Mid-week market update: Investors have seen this movie before, which I described as a Trump collar. As the accompanying chart of the trade war factor, Trump shown a pain point at which the market anxiety, as measured by the VIX and MOVE Index, rises enough that he moderates his course on tariff belligerence. As market anxiety cools down, and he makes some gains to score political capital, the Tariff Man emerges and he asserts his “Art of the Deal” persona. In the wake of the trade deal with Vietnam and the passage of the tax bill, we are back in the Tariff Man zone.
In effect, he is financing the Trump TACO Put with the sale of a Trump Tariff Man Call option on risk assets. It’s therefore not a surprise that the market is pausing its gains this week.
What’s Next?
What’s next? Market history offers investors two views. On one hand, the stock market tends to pull back after the S&P 500 comes off a ride on the upper Bollinger Band. However, there are some minor exceptions when the market has consolidated sideways after the upper BB ride.
Momentum Support
On the other hand, the rally off the April panic bottom was extraordinary inasmuch as it was a snapback of capitulation selling, characterized by strong price momentum during the recovery phase.This historical analysis of similar snapback rallies has shown strong sustainable gains over a 2-12 month time horizon. Based on this analysis, we are in week 2 of the rally. Despite the positive average returns shown in weeks 1 and 2, the % positive success rate in the first two weeks of the rally was weak. The success rate and average return improves at the one-month horizon, but risks remain.
That’s where we are. If the current market rally were to follow past momentum examples, a useful template might be the 2011 recovery experience when the S&P 500 went on several upper BB rides after it recovered and broke up through resistance in early 2012. In those cases, the pullbacks after upper BB rides tended to be relatively shallow, which is my base case scenario.
Other historical studies are supportive of the price momentum bull case. Wayne Whaley observed that “the S&P has now advanced 26.0%, doing so in less than a Quarter, 86 calendar day (April8-July3) to be precise…Looking back through post 1950 history, I can only find five prior occasions in which the S&P has advanced 25% in less than a Quarter and none of those five occasions were anywhere near an impending top.
In addition, sentiment is not stretched, which gives the bulls more room to run. Fred Meissner of the
Fred Report observed that Investors Intelligence “looks more like an intermediate bottom than a top”. The percentage of bears haven’t capitulated yet, indicating there is a lot more underlying buying power for equities in the coming weeks, especially if stock prices were to continue rising and traders chase the S&P 500 upwards.
In conclusion, the path of least resistance for stock prices over the next few months is up. While it’s impossible to accurately pinpoint how far the S&P 500 pull back after the latest upper BB ride, traders should be accumulating long positions this week and next week in anticipation of more highs in the coming days.
Cam, possible to resend me that alert? I did not get min