The Zigmont Report (Daily Market Recap for 5/21/18)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own

Time out.  The trade tensions with China are now paused.  The US suspended its threat/plan to levy tariffs on $150 billion of Chinese imports.  China agreed to suspend their threatened/planned tariffs on $50 billion of US exports.  US equity markets digested this news very positively and while nobody has a clue as to how the US/China trade negotiations will play out, today’s news is being interpreted as a signal that there’s way more bark than bite to all the trade war rhetoric.

Investors are now dismissing the potential for a true trade war to break out.  That probably makes sense too.  Everyone knows that China and the US are better off negotiating future trade changes without imposing tariffs along the way.

The only risk therefore is *if* the negotiations go horribly wrong.  That’s an outlier of course but it still exists.  The market is currently assuming a resolution to the China/US trade tiff that’s GDP neutral or better.  That’s probably the right outcome to assume but it’s not a done deal until it’s a done deal.

Anyway, the market’s bullish reaction to this news makes perfect sense but the odd part of today’s move is that the activity is anemic again.  The capital flow was 79%!  That means that only 79% of the total dollars that usually move through US exchanges, moved through them today.

For quiet summer trading sessions, that’s not such a head-scratcher.  When the equity market rallies almost 1% on news that fundamentally changes the investing landscape however…. that’s counter-intuitive.

We’ve had an activity lull for 2-3 weeks now.  Today’s not an anomaly because the flow was light.  Today is an anomaly because the news was material, prices moved materially, *AND* the flow was light.

It’s as if one-fifth of the money that used to flow through markets started sitting on the sidelines in May.

What’s going to get that money back in the game?  When it does return to the markets, will it push bullishly or bearishly?

I have no answers but those questions are driving me bonkers.

See you tomorrow,