What Wall Street Gets Wrong About This "Kind-Of Rally"

The Dow and S&P 500 both broke three-week losing streaks last week, and the Nasdaq Composite was up for the second week in a row.

We're heading back up closer to all-time highs.

The Dow's only 582 points, or 2.12%, from Olympus, and the S&P 500's only 1.9% from its all-time highs. On the other hand, the Nasdaq Composite, the index that's been higher for two weeks, is 3.5% away from "magic land."

So why do I say this is just a "kind-of rally" with all this seemingly good news?

Clearly last week was an otherwise down week if not for the one positive lifting market on Friday: trade talks.

This was good news, until it was stripped down and re-rated by market judges.

The reason that the Dow was up more than 500 points but ended up on Friday only 242 points higher was the whole judgement thing.

The United States looked like it scored a victory because China agreed to purchase $40 billion to $50 billion in U.S. agricultural products, at least according to the White House, but the time frame of any purchases wasn't immediately clear.

Also, China agreed to open its market to international financial services, again according to the White House. Trump, potentially allowing U.S. banks and insurance companies to expand in China: no timetable there either.

China looks like it scored on account of the United States not moving forward on Oct. 15 with a planned increase in tariff rates to 30% from 25% on about $250 billion of Chinese goods.

But that's not all...

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They Say It's a "Deal," but We Won't Get One Anytime Soon

This news woke up markets, but they sold off into the close as soon as investors and traders mentally compiled a list of what wasn't even discussed.

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  • Tariffs of 15% are still scheduled to be imposed on $156 billion of Chinese imports on Dec. 15, barring further progress in the talks.
  • The United States didn't announce any relaxation of restrictions that it's imposed against Chinese telecommunications giant Huawei.
  • The U.S. said that China would agree to better protections for U.S. intellectual property, but that this would be "addressed later."
  • The U.S. wants China to agree to a pact not to manipulate its currency. Treasury Secretary Steven Mnuchin said a pact was "almost complete." But it's been on the table for months already, and nothing's happened.
  • The United States wants China to restrict the practice of requiring American companies to share technology with Chinese partners in exchange for access to the market. Mnuchin said they had made "good progress" but hadn't reached a deal: more of the same positivity without possibility.
  • The U.S. had hoped that China would take actions to rein in state-owned companies, but no progress was cited and won't happen probably ever.
  • S. negotiators have pressed China to change rules on information security, cross-border data flows, and high-tech sectors such as cloud computing, but - you guessed it - no progress was cited.
  • Existing tariffs from both sides remain in place with no mechanism to unwind them.
  • Both sides have said that they want a way to ensure compliance. The United States said there will be a consultation process, but no details have been announced.

That list has more bullets than the Gunfight at the O.K. Corral! It's kind of long, right? That's why the rally is just a "kind-of" rally.

And that's why I didn't recommend any big moves for my subscribers last week.

Now, that brings us to the real rally engine...

Earnings Now Mean More Than the Trade Talks

This week's going to be different, not because of news, but because of earnings.

This is a chance for traders to take on a little risk, because I think the markets could go higher. I'm researching some recommendations right now, in fact. We're going to get into some plays ahead of some earnings reports, and after, we'll see where some stocks do once their numbers hit the tape.

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We're so close to making new highs; we'll see if, as I suspect, this market wants to go higher.

It's going to be all about the epic struggle between good and bad S&P 500 earnings reports, recession fears against economic strength.

And I think we'll see some volatility, too, but nothing unmanageable (or unprofitable). Markets will likely pivot away from fake deals and back toward good, old-fashioned corporate performance.

For now, I'd be cautiously long with big U.S. indexes, with plenty of dry powder on hand to capitalize on what could be a nice rally.

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About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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