Stocks Rally As U.S. & Mexico Form A Preliminary Trade Agreement

Monday was an amazing day for equities as the S&P 500 increased 0.77% and the Nasdaq increased 0.91%. The Russell 2000 was only up 0.16% because the catalyst for the ‘risk on’ trade was the trade deal between America and Mexico.

Large caps are helped by trade more than small caps. The timing of the deal puts more evidence behind my thesis that Trump wants to get them done before the mid-term elections to make his party look better to the voters.

The CNN Fear and Greed index has increased to 77 which is extreme greed. I am now bearish in the short term because stocks are overbought. A few months ago, it was popular to say the bull market was stalling and now it’s popular to say new all-time highs are certain.

This sentiment change explains why I’m bearish.

The trade deal with Mexico is a positive, but stocks still can’t go up every day.

The stocks most affected by trade did the best. GM stock was up 4.84%; Boeing stock was up 1.24%; and Caterpillar stock was up 2.78%. The Mexican peso was up 0.7% versus the dollar.

The best sectors were the financials and materials which were up 1.34% and 1.47% respectively. The worst sector was the utilities which declined 0.64% because the action was ‘risk on.’

Trade Deal With Mexico

The trade deals need to be passed by Congress. This preliminary deal with Mexico will be voted on after the mid-term elections. It will be interesting to see what will happen to all these deals if the GOP loses control of Congress.

This makes the elections more important than they’d otherwise be. Markets often root for gridlock because it means nothing bad will get done which means there is certainty.

In this case, gridlock would be a problem. If none of the trade deals are allowed to pass, there will be a trade impasse.

The biggest negative of this deal is the lack of certainty on what it means. We don’t know if Canada will be included in the deal as Canada isn’t included in the preliminary agreement.