incentive to get a deal done. So the fiscal plan will not be a catalyst for a meaningful decline over the coming weeks in our opinion. If we get a meaningful decline any time soon, it will come from a different issue. Instead, the situation with China is at the top of our list as an issue that could disrupt the markets over the near-term...especially since so few people are focusing on it right now.

Having said this, the stock market acts very well. On Friday, the S&P 500 closed above the top end of the sideways range it had been in for the second time in two weeks. When it did that at the beginning of the previous week, it fell-back rather quickly, so we’ll have to see if it can hold-up better this time. With the S&P futures trading higher by 20 points this morning, it bodes well for the idea that the breakout can hold this time. Yes, the SPX continues to lag behind the Nasdaq...whose rally is being fueled by a small handful of names. Thus this continues to raise concerns in many investor’s minds, but if the S&P can rally much above 3,300, it’s definitely going to be a bullish sign.

One index we’ll be watching closely going forward is the Russell 2000. We haven’t talked about this index much recently...because it simply hasn’t done anything recently! It spent the last two weeks of July in a ridiculously tight range...just above its 200 DMA. It range since July 15th has been just 1.8% on a closing basis!!!

The pattern the Russell has formed over the past two months could be seen as an “ascending triangle,” but we think a “symmetrical triangle” is the more accurate description. Either way however, we’ll be watching the June highs of 1537...and any significant break above that level will be quite bullish for this small-cap index...and show that the rally is finally broadening out at least some-what. On the flip side, the 50 DMA has provide solid support for the Russell since May, so a break below that line (which would also take it below its trend-line from March) would raise a yellow warning flag in our mind. Right now, that line comes-in just below 1,440.

(Looking at the chart, it looks like the Russell is getting close to a “golden cross,” but we have to remember that a golden cross takes place when a rising 50 DMA crosses above a rising 200 DMA. Right now, the 200 DMA is declining for the RUT. We’re not too worried about this...and any significant break above the June highs will be quite positive either way. However we just wanted to make sure to highlight how this this part of the situation is really playing out.)

Again, there’s no question that the market acts very well. When the stock market gets disrupted at a time it is acting well, the catalyst is usually something that few people are focusing on before the “disruption” takes place. Right now, we think the situation with China is the one issue that not enough people are focusing on...and thus it could disrupt things more than people expect over the coming weeks.

Matthew J. Maley

Managing Director

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Aug 03, 2020 — 9:08 AM
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