President Trump tweeted Thursday that China and the U.S. were getting “very close to a [trade] deal.” The stock market immediately rocketed.
Then Trump said Friday that he had approved the so-called phase-one trade deal. The details are still lacking, and hiccups cannot be ruled out. Bernard Baumohl, chief global economist at the Economic Outlook Group, wrote in a note that the agreement “has not even been vetted by lawyers and thus remains unsigned by both parties.”
Here is an instructive look below the surface. Let’s start with a chart.
The chart
Please click here for an annotated chart of ETF DIA, +0.06%, which tracks the Dow Jones Industrial Average DJIA, +0.01%. Similar conclusions can be drawn from charts of S&P 500 ETF SPY, +0.06% and Nasdaq 100 ETF QQQ, +0.33%.
Note the following:
• The chart shows a strong up move in the stock market after Trump’s tweet.
• The chart shows a significant pullback from the highs before the rally got a second wind.
• The most important thing to note from the chart is the VUD indicator. The VUD indicator is the most sensitive measure of net supply and demand in real time. Orange shows net selling, and green shows net buying.
• The VUD indicator shows that there is quite a bit of selling as prices have moved up. This indicates that many investors are selling into the strength.
• The volume picked up after Trump’s tweet. This is a positive.
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Money flows
Segmented money flows provide an X-ray of the stock market, giving an edge to prudent investors. Here are the money flows after Trump’s tweet.
• The momo (momentum) crowd is aggressively buying stocks. The smart money is lightly selling into the strength.
• The momo crowd is aggressively buying popular large-cap stocks such as Apple AAPL, +1.36%, Google GOOG, -0.18% GOOGL, -0.12%, Facebook FB, -1.34% and Amazon AMZN, +0.03%. The momo crowd is also aggressively buying semiconductor stocks such as Nvidia NVDA, -0.04%, Micron Technology MU, +0.45%, Intel INTC, +0.42% and Skyworks SWKS, +0.33%.
• The momo crowd is aggressively selling gold. The smart money is inactive.
• The momo crowd is aggressively buying oil. The smart money is selling oil.
• The momo crowd sold bonds on the news. The smart money is inactive.
• The dollar was bought on the China news but has dropped on the Conservative’s (and Boris Johnson’s) massive win in the U.K.
A trick?
Could this be a trick by Trump to negotiate better with the Chinese and also run up the stock market at the same time? Please see “Trump perfectly orchestrates the stock market’s rise whenever momentum wanes.”
Second reaction
The first reaction is positive for stocks. On well-telegraphed issues, the first reaction is often wrong. After the initial surge, normally there would be a high probability of a “sell-the-news” reaction. However, this is December. Performance chasing is on. In performance chasing, lagging money managers aggressively buy wining stocks to catch up to their benchmarks. Please see “Believe in a Santa Claus rally if you want, but first look at this chart.”
Tail risks
At this time it is important to take notice that the smart money is protecting against tail risks. Please see “Potential ‘tail’ risks are the newest danger in the stock market.”
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.