The S&P500 experienced its first one percent loss since October. This came as quite the shock for those that assumed the Trump trade would take us to the moon. But it was little surprise for those of us that have been doing this for a while. Many people will claim they saw this was coming, but the following is what I wrote the day S&P500 exploded to record highs following Trump’s first address to Congress and when Trump mania reached a fever pitch:
While owners feel good and comfortable with their positions, we really should be asking ourselves if this is a better place to be adding new positions or taking profits. Risk is a function of height and by that measure this is the riskiest the market has been in quite some time. Momentum is clearly higher and will likely continue, but I feel much safer buying discounts than paying a premium. It is simply a matter of risk versus reward. This breakout carried us to record highs and has already moved us 15% above the November lows. While we can keep drifting higher, what are the odds we rally another five, ten, or fifteen percent? With history as our guide, a near-term dip is more likely than a continuation. As we started with, markets move in waves. You know it, I know it, everyone knows it. Unfortunately many in the crowd have temporarily forgotten it.
And given today’s meltdown, we now we find ourselves in the midst of this expected pullback. The more pressing question is if this the start of a major correction, or just a routine two-steps forward, one-step back?
The excuse for today’s selloff was the failure of a Republican controlled Congress to quickly reach a deal on repealing Obamacare. The thinking goes that if they cannot get their ducks in a row on Obamacare, then the much more important tax reform is also in jeopardy. But the thing to remember is this is how politics works. As the saying goes, there are two things you don’t want to know how they are made, sausages and laws. This is an ugly and drawn out process. Just because Representatives claim they won’t support this bill doesn’t mean they won’t support a bill. This is how negotiations work in politics. Grind the process to a halt, get concessions for your constituents, and then let everything proceed. If our politicians were not doing this, they wouldn’t be doing their job.
So if this is the way politics always works, should we really be worried that the repeal of Obamacare and Tax Reform are dead? No of course not, that is just as ridiculous as assuming the Trump trade was taking us to the moon. Today’s pullback is normal, routine, and most importantly buyable. But the thing to remember about buyable dips is they wouldn’t happen unless they felt real. If everyone knew it was a buyable dip, no one would sell and we wouldn’t dip in the first place. Of course this feels real and of course it is scary. Every buyable dip feels this way.
The challenge isn’t knowing if we will bounce, but when. Most owners have been confidently holding for higher prices despite concerning headlines and price-action. Are today’s headlines likely to change their mind after they stood their ground through far more bearish headlines? No probably not. That means we should expect this selloff to run out of supply soon and rebound back into the heart of the trading range. What happens after that is an entirely different debate, but at the moment this is a better place to be buying equities than selling them.
The one exception is if we stumble across truly unsettling news that shifts the market back into a half-empty outlook. That said, today’s headlines are definitely not that. Repealing Obamacare is not dead. Tax cuts are not dead. Reducing regulation is not dead. This is simply a process and that takes longer than the stock market was hoping for. The great thing for us is these discounts create profit opportunities for those that are willing to take them.
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Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.