This Saturday evening, Donald Trump and Xi Jinping will sit down to dinner in Buenos Aires at the G-20 conference. Investors are holding their breath, hoping that the two might come to some agreement that could lower tensions and avert a full-out trade war between the U.S. and China.

 

Given past rhetoric and the president's mercurial temperament, anything could happen. Xi Jinping and his advisors, after years of dealing with Washington, believe if they just hang tough and wait Trump out, the outcome will be "business as usual" on their terms.

 

Unfortunately, Wall Street and the media have created another binary event out of the dinner. Either there is a breakthrough, in which case the markets roar higher, or there is no deal and stocks fall back to the lows and maybe break them. I wish it were that easy.

 

The trade relations between our two countries are complicated. I mean really complicated and no single dinner or event is going to solve it. A new economic relationship with China will take months, even years, and require talks on many fronts. Tariffs are just one small issue in these talks, although the president uses that issue constantly in his tweets and rallies.

 

Whether he is truly that naïve (a possibility) or is just using a dumb-down approach for the benefit of his political base, is unknown. His rhetoric on many other issues (immigrants, the wall, jobs, the media, Mueller, etc.) indicates that he believes his audience has little understanding and even less patience on the issues that beset us than he does.

 

Clearly, the president has had a "bad hair day" on several fronts this week. GM's announced layoff of 14,000 U.S. workers and the closing of several factories damage his MAGA claims of bringing high-paid jobs back home. Mueller's investigation looms closer and new revelations on his Russian dealings during the presidential campaign have surfaced. And then there is the stock market's decline, which the president believes is his true opinion poll. Something positive out of this weekend might distract the public from these negative developments.   

 

If we consider his "new" North American trade agreement signed this week in Argentina as a template, there is a chance that Trump could claim another trade victory on the China front. Most readers have realized by now that only marginal changes were made in this updated Mexico, U.S., Canada trade pact.

 

He could use this same kind of sleight of hand in negotiations with China. We know, for example, that the Chinese have already offered a number of concessions to the U.S. on trade, although the administration has not been forthcoming in revealing the details. It would be easy (as it was with Mexico and Canada) to claim victory by simply accepting superficial changes to an existing trade pact. 

 

As for this weekend, if I were passing the gravy, I would agree to a joint statement with Xi after dinner that indicates "progress." Some nebulous statement from Xi, such an increase of soybean purchases by China, or postponing the January deadline on tariff increases by the U.S. from "Don, the Con" could give the markets new hope without much content.

 

In the meantime, you may be wondering why the markets turned around this week. Fed Chairman Jerome Powell, in a speech before the Economic Club of New York, announced that interest rates were just below a level where further rate hikes might not be necessary. Investors liked that — a lot. As a result, the S&P 500 Index has gained back some of its losses since Oct. 3. It is now down 6 percent from the beginning of last month, and up slightly for the year.

 

Good news out of Buenos Aires could ignite a Christmas rally and send the Dow up 500-700 points in a short period of time. Bad news might do the opposite. As it stands, November was a positive month for the markets. Stay tuned for the fireworks.

 

Black Friday sales are in full swing. Normally, today is all about the retail trade. Consumers spend the day waiting in line, picking up heavily discounted "door buster" deals, and generally starting their holiday gift shopping. This year, it appears traders are also holding their own Black Friday sales.

 

The day after Thanksgiving, the stock and bond markets are open for a half day. Few turn up for work, so trading desks are usually manned by a skeleton crew, volumes are light and the indexes meander about the center line. As such, what happens on Black Friday has little consequence in the grand scheme of things.

 

The real action is before a holiday, especially one that coincides with a long weekend, like this one. In volatile markets, such as the one we have this year, few traders want to go "long" stocks through this long weekend. Their preference is to sell before the holiday and re-examine things when they come back on Monday.

 

This year, thanks to the Trump trade war fears, the concerns over raising interest rates, and a possible slowing of the economy next year, stocks continued their two-month, long decline on Friday. As I warned readers last week, if the S&P 500 Index failed to hold 2,720, the next stop would be somewhere around 2,600. That is exactly what happened.

 

So here we are testing the lows that we put in back in February. From a technical point of view, we have a classic case of a "double bottom." That's when stock indexes reach a low, bounce up, and then re-test that low once again. At times it only takes a few weeks or months. In this case, it took longer. Many times, a correction will not be over until a double bottom occurs. Are we at that point now?

 

I would like to say yes, so I will, but there are conflicting signals. Take sentiment indicators, for example. The number of bulls has dropped to a little less than 40 percent. That's a good sign if you are looking for a contrary indicator. But back in February, bullish sentiment hit a low of 24.7 percent. That would seem to indicate that investors will need to become even more bearish before this pullback is over.

