Over the past few weeks, the stock market has grinded higher, but recently began showing some subtle signs of a slowdown in momentum. These weren’t major red flags. And, given the strong rally from Christmas Eve, sellers have been punished in all of 2019.
Having said that, the subtle signs of slowing momentum coincided with a technical pattern known as a double top. As we approached the old highs from last October, the odds of sellers looking to lock in profits from recent months and temporarily sit on the sidelines were high.
And, it doesn’t stop with a double top. How about a triple top? On the chart below, you’ll notice 3 distinct “tops” in the last 18 months. We’re not the only ones watching this.
All that was needed for a sell off was an excuse to sell and President Trump (and the Chinese apparently) gave investors that reason. More tariffs and trade tension over the weekend combined with tension in the Middle East involving a U.S. aircraft carrier was the perfect recipe. So, the selloff has begun. How long it will last, nobody knows. So, while the obvious trade is for the market to continue downward, traders realize that we’re only one tweet away from the stock market going back up to new highs. But, for the time being, we wait.
It’s interesting to note that coming into the weekend, both the U.S. and Chinese stock markets were performing fabulously. Did both the U.S. and China feel as though they had some negotiating power because of their strong markets? Probably so. Why not see if they can get a better deal? So, the timing of the most recent “disagreement” on trade makes sense.
As I tweeted out recently, most negotiations get the heated right before a deal is done. So, it wouldn’t surprise us to see a deal get done sooner rather than later. But, we should all be prepared that the news flow could get worse in the short-term and the correction could just be getting started. How do we prepare? Not by selling everything today. But, by having a portfolio that makes sense for your circumstances. You should already have a portfolio that can withstand some speed bumps along the way. The last speed bump we had was in early March and that only lasted a few days. But, even December was a speed bump in the big picture.
Corrections (short-term downdrafts) can happen for any reason at any time. But, news events don’t lead to bear markets (long lasting downdrafts).
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