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My Latest Market Thoughts

June 25, 2018, 8:31 pm

With the Federal Reserve off the table as a credible threat until September and another month to go before earnings season heats back up, last week was relatively quiet in terms of market-driven developments.

The biggest headlines came from overseas, where the Bank of England shocked global traders with hints of an interest rate hike on the horizon, and from Washington, where the latest salvos in the simmering trade war prompted plenty of chatter but little concrete drag on the economy or the market.

We did hear from Red Hat (RHT) with its earnings results out last Thursday. Guidance didn’t meet consensus, which unnerved a few investors and put a wide swathe of the tech sector under pressure in the absence of more substantive news. Most of the damage was concentrated in software and smaller, more speculative computing stocks that have reaped the bulk of the NASDAQ’s ongoing slow-motion rally lately.

Despite the selling in tech, the sector remained a clear leader for the month to date as well as the quarter and the year. Volume is neither elevated nor suspiciously absent even with the onset of summer, with overall turnover on the S&P 500 trending almost exactly where it was last month and this time last year as well. This isn’t a sell-off or even a trader strike; investors didn’t actually “sell in May and go away,” much less wait until June to retreat to the sidelines. What I think we really saw was a little healthy profit-taking in some of the more speculative areas of the market that have done well.

Monday’s big selling was mostly due to trade war escalations. The European Union (EU) and China teamed up to defend the multilateral trading system and the Wall Street Journal reported that President Trump is planning a twin set of initiatives to restrict Chinese investment in the United States. The Treasury department is looking at rules that bar firms with at least 25% Chinese ownership from purchasing companies involved in “industrially significant technology.”

We could be in for some additional choppy trading, as I expect trade war talks to be the main focus this week. However, any cooling of the headlines (which I believe is inevitable given political considerations heading into the election) will help buoy stocks higher. We also have the end of the month and quarter on Friday, which could add some crosscurrents.

The good news is that the market’s reversal opens up new opportunities to make money on great stocks. Plus, we should see a solid summer earnings season. There could be a few clouds in the forecast, but that’s okay. If it gets a little stormy a good way to make money on the swings is by shorting selective areas of the market or trading on the volatility. The key is to stay strategic right now to limit your downside and increase the upside potential of your investments.

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