 

We are also seeing some early signs of "divergence." Back in October, when the S&P 500 hit 2,600, the peak daily reading of new lows for individual stocks was just under 18 percent. But this week, those same stocks hitting new lows was a mere 4.16 percent. So, what?

 

When you have a situation where the broader market is making new lows (like Tuesday), while the percentage of stocks trading to new lows shrinks, it is considered a positive divergence. If we see this continue next week, it would be a signal that investors are being more selective in their sales rather than just committed to a wholesale selling of all equities. That would be another positive sign.

 

What would be a bad sign, is if the S&P 500 Index failed to hold this 2,600 level. That would indicate more pain in the near future and lower stock market averages across the board.

 

Against this backdrop, it is interesting to note that according to early reports, this year's holiday shopping season is starting off with a bang. Consumer confidence is fueling higher holiday spending, even while the stock market is selling off the retail stocks that will most benefit from this trend.

 

Hang in there, folks, this too shall pass.

 

This week saw a re-test of the October lows. That is to be expected in most stock market corrections. What is important to the future well-being of equities globally is that the averages do not decline much further from here.

 

That does not mean that if the S&P 500 Index, for example, falls by another percent or so the ball game is over. Remember, folks, calling the levels of the stock market is an art, not a science. Sure, we could overshoot (most times we do), thrash around a bit more, and then recover. What I don't want to see is a solid and definitive drop lower over a week or more.

 

On the S&P 500, if we were to break 2,685, the next level of technical support would be 2,603. That would, in my opinion, trigger a panicky rush for the exits. If the 2,603 support breaks, then who knows.

 

From a fundamental point of view, there isn't much different that has transpired since last week or, for that matter, the last few months. The elections are over, but the new Congress doesn't get a chance to bat until after the New Year. In the meantime, we are already hearing the

noise levels rise.

 

One Democrat, California's Rep. Maxine Walters, a ranking member of the House Financial Services Committee, has promised to roll back some of the bank deregulation of the past two years. Another Democrat warned that signing on to the new North American Trade Agreement will require "adjustments" in the deal.

 

At the same time, the FANG stocks, led by Apple, continue to batter the technology sector, dragging the NASDAQ index lower. Many individual stocks have already dropped 10 percent, which would technically qualify as a "correction."

 

In a race to the bottom, oil prices have also come under pressure, declining over 20 percent in the last month or so. In hindsight, the oil price was over-extended. Oil is in the throes of a sharp, short sell-off, which is exactly why most investors should steer clear of commodities. It takes a strong stomach to weather the ups and downs of a commodity cycle.

 

Both equities and energy, however, are due for a bounce, which should happen soon. The Iranian embargo, as I predicted, is not working out as well as the president had hoped this second time around. Since many nations did not and do not agree with Trump's unilateral decision to re-instate an embargo on Iranian oil, its effectiveness has been dramatically reduced. Cheating is rampant. Nations may be grudgingly forced to pay lip-service to the U.S. embargo but are looking the other way, allowing their companies to find ways around the Iranian oil embargo.

 

Of course, if you follow the financial news, the bulls of September have now all turned bearish. The TV Talking Heads are showcasing one "Permabear" after another, who are confidently predicting (for the 100th time in the last two years) that this time they are going to be

right. Calls that "The end is nigh," or "Run for the hills," should be ignored.

 

In this atmosphere of panic, pain and fear, try to remember the positives. Seasonality is in the bull's favor. The S&P 500 was up every year after a mid-term election since WW II. And if this were truly the end of the upside for this cycle, where was the blow-off top that has always marked the end of a bull market? No, it is too early to get defensive and it is way too late to sell. 

 

Hunker down and wait. You will likely be rewarded.

 

Stocks are in the process of consolidating after the big gains over the last week or so. So far, the October sell-off has led to a recovery of about half of what was lost. In the two months ahead, we should see even further gains.

 

No matter how much we would like it to, the stock market rarely goes straight up. It is one reason why I constantly advise clients not to check their portfolios on a daily, weekly, or even monthly basis. And never check them in down markets. Why put yourself through that emotional turmoil — especially when you have no intention of using the money anytime soon.

 

As we now know, the Democrats regained the House this week. As I, and everyone else on Wall Street predicted, the Republicans maintained their hold on the Senate. Some races, such as Florida, are still too close to call. But the results were predictable enough for the markets to rally over 2 percent the day after the results.

 

Since then, traders have been selling. That's natural. Once they bank some profits, and some of the overbought technical conditions as well as investment sentiment is reduced, stocks will find their footing and advance once again. In the meantime, get ready for the political noise that will most assuredly begin emanating from Washington.

