Caution Is the Watchword of the Day in Investing

Markets have continued to navigate their recent volatility so far this week. Monday saw the S&P 500 and Nasdaq drop about 1.2% on the day. Tuesday brought a respite and a big rally in the market that was triggered by the Trump administration moving back the proposed date for new 10% tariffs on many Chinese imports. Some items will see tariffs delayed indefinitely. New trade talks also are slated to commence shortly.

I wish I was sanguine that these measures increased the odds of getting some sort of trade agreement enacted. Unfortunately, I think this was done in part to avoid negative impacts on retail and consumers during the big holiday season.

China has shown no urgency to restart talks or make any significant concessions, or at least any it will keep long term without an effective enforcement mechanism to which it will not agree. With tension in Hong Kong rising by the day, Chinese leadership can't afford to show weakness on any front. Besides, the Chinese seem content to wait this administration out hoping they get much more pliable negotiating partners after the 2020 election.

Not that the trade war is not having a significant impact on China. Industrial output just posted its weakest levels in 17 years in the Middle Kingdom. Retail sales and fixed-asset investment are also slumping.

Unfortunately, the Chinese have little room or will to negotiate at this time. The Trump administration also is showing little willingness to accept something that will allow both sides to save face and is focused on getting major and long-overdue concessions. This means investors should be ready when new trade talks go nowhere, as this will roil the markets again should talks break off and some tariffs are re-imposed

The escalating trade war is inflicting collateral damage outside the two largest economies in the world as well. Germany's economy just had a slight contraction in the second quarter. The U.K. contracted 0.8% during the quarter, the first negative quarterly figure since 2012, as both Brexit and trade tensions take their toll.

We also have the yield curve that just inverted as the 10-year Treasury yield went below the two-year overnight. This is a notable signal for recession watchers and should have the market opening down here on Wednesday.

Despite the recent turbulence in the markets, the S&P 500 is still up in the low teens so far in 2019 although it is barely up from its level a year ago. The Russell 2000 is trading almost exactly where it was two years ago.

In short, I continue to be cautious in this sideways market. I continue to deploy dry powder into equities on significant market dips primarily using buy-write option strategies. Several of the buy-write positions I initiated during the major swoon in the market in the fourth quarter expire in the money this Friday, which will bolster the cash position in my personal portfolios. In my next column I will highlight targets I have in mind for new buy-write positions during the next dip in equities.