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We suffered a down market this week with the Standard and Poors 500 Index (SPX) opening Monday at 2791 and closing today at 2752, down 39 points for the week. In fact, we lost five points in the last two minutes of trading this afternoon. That will give us something to think about this weekend. Is this a residual effect of the correction? Or is this a market reaction to the discussion of trade tariffs?

The healthy effect of a correction is to adjust prices to more reasonable levels. Maybe the market is sending us a message something like:

The market high of 2873 toward the end of January was definitely over-valued.

Recovering over 70% of the correction by the end of February was too much, too soon.
Trying for that high again last week was still too much, too soon.

Perhaps the recent market range for SPX from the low this month to the high last Friday represents the trading range for the near-term future?

The Russell 2000 Index (RUT) has outperformed SPX handily since the correction and came very close to matching its previous all-time high last Friday. But this week took the wind out of RUT’s sails, closing today at 1586 after opening the week at 1602.

The NASDAQ Composite was even more bullish than RUT last week, breaking its previous all-time high last Friday and then again on Monday. But NASDAQ just settled lower the rest of the week, closing today at 7482.

Most analysts attributed the market weakness two weeks ago to trade tariff talk and fears of a trade war. Then they declared tariffs old news and cited the excellent jobs report as the driver of last Friday’s strong market. But this week’s market weakness is now blamed once again on fears of a trade war.

I saw the Secretary of Commerce, Wilbur Ross, interviewed last week and his analysis of the proposed 25% steel tariff claimed it would only add about $150 to the cost of the average new car. That seems pretty innocuous. But then I saw a Congressman claiming his study concluded the proposed steel tariffs would result in the loss of five jobs in our steel consuming industries for every job gained in our steel industry. Both of these conclusions can’t be true. Perhaps we have another case of the statistics being manipulated to suit a particular agenda.

Of course, we can’t forget that Trump is the consummate negotiator. Perhaps the end result of all of this tariff talk will be some relatively palatable tariff adjustments and all of the fear mongering was unnecessary.

I am inclined toward the alternative explanation that this is simply the market’s ongoing correction: first the market over shot to the downside and bounced hard, but overshot on the upside, and swung back lower, and so forth. If this explanation holds  any water, we should see the market oscillations slow in amplitude, resulting in a range bound market for a few weeks with the ultimate result of a more reasonably priced market. If I stand back and look at the big picture of the market, this explanation appears quite reasonable. The S&P 500 price chart does look like oscillations that are dampening on each cycle. If we accept that hypothesis, what market posture should we take?

The underlying bullish strength of this market is undeniable. Given that premise, I will be trading based upon sideways to slightly bullish expectations. Stocks like GRUB and PANW have been largely unaffected by the market uncertainties and can be played full out bullish. Stocks like AAPL are best played with trades like diagonal call spreads that allow for some slow trimming of the cost basis over a few weeks.