Near-term dynamics:

1. Last week finished in relatively, although not resoundingly, bullish fashion in the U.S., while China’s equity indexes finished notably strong, presenting a bullish setup to start the coming week. In currencies this evening, the key pair to track to gauge what most concerns traders these days (U.S./China trade developments) – AUD/JPY – is trading higher; also bullish coming into the week.

2. US/China trade negotiations are reaching their final stage. The market is likely to rally initially on confirmation that a deal has been struck; the details regarding existing tariffs, however, pose real downside risk. As it stands, some tit-for-tat tariffs will remain at the behest of the U.S., which, at a minimum, will restrain any positive reaction in markets; could in fact spark a notable selloff.

3. US/Japan trade negotiations have begun. Japan desperately wants to avoid a tit-for-tat tariff episode. There’s no indication of where those talks are headed at this point.

4. The US and the EU are ruffling each other’s feathers over the WTO declaring that both are guilty of illegally subsidizing their respective plane manufacturing behemoths. The U.S. struck first by citing the WTO’s findings over Airbus as justification for proposing tariffs on $11 billion worth of EU imports, and an antagonistic tweet from Trump. The EU followed up last Thursday by citing the WTO’s findings over Boeing as justification for threatening tariffs on $20 billion of U.S. imports. The EU states that it would prefer not to enter into a tit-for-tat tariff episode. A trade row between these two would reflect negatively (resoundingly so) on equity markets.

5. Last Friday the 1-month vix future spiked higher; suggesting volatility traders are bracing for a potential near-term selloff. A jump in the put/call ratio (although not as dramatic) confirmed that sentiment on Friday.

6. The intraday trading pattern has lost its bullish character of late. What was a consistent pattern of strong finishes over the past few weeks, has now become an ambiguous picture that features several days where a gap higher at the open eroded into, at best, a weak trading session; suggesting that the smart money may be fading rallies.

7. Earnings season is now in full force. The setup is contrarianly bullish, as the market tends to perform notably well when earnings expectations are notably low, which is the case presently. However, with the palpable uncertainty over the present state of US/World trade relations, traders are unlikely to bid stocks hugely higher (in the aggregate) on better than expected earnings announcements.

8. Potentially strong technical resistance sits .5% higher at 2920 on SPX.

Despite my guarded near-term view expressed above, the market internals (volume trends, breadth, relative results by sector, etc.) are unequivocally bullish. Nevertheless, the above indeed makes for a near-term potentially precarious setup that could have those internals flip bearish in short order. On the other hand, given the monster political risk of a misstep in trade negotiations/decisions, should the U.S. change its narrative on the use of tariffs – i.e., express a strong desire to avoid a repeat of the China experience – money would absolutely scream into global markets, pushing stocks markedly higher, and, thus, more than making up for what would’ve otherwise been a very strong 2018.