The S&P 500 surged to fresh highs as investors chose to ignore trade war headlines and instead embraced optimistic third-quarter forecasts.
Fortunately, readers of this blog saw today’s breakout coming from a mile away. I wrote the following two weeks ago when the market was threatening to tumble under 2,870 support:
“The economy continues to hum along and that is the only thing that matters to the stock market. As long as the economic numbers look good, expect prices to keep drifting higher. Institutional money managers that were hoping for a pullback will soon be pressured to chase prices higher or else risk being left even further behind.Their buying will propel us higher through year-end. Unfortunately that doesn’t mean the ride between here and December 31st will be smooth and uneventful. Expect volatility to persist, but unless something new and unexpected happens, every dip will be another buying opportunity.”
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While it is easy to say the market doesn’t care about Trump’s trade war after we surged to record highs. It wasn’t nearly as obvious three weeks ago when a lot of owners were selling the fear and uncertainty, causing prices to fall four days in a row, and five out of six trading sessions. We get paid for seeing these things before everyone else, not after it is obvious to the crowd.
Nothing has been resolved between the US, China, Europe, and Canada and no doubt things will get worse before they get better. But our market has been telling us all summer it doesn’t care. These events haven’t put a noticeable dent in our economy or corporate profits, so most investors are ignoring the noise.
So far Trump’s trade war went from $15 billion in steel and aluminum tariffs to now we are taxing more than 50% of everything that comes from China, and they are taxing 85% of everything we send their way. The way both sides are going, a further escalation is inevitable, That means we are not far away from both sides taxing everything. But if the market doesn’t care about 50%, bumping it up to 100% won’t make much of a difference.
Without a doubt, we are living in a “half-full” environment where most traders assume things will turn out for the best. That’s why owners overlook negative trade headlines so quickly.
This is a typical trait of an aging bull market. Five years ago traders were afraid of their own shadow and panic-sold every bump in the road. The catastrophic injuries suffered during the 2008 financial crisis were fresh in most investors’ minds, and they lived in fear of a repeat. But here we are nearly ten years later and every defensive sale proved to be a costly mistake. After years of getting burned selling prematurely, most traders learned to stop reacting defensively. That’s how we ended up in this situation where the market refuses to sell off no matter what the headlines are.
While conventional wisdom tells us complacency precedes the fall, what conventional wisdom fails to mention is periods of complacency last far longer than anyone thinks possible. No doubt this bull market will die like all the others that preceded it, but it will not be dying anytime soon and we should enjoy the ride higher.
There is nothing to do with our longer-term investments expect to hang on and enjoy the ride. Things are a little more challenging with our short-term money. We are left with a choice of either staying in cash and waiting for the next buyable dip. (Cannot buy the dip if we don’t have cash!) Or shifting our time horizon and sticking with a medium-term buy-and-hold. Neither choice is wrong; it largely depends on a person’s trading philosophy and risk tolerance.
The next significant milestone is 3,000 and at this rate, it is only a few weeks away. Bad news won’t take us down and good news will push us higher. These record highs are scary, but a market that refuses to go down will eventually go up.
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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.