Daily State Of The Markets: 'Tariff Tantrum' Triggers The Retest Phase

Summary

• It is clear that the "tariff tantrum" is the focal point of the market.
• Last week's move down appears to have triggered a "retest"
• However, the indicators tell us that the bulls should be given the benefit of the doubt here.

The "Tariff Tantrum," as it is being called, is clearly the current focal point of the market. With the glaring exception of the White House, most everyone agrees that embarking on a trade war doesn't do anybody much good. And whether or not the president actually makes good on the threat to impose tariffs of 25% on steel and 10% on aluminium remains to be seen.

However, the bottom line here is markets hate uncertainty and the proposed tariffs bring all kinds of uncertainty into the mix. Profits. Retaliation. And unintended circumstances to the economy are the primary issues traders appear to be fretting over presently.

Just like that, the two-week rally off the correction low ended and the "retest" began. Anyone who has been around awhile knows that emotional declines tend to follow a similar pattern. Something I call the "crash playbook." First, there is the dive that comes out of nowhere. Then the emotional or panic low. Then the "dead cat bounce." Then the "retest." And finally, the "bottoming/basing phase" takes hold. And the entire process tends to take a few months.

So, with the S&P 500 putting in three pretty strong down days and breaking back below its 50-day moving average last week, it appears that the "retest" is underway. The question now, of course, is how low will it go?

Remember, a retest can take many forms. The market can simply head down for a few days before buyers decide values are good and it's time to get back in the game. Or the retest can become much more literal and stocks run back down to the prior lows - sometimes even exceeding those panic lows. Such a move tends to be scary and wash out the remaining "weak hands." This creates a moment where everybody who wants/needs to sell, does so. And in short, this is the stuff that bottoms are made of.

What Do The Indicators Say?

Whenever the question of what Ms. Market is likely to do next from an intermediate-term perspective arises, I look to my indicators for clues. And this is what my Monday morning report is all about.

In looking at the indicator boards, it is clear that the Trend indicators are not so hot right now. The Momentum indicators vary by time-frame. The Early Warning board is starting to lean bullish. And the External Factors board is a bit discouraging. However, my "Primary Cycle" board, which is a group of my favorite longer-term market models designed to tell me which team is in charge, suggests that this remains a bull market until proven otherwise.

Sure, the Risk/Reward Model is negative. But as I've been saying for over a year, this model has been struggling with the current environment due to the heavy emphasis on monetary and sentiment indicators in the model. Yet at the same time, the fact that the model reading is red, should remind us that this is NOT a low risk environment.

My Take

My takeaway on this windy Monday morning in Golden, Colorado is that we have a "bad news" market on our hands at the present time. This trend is occurring within a corrective phase, which is occurring within a cyclical bull market, which is occurring within the context of a secular bull phase. So, while there is no telling what stocks will do this week, I believe we remain in a buy-the-dips environment.

With that said however, we must keep in mind, that all good things come to an end at some point. Therefore, it is important to remain alert for things like a peak in either earnings or economic growth and to stay flexible.

Thought For The Day:

Don't worry about losing. Think about winning. - Mike Krzyzewski