foxex: Tariff Rumors Trigger S&P 500 Spike

Chart Advisor | INVESTOPEDIA

Focus on the Price

By John Jagerson, CFA, CMT

Thursday, January 17, 2019

1. WSJ trade tariff story fools market

2. S&P 500 spikes, pulls back then closes strong

3. Rising Treasury yields could drag on dividend-paying stocks

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Major Moves

The S&P 500 jumped dramatically higher just after 2:30pm EST today on rumors that Treasury Secretary Steve Mnuchin had suggested the United States should lift some, or all, of its tariffs against China in an attempt to move trade talks forward.

The Wall Street Journal (WSJ) broke the story citing sources close to the trade negotiations between the U.S. and China.

However, Treasury officials were quick to deny the rumors, stating that the negotiations are "an ongoing process with the Chinese that is nowhere near completion."

Just as quickly as the S&P had jumped higher in reaction to the initial rumor, the index turned back around just as quickly in reaction to the denial.

Here's the thing though. The reversal didn't last.

After 15 minutes of pulling back, traders jumped right back in and started buying, forming higher lows on the 5-minute chart of the S&P 500. The index wasn't able to climb all the way back up to its intra-day high, but it got close.

The S&P 500 rose 0.76% to end the day at 2,635.96. This is the highest close for the index since it broke down through support on December 14th.

When you look at the trend of the 5-minute chart, you will see that it was moving steadily higher the entire day. This tells us that while the temporary spike in the aftermath of the trade rumor was exciting, it wasn't the primary bullish driver that was lifting stocks for most of the day.

A better-than-expected earnings season continues to be the bullish driver for the market. Positive announcements from companies like Fastenal (FAST) and PPG Industries (PPG) kept traders enthusiastic that more good news may be just around the corner.

Read more:

Buy On The Rumor, Sell On The News

The Basics of Tariffs And Trade Barriers
Globalization: Progress Or Profiteering?

Source: finviz.com

Risk Indicators

Just as the S&P 500 has been steadily rising during 2019, so has the 10-year Treasury Yield (TNX).

The TNX ended a dramatic two-month pullback of 21% from the indicator's high close value of 3.23% on November 8 when it reached its recent lows on the second day of trading this year, falling to close at 2.55% on January 3. Since that time, the TNX has been steadily recovering.

This rebound in the TNX is significant because, unlike last year, it doesn't appear to be driven by growing expectations that the Federal Open Market Committee (FOMC) is going to be aggressively raising interest rates this year.

The FOMC raised rates four times during 2018 and bond traders responded by pushing Treasury yields higher. This year, analysts are wondering if the FOMC is going to hold off on raising rates all together, and Treasury yields are still recovering.

Part of the recovery is likely the result of bond traders believing they may have overdone it in their rush to buy Treasuries at the end of 2018. Traders often move into the safe-haven of Treasuries when the stock market starts to pull back. When traders buy Treasuries, it pushes the price of the Treasuries higher and the yield on Treasuries lower due to the inverse correlation between price and yield.

However, a portion of the rebound in yields is likely being driven by improving economic expectations. We're going to have to wait and see what impact the government shutdown ultimately has on U.S. gross domestic product (GDP) in Q1, but with China pumping liquidity into its economy and U.S. consumers continuing to spend, traders appear to still be harboring hope for economic growth.

While this may be good news for those seeking higher bond yields, it's not great for dividend-paying stocks. The higher the TNX goes, the less competitive dividend yields become. To become more competitive, dividend yields are going to have to rise as well.

Dividend yields only rise for two reasons: the company can increase its dividend, or the price of the stock can drop in comparison to the current dividend. We saw plenty of the latter today.

High dividend-yielding stocks, like CenturyLink (CTL), Verizon Communications (VZ) and Edison International (EIX) – which have dividend yields of 13.51%, 4.22% and 4.52%, respectively – pulled back today while most of the S&P 500 was rising.

If the TNX continues its march higher, dividend-paying stocks are likely to suffer greater losses.

Dividend Yield For The Downturn

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Bottom line: Defensive isn't so hot right now

Defensive stocks, like strong dividend-payers, were starting to look pretty good at the end of 2018, but they have been lagging behind riskier growth stocks so far in 2019. Watch this relationship during the coming weeks. If the performance gap continues to widen, it is strong confirmation the bulls are regaining control of Wall Street.

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