The S&P500 bounced back Tuesday, recovering a big chunk of Monday’s selloff. Things got ugly Monday after China announced 30 billion of retaliatory tariffs in response Trump’s steel and aluminum tariffs. Fortunately the worst fears dissipated by Tuesday and the S&P500 reclaimed the 200dma and 2,600 support. While we are still on thin-ice, it was encouraging to see traders more inclined to buy the dip instead of turning Tuesday into another bloodbath.
The stock market fell in love with Trump and his tax cuts in 2017. Unfortunately the relationship has been far less blissful in 2018. Trump’s protectionist stances are contrary to the market’s preference for free and open trade. To this point the announced tariffs and retaliations have been modest and manageable. But the fear is round one could lead to rounds two, three, four, and five. The problem with trade wars is once they get started, retaliations and counter-retaliations get out of hand quickly. And so far China claims they are willing to go tit-for-tat with Trump. The biggest question is how far Trump is willing to take this.
The situation got even more complicated Tuesday afternoon when Trump announced a second round of tariffs specifically aimed at China’s anti-competitive practices. While overnight futures are down some, they are actually holding up relatively well for what looks like the start of round two of these trade wars.
It is encouraging to see the futures market only give up a small portion of Tuesdays gains. While things could change during Wednesday’s regular session, the longer these tariff headlines play out, the more they get priced in. That’s because owners who fear a trade war with China have been bailing out of the market for several weeks already. Once a pessimist leaves the market, he is replaced by a confident dip buyer who is willing to hold these headline risks. This turnover in ownership, replacing fearful owners with confident dip buyers, is what helps the market find a floor. While it is too early to say the worst is behind us, the potential for a larger selloff diminishes with each successive round of fearful headlines. Nervous sellers can only sell once. After they leave the market, their opinion no longer matters. And maybe, just maybe this is what is propping up the market here. If it doesn’t react strongly to Trump’s second wave of Tariffs on Wednesday, then the market has already largely priced them in.
And none of this surprised those of us that were paying attention. As I warned subscribers last week, holding near 2,600 for several days was an ominous sign. The inability to rebound decisively left us vulnerable. The longer we hold near support, the more likely it is we will violate it. And that is exactly what happened Monday. While I had no idea what the headline would be, I knew we were vulnerable to a reactionary selloff and the risks were elevated. But I also told subscribers that a dip under support was to be bought, not sold. As I wrote earlier, the longer a story plays out in the news, the more it gets priced in. The first dip is always the most shocking. But each successive dip gets smaller and smaller. While Monday’s headline losses were shocking, most of what we gave up were last week’s rebound. The actual dip under support was far less significant and bouncing so quickly after crashing through support was an encouraging buy signal.
A couple of months ago people were begging for a dip so they could get in at cheaper prices. But now that the dip is here, those same people are too afraid to buy. The thing to remember about risk is it is a function of height. Despite how it feels, the lower we go, the less risky owning stocks is. That’s because a lot of the downside has already been realized. While we could slip even further over the next few days and weeks, without a doubt it is better to have bought at these levels than at much higher prices when it felt safe. The most successful traders are the ones who buy when other people are fearful and sell when everyone else feels safe. Even though prices could slip a little further, this is still a very attractive place to be buying. We were asking for a dip and the market gave it to us. Don’t lose your nerve now just because everyone else is freaked out.
Bitcoin continues to struggle. Even though prices bounced on Tuesday, a few hundred dollar rebound from recent lows is a pathetic bounce for BTC. We are still most definitely in a strong down trend and there is no reason to think the worst is behind us. The thing to keep in mind is prices bounce decisively from grossly oversold levels. It is hard to claim last week’s dip to $6,500 was anything like the shocking free falls over the last few months. And the same can be said of today’s few hundred dollar rebound. If we haven’t reached shockingly oversold levels yet, then we are not done falling yet. Expect prices to undercut Feburary’s lows over the next few weeks and that violation to trigger a large wave of defensive selling. Don’t expect prices to bounce until we fall into the $4k range. Then and only then will it be safe to buy the bounce.
The tech trade has also been weighing on the stock market lately. But the fever broke Monday when FAANG stocks failed to undercut their recent lows (unlike the broad market). That relative strength told us prices were actually firming up because owners were less inclined to sell them. As the saying goes, the stock market predicted nine of the last five recessions. The same can be said for the market predicting the demise of the tech trade. In a few weeks time most people will be kicking themselves for not buying this dip.
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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.