Summary:

  • The S&P 500 (SPX) fell 33 points last week to 2826, a decline of 1.2%.
  • This occurred as the trade war continued to intensify, with speculation about how China will respond to US policy on Huawei.
  • Our projection this week is for stocks to test support at 2800 and for a significant drop if it successfully breaks that support.

The stock market resumed its corrective ways last week, after an uptick towards the end of the previous week encouraged more selling, as I pointed out in the latest Market Week show.

After the Trump administration banned US firms from doing business with Huawei, tech firms such as Google, Intel, and Qualcomm made public how this policy would affect operations. For example, Google announced limitations on how Huawei would be able to use the Android operating system.

China later threatened to retaliate, with Foreign Ministry official Lu Kang explaining that, “We urge the US to stop this practice and instead create better conditions for business cooperation.”

Yet the impact of the policy spread, as UK and Japanese mobile operators announced they were pausing launches of new mobile Huawei mobile phones. Other firms in both countries also announced how the US policy would affect their business.

Perhaps in an attempt to calm the markets, Treasury Secretary Steven Mnuchin pointed out that, “I’m still hopeful that we can get back to the table. The two presidents will most likely see each other at the end of June,” referring to a potential meeting at the next G20 event.

The US Department of Agriculture (USDA) announced a $16 billion subsidy program that will provide cash benefits to producers of various crops as well as dairy and pork that were impacted by the trade war. USDA administrator Sonny Perdue explained that, “China hasn’t played by the rules for a long time and President Trump is standing up to them, sending the clear message that the United States will no longer tolerate their unfair trade practices.”

Looking at the global macro picture, the results mostly underperform. For example, in the US, both new and existing home sales fell short of the average analyst estimates. As well, Chinese industrial production and German manufacturing PMI also fell short. And the Eurozone PMI came out at a recessionary 47.7.

Looking forward, our approach to technical analysis uses market cycles to project price action. Our analysis of the S&P 500 is for an overall down week, with a test of the 2800 support. If it breaks below that support level, then selling could be quite severe. However, if it holds 2800, then a minor rebound is expected before risks grow of another sharp decline into mid-June.

For more from Slim, or to learn about cycle analysis, check out the askSlim Market Week show every Friday on our YouTube channel.