Why Today’s Flat Open is Actually a Really Good Thing…

Don’t you just love it when an already good thing turns out even better than you expected?

Many people don’t know this, but one of the most significant inventions – one used by countless people on a daily basis – was created completely by accident…

I’m talking about the microwave.

Physicist Percy Spencer worked for the defense contractor Raytheon during World War II, and earned several patents for improvements to radar transmitters for the U.S. military. His work would ultimately help to increase the range and efficacy of U.S. radar installations.

But that’s not the only improvement he made…

During one particular experiment in 1946, in which Spencer was trying to boost power levels of a radar device, he noticed that the peanut cluster bar had melted (some versions of the tale say it was a chocolate bar, but those closest to him will tell you that Spencer always carried a peanut cluster with him because he liked to feed squirrels. This is an important distinction because chocolate melts at a much lower temperature, meaning that being able to melt a peanut cluster with microwaves was much more noteworthy).

The next day, Spencer brought in corn kernels and placed them under the magnetron that projected the microwaves. Sure enough, the kernels popped, and Spencer shared the first-ever microwave popcorn with the entire office.

Thus, the microwave was born.

By 1975, more than 1 million microwaves were sold every year. Spencer’s discovery would prove to be incredibly impactful to the way we cook, even to this day.

In turning our attention to Wall Street, we see another market positive (in the form of the positive G20 Summit outcome) that could end up being even better than we expected…

After the Goldilocks Trade Truce – What to Expect

This past weekend, all market-watching eyes were indeed on Osaka, Japan and the meeting between Presidents Trump and Xi.

On Saturday, I wrote to you that there were three possibilities for the outcome from the meeting. Here’s a recap:

“Traders and investors seem to have an expectation that no real “deal” will be done. So that makes a “Goldilocks and the Three Bears” scenario for the weekend…

  • Papa Bear Scenario: “Goldilocks found his bed too hard”. This happens if one or both sides takes a hard line and calls off talks, ends them abruptly, or says they’re ready to fight for the long haul. Markets will dive south – how far of a drop will depend on how hard a line is taken. I think this is the least likely of the three scenarios.
  • Mama Bear Scenario: “Goldilocks found her bed too soft”. If some meaningful movement is made with IP protection, or a firm timeline for removing or reducing tariffs, we will have gotten more than most expected. Markets will open up very strongly for overnight trading Sunday. Again the size of the move up will be aligned with how big the positive surprise is.
  • Baby Bear Scenario: “Goldilocks found his bed ‘just right'”. Here we get some form of positive sentiment and statements from both sides but no clear new concessions or path forward. This is largely what the market expects. If the statements are more positive with real timelines attached, markets move up. If they’re more bland than expected, we move down modestly. Any move toward a resolution will be seen as at least a mild positive by the markets.

We got the “Baby Bear Scenario” – a call to restart negotiations with some key concessions thrown in by both sides: The U.S. suspended upcoming tariffs on a new $300 billion dollars’ worth of imports from China, while China restarted suspended agricultural purchases from the U.S. And there was also a very unexpected announcement that the U.S. would halt the export ban for selling to Chinese tech giant Huawei.

All these factors led to the S&P 500 opening at new all-time highs on Monday morning. But after poor economic data came through showing a continued slowing of manufacturing growth (though not as bad as analysts forecast), the market gave back a large chunk of their gains:


By the afternoon, the market had given back most of its gain. But recovered somewhat into the close.

Importantly, as I’m writing this on Tuesday morning, it looks the market has a good chance of avoiding the debacle that happened after the last G20 meeting.

You may remember that we were in a similar tariff/trade stalemate with China heading into the meeting in Brazil at the end of November. At that late 2018 meeting, the U.S. and China postponed the pending tariff enforcement for 90 days, and the markets reacted with a similar up opening on Monday December 3rd. But on Tuesday, President Trump made his now-infamous “Tariff Man” tweet and the Dow plunged 800 points:


This week, there was another tariff trigger that could have kicked off another big down day – The Trump administration threatened the European Union over the ongoing battle around subsidies paid to the Airbus company (Boeing’s main competitor).

And yet the market is set to make a flat open. That more bullish tone gives the market a great chance to push back to the top of the charts near all-time highs during the holiday shortened week.

We’ll remain bullish and buying pullbacks until further notice…

Happy Fourth of July!

Great trading and God bless you,

 

 

D.R. Barton, Jr.

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