TL;DR: At the end.
On Thursday, the S&P 500 continued its rebound from a dip under 2,800 support. But such a reversal shouldn’t surprise readers of this blog. Last week I wrote:
“Tuesday’s tumble challenges 2,800 support for the third time this month and obviously, there are two ways this plays out. Either the market collapses, or prices bounce. Of course, what that looks like over the next few days and weeks is less obvious. The most likely scenario is prices crash through 2,800 support and just when things look their most hopeless, supply dries up and prices bounce.
The stock market loves fooling everyone and violating support just before bouncing is the best way to trick both sides into giving away money. Convince the bulls to abandon their favorite positions all while tempting bears to jump on the short bandwagon. But rather than prove these second-guessers and cynics right, the market embarrasses both by turning around not long after they make their bearish trades.”
And so far that is exactly what happened this week.
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Now that prices are back above 2,800 support, the question is what comes next?
The biggest headline in front of us is Monday’s deadline for new tariffs on all Mexican imports. If Trump follows through on his threats, it creates an all-new front to his trade wars. This adds punitive taxes on imports from our two largest trading partners. New taxes are great if you are a government bureaucrat and love spending other people’s money. Unfortunately, new taxes are a burden on hard-working American consumers and US business. And as most business savvy people know, increasing taxes is never good for the economy.It doesn’t matter what the Fed does, if the US economy falls into a recession, stocks will go down. Click To Tweet
The biggest threat is if these growth robbing taxes push the US economy into a recession and is why the Fed is growing increasingly cautious. They told us this week they were open to rate cuts if the trade war weakens the US economy and those comments kicked off the latest rebound. But in reality, it doesn’t matter what the Fed does, if the US economy falls into a recession, stocks will go down.
No matter what happens months from now, we trade the market we are giving and so far this one keeps acting like it wants to go higher. As long as we hold 2,800 support, then we should continue giving it the benefit of doubt. But if we cannot hold this critical support level and start a new trend of lower highs, we need to shift to a more defensive outlook and for the first time in a long time, that includes our long-term investments.
I won’t pretend like I know what Trump is going to do and if those decisions will push the US into a recession. Instead, we follow the market’s lead. If it doesn’t want to be bothered by these things, then neither should we. If it wants to overreact to them, then that reaction is what we need to base our trades on.
Prices peaked in early May near 2,950. We bounced up to 2,875 in mid-May. And now we are bouncing to 2,840 in early June. If prices fall under 2,800 next week, that will mark our third lower-high and things don’t look good. But if prices continue recovering next week and remain above 2,800 support, this Monday’s dip to 2,750 was just another bump on our way higher.Politicians are holding this market hostage and traditional stock analysis doesn’t apply. The best we can do is follow the market’s lead and trade accordingly. Click To Tweet
I wish I could be more definitive with my outlook, but politicians are holding this market hostage and traditional stock analysis doesn’t apply. The best we can do is follow the market’s lead and trade accordingly.
Most Likely Next Move: If prices hold above 2,800 next week, then all is good. If we crash back under support so quickly after retaking it, demand is becoming a serious problem and we should expect lower lows.
Trading Plan: Buy the dip, but keep a tight stop. Start small and only add more after the trade starts working.
If I’m Wrong: Trump’s trade war is killing this bull market and that will show up as a series of lower highs. If investor sentiment flips, this could be the start of a much longer retreat.
What’s a good trade worth to you?
How about avoiding a loss?
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Tags: S&P 500 Nasdaq $SPY $SPX $QQQ $IWM
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, 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 young children.