Hope turns to disappointment

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On Tuesday the S&P 500 got off to a rocky start following the Labor Day weekend. Trump and Canada couldn’t come to terms on a new NAFTA and that let air out of last week’s hope-filled rally to all-time highs.

Tuesday’s weak price-action fits perfectly with what I wrote last week:

If the best trade is buying weakness and selling strength, no matter how safe 2,900 feels, this is definitely the wrong time to be buying. Resist the temptation to chase these prices higher because recent gains make this a far riskier place to be adding new money. The risk/reward shifted away from us because a big chunk of the upside has already been realized, while the risks of a normal and healthy dip increase with every point higher. In fact, if the best trade is buying weakness and selling strength, this is actually a darn good time to start thinking about locking-in profits. Remember, we only make money when we sell our winners and it is impossible to buy the next dip if we don’t have cash.

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It is little surprise Canada didn’t roll over for Trump and Friday’s arbitrary deadline came and went without a deal. Both sides threw barbs at each other in the press over the weekend, but this is little more than grandstanding for the cameras that accompanies all political negotiations.

Even though we didn’t get a deal this weekend, there is no reason we shouldn’t expect one over the next few weeks. Canadian and American businesses are far too reliant on NAFTA and it would be incredibly disruptive to both economies to throw it out. Even the president of the powerful AFL-CIO union came out strongly against excluding Canada. If the unions are against it, you know it must be really bad for business.

While the market dipped Tuesday, the losses were modest and we are still at levels that were all-time highs last week. This is more of an exhale following a strong run than the start of a bigger correction. This is an incredibly resilient market and owners have refused to sell far more dire headlines this spring and summer. There is no reason to think anything changed this week.

As I wrote last week, there are plenty of good reasons to take profits at these highs, but selling because Canada didn’t jump aboard Trump’s ‘new and improved’ NAFTA deal by an artificially imposed Friday deadline is not one of those reasons.

We take profits because it’s been a nice run. We take profits because we are running into resistance. We take profits because we buy weakness and sell strength. We take profits because we need cash to buy the next dip. But we definitely don’t sell because we are afraid of Canada collapsing this market.

Personally, I would love it if this selling spiraled out of control so that we could jump in at much lower levels. Unfortunately, I doubt we get that lucky. Instead, I expect this dip to bounce quickly. Support at the old highs near 2,870 is as far as this goes, and most likely we won’t even get that far. This is simply an exhale after a nice run and we shouldn’t read too much into this normal, healthy, and periodic gyration.

Until further notice, keep doing what has been working. That means buying weakness and selling strength in our short-term trading account and sitting on our favorite stocks with our longer-term investments.

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Jani

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