 

President Trump, at long last, has fired his attorney general, Jeff Sessions. It won't matter who he appoints in his stead, in my opinion, because nothing will stop the Mueller investigation and its findings from being disseminated. The Democrats will see to that.

 

The question that the markets will ask is:

 

"Who, if anyone, did anything wrong?"

 

Chances are it won't be Donald Trump, if history is any guide. Rarely does the captain go down with the ship in politics.  His first mate, bosun, and any number of sailors might drown, but unless he has been stupid and failed in some way to cover his trail, the president will come out blameless. In which case, the markets will celebrate that victory.

 

My column yesterday pointed out that little, if anything, can be expected in the way of legislation over the next two years. That removes an unknown variable from the financial markets. What's left?

 

Trump's trade war and rising interest rates. Both will receive undue attention from investors. Trade will likely take a back-seat until Trump meets his Chinese counterpart this month, which leaves interest rates.

 

Throughout their careers, few of Wall Street's professionals have ever experienced a rising interest rate environment. Most are too young to remember. Many were not even born during the era of the oil embargo, double-digit interest rates and inflation. To them, this is all theoretical and not anchored in experience.

 

Therefore, they won't know when and how rising interest rates may trigger a recession. What's worse, they also won't know when too much inflation, versus too little inflation, is good (or bad) for the stock markets. As such, most of the investment community will live in a state of perpetual jumpiness. Jumpiness is a state of nervousness marked by sudden jerky movements. We just had such a day on Friday.

 

The Fed met this week and simply repeated what the markets already knew: that a rate hike was in the offing next month and further hikes should be expected next year. The only "new" comment was a sentence indicating that business investment seemed to be moderating slightly. Nonetheless, global markets fell on Thursday night and into Friday because many felt disappointment that the Fed was still on course.

 

 My belief is that kind of overreaction may continue to occur. When few in the markets understands the natural process of a growing economy, rising interest rates, and over (versus under) heating, any hike in interest rates is automatically considered negative for stocks.

 

It is not, but one must live through the experience of rising interest rates in order to understand them and to take the process in stride. Unfortunately, our "professionals" are all on a learning curve. What is theory and what is true will only be realized in hindsight. This is the world we live in, so expect more jumpiness in the foreseeable future.  

 

 

It happened like clockwork. Earlier in the week, all three main U.S. averages re-tested their lows and then proceeded to bounce back, only to give it all back. That's what happens during corrections, but it is not over yet.  After all, it is October.

 

Readers will recall that last week I wrote that nine out of 10 times markets will re-test their recent lows. Naturally, this is more of an art than a science, so prices can bottom somewhat above or below those lows. In this case, the Dow hit its lowest level in four months. The S&P 500 Index slipped below its recent lows while NASDAQ got hit the worst, wracking up a total 10percent decline from its highs.

 

This is how it should be since all year long the markets have been led by the advances in the tech-heavy NASDAQ. And by the way, there was no new news on Tuesday. There was no event that anyone can point to for the decline. That also makes total sense when you understand that this entire pullback has been technically-driven. 

 

And it isn't over yet. We still have five days left in October and another six until the mid-term elections. The way the market has been acting this week, we could continue to see 1-2 percentage point-sized swings daily.

 

The fuel for these pyrotechnics is earnings results. Remember my warnings that earnings this quarter, although good, would not be "as good" as the past few quarterly results? As an example, Thursday evening, two of the big FANG stocks, Amazon and Google, reported after the close. Their top line revenue growth was less than expected, which came as a bit of a surprise to investors. No never mind that profits beat expectations since these days profits can be manipulated easily by simply buying back additional shares.

 

Index futures Thursday night dropped like a rock as a result, and Friday morning the Dow dropped 300 points on the opening. Earlier in the week, companies like Caterpillar and Boeing reported. Their announcements were enough to move the markets (up in the case of Boeing, and down on Caterpillar's results). Why, you might ask, do individual company results suddenly have the power to move markets like this?

 

It's all about expectations. Investors have been fretting about Trump's trade war all year. So far, the fallout has only impacted a few areas. Farming, for one, and maybe some companies in the steel business. The fear is that over time more and more companies will pull back investments, lose sales, or be damaged by these tariffs. And what may happen to one, may happen to all.

 

If you believed, as I do, that this is an inaccurate and rather simplistic view of the world than the fact that one company might see some fallout if tariffs are imposed does not warrant taking an entire sector, or in this case, an entire market down with it. However, markets are not rational at times. This is one of those times.

 

Friday, it was announced that the country's economy grew by 3.5 percent in the third quarter, which was faster than expected. Fearful investors barely paid attention to the news. That should come as no surprise. You can search to doomsday for a solid fundamental reason why we are experiencing this sell-off. You won't find one. Bottom line: the markets were overbought and in need of a healthy pullback. Don't over think this one and stay invested.