Market’s classic dilemma: traders face tough choices

The stock market faces a classic dilemma, presenting traders with two starkly different choices. On Tuesday morning, the S&P 500 traded slightly lower following a tariff reduction on China. Despite the index advancing in 17 of the last 20 trading sessions, tremendous doubt remains about the economy’s ability to avoid a slowdown. This negativity and doubt have helped build a “wall of worry” that the market has steadily scaled. Investors fearing being left behind have been compelled to invest more capital, even amid concerns that the impact of tariffs and trade turmoil will soon be felt. Higher inflation expectations are building, preventing the Fed from signaling imminent rate cuts. This situation presents traders with two basic choices: stick with the trend until it ends or start anticipating a market turn. Traders who try to anticipate a turning point typically have very poor timing.

Traders’ tough choices outlined

