Have markets hit a top? Or are we heading for a Santa rally?

Donald Trump began the week in an uncompromising mood

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The US equity markets, followed by the British markets, took quite a hit at the start of this week.
It began on Monday with – you guessed it – a tweet from Donald Trump. He is slapping steel and aluminum tariffs on Argentina and Brazil.
Then on Tuesday he deviated, as is his way, from the required, all-out bullish robot-president-speak, and suggested there might be delays to the trade deals between the US and China.
Markets did not like that one bit…
Why Donald Trump wants a weaker dollar 
For those who like their detailed stats, the market reaction earlier this week to trade war concerns was quite noticeable.
The Dow Jones went from an intraday high on Monday of 28,201, to an intraday low on Tuesday, of 27,321 – a drop of nearly 3%. The S&P 500 did something similar, going from 3,157 to 3,069.
As I write, the S&P 500 has already clawed back more than 50% of that drop. It now stands at around 3,112. The more international – and thus more vulnerable – Dow looks weaker at 27,650.
For those that like to closely analyse these things, here is what Trump actually said (eccentric capitalisation and all).
First on tariffs: “Brazil and Argentina have been presiding over a massive devaluation of their currencies. which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the US from those countries.

“The Federal Reserve should likewise act so that countries, of which there are many, no longer take advantage of our strong dollar by further devaluing their currencies. This makes it very hard for our manufactures & farmers to fairly export their goods. Lower Rates & Loosen – Fed!”
As a sound money advocate, boy does it sadden me to see money being used as a political tool like this. Nevertheless, by golly does Trump want a weaker dollar.
Later he added this: “Manufacturers are being held back by the strong Dollar, which is being propped up by the ridiculous policies of the Federal Reserve – Which has called interest rates and quantitative tightening wrong from the first days of Jay Powell!
“The Fed should lower rates (there is almost no inflation) and loosen, making us competitive with other nations, and manufacturing will SOAR! Dollar is very strong relative to others.”
The bigger question over the next year or so is: will Trump get his way? Are we going to get a weaker dollar?
The dollar has been trading in the narrowest of ranges, though with a slight upward bias, all year. But if we get a weaker dollar, then  both US equity markets and gold will fly. So this bears watching.
As for the China trade deal, here is what Trump actually said, as opposed to what he is reported to have said: “In some ways, I like the idea of waiting until after the election for the China deal, but they want to make a deal now and we will see whether or not the deal is going to be right.”
So he is not saying there won’t be a deal until after the US general election. He’s saying “in some ways I like the idea”. That sounds to me like a man keeping his options open. Which surely makes practical sense.
When asked if he had a deadline in mind, Trump said: “I have no deadline, no… In some ways, I think it is better to wait until after the election if you want to know the truth.”
The threat of dragging this out puts the Chinese under more pressure than it does him, is probably his thinking, and it’s not such a ludicrous line of thought.
Yet, the way equity markets reacted, you would think trade between China and the US had virtually ceased. So just how bad was the damage?
’Tis but a flesh wound – a Santa rally seems likely 
If you’re day-trading or looking at stock prices on your phone all day (which you probably shouldn’t be – but you’re an adult, it’s up to you), the market action was pretty nasty and volatile.
No doubt some short sellers somewhere saw some overbought readings, went short and scalped a couple of percent. But how many other times in this ongoing bull market have we seen overbought readings that have not resulted in sell-offs? They’ve just led to more overbought readings.
Nobody rings a bell at the top of the market, but I don’t think Monday was the top. Far more probable was that this was just another of those violent corrections we have seen in an ongoing bull market.
Markets have had a rip-roaring autumn. As a result, they were overbought. It’s normal and natural that some kind of sell-off should occur. The only question was when.
You can blame Trump if you like – and certainly his comments didn’t help, even if he was only saying what he thought – but I’d say his comments were more the excuse, or the trigger, than the fundamental reason for the sell off. When we look back at this week six months or a year from now, this whole episode will look fairly meaningless.
Anyone who is long US equities wants them to go higher. But there can’t be many people who want that quite as much as Trump himself. If he gets his weaker dollar, he will get his way. He may even get his way without a weaker dollar.
I have many faults, but one of them – and apparently this is typical of someone of my star sign (Virgo and Virgo rising) – is that I can be a little petty or perfectionist. I’m very much a US stockmarket bull. I have been for a long time, as regular readers will know, and I wrote about my latest buy signal back in the spring.
But I would actually like stockmarkets to pull back a little more than they have.
Earlier in the autumn, we broke out to new highs. I said buy the break out.
But for this bull market to look really solid from a price action point of view, I’d like to see it come back to the break-out point, for the re-test to hold, and for us to move higher from there. Structurally, that would look really sound.
The break out point on the S&P 500 was around 3,030. On the Dow it was 27,400. So, as far as the Dow is concerned, mission accomplished!
As far as the S&P is concerned, will the market gods grant us a chance to go back and test those levels (where we buy, buy, buy with a stop just below)? Or do we go higher from here?
The next annual event we have to look forward to is the Santa Claus rally. Despite the rough start, the odds – says Jeff Hirsch at Almanac Trader – still favour a gain for the rest of December. I’d expect a bit more choppiness first, however.
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere. If you want a signed copy, you can order one here.

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