Are Stocks Stuck in a Trading Range? After a big bounce from the April bottom stocks are having a hard time breaking above 6,000 for the S&P 500. Why is that? And what happens next for stocks?...
This story originally appeared on WallStreetZen
We have enjoyed a tremendous bounce from the bottom of the April correction. Now it seems we are just a stone’s throw away from the all time highs at 6,147. Yet I think it will take a lot more proof of success on tariffs for that to happen.
Meaning we have really been stuck in limbo since mid May when took our first shot at breaking above the psychologically important 6,000 level. Since then, we have traded in a narrow range on the ebb and flow of the tariff headlines.
My point is that this trading range will likely be in place til investors have more conviction on the final outcome of these plans that could dramatically effect inflation and the odds of recession.
We will talk more about that in the June commentary shared below.
Market Commentary
Here is the most recent picture of the S&P 500 where the current trading range becomes a lot more evident.
After flirting with bear market territory in early April we enjoyed a tremendous bounce culminating in the May 12th bullish breakout back above the 200 day moving average (red line).
Since then stocks kept moving a notch higher as the tide of tariff stories turned more positive. But then investors started to realize that the “outline” of a deal with China is different than a finalized deal.
Plus, there are at least 10 other major trade deals that need to be hammered out to create a bit more calm such as with Mexico, Canada and the EU.
More and more investors believe this is just 2018/19 revisited. Meaning that the trade wars we engaged with back then started with 2 sides very far apart (namely the US and China). Then as time rolled on each side became more open to reasonable compromises.
The net result was a return to bullish conditions after an extended correction. Now with investors once again used to Trump’s “unique” negotiating style the odds point to the same being the case here.
Yet they are not so certain of that outcome to take out the previous high of 6,147. This points to the formation of a trading range giving investors time to see what comes next.
That range is framed on the low side by the 200 day moving average currently @ 5,790 and the psychologically important 6,000 level that we have been stuck below since mid May.
In my May 21st Zen Investor webinar I talked in-depth about the risks still out there with tariffs and potential recession. In essence the better those things are resolved...the sooner we take off on a bullish run above 6,000 followed by a break out to new highs above 6,147.
Or simply stated, the bull market would be back on with probably another 2-3 years of upside on left on the clock.
Conversely, if the worst feared outcomes for tariffs comes to fruition, then we are looking at likely higher inflation and potential recession. Obviously, these outcomes would result in further weakness for stocks.
If just inflation, then maybe retreat towards the April lows of 4,800. If recession, then expect bear market with lows closer to 4,000.
Gladly I still see the bullish outcome as the more likely as Trump has shown enough cards that his tariff demands are not really as extreme as first appeared. Some investors are calling this the TACO trade.
Trump
Always
Chickens
Out
That is an amusing term that is certainly getting its fair share of laughs. However, I think its misstated.
It’s not chickening out if you never intended to follow through on the threats. It’s just part of his negotiating style. Like lowballing someone on the purchase of a house to see if it weakens their position on what they take as the final offer.
Clearly most investors have skewed the odds in favor of return to bullish conditions given how we are so much closer to the highs than the recent lows. But again, this is a logical time for folks to press pause and see what happens next before the next major move for stocks.
Our investment plan in the short run with a likely trading range at hand is to appreciate that the average stock may be breakeven...but our goal is to own better than average stocks (nay...great stocks!) thanks to the 115 factor review of the Zen Ratings.
So, I like our odds to outperform during this holding pattern for the broader market.
Note that on the other side of this I still say bull market and new highs is most likely. That is why the majority of our portfolio is Risk On growth stocks with the most upside potential.
However, we have just enough defensive/conservative positions sprinkled in to reduce the volatility in our portfolio if things get rough once again.
All in all, I think we are properly aligned with current market conditions and ready to skew more bullish or bearish depending on how things proceed on the tariff front.
What To Do Next?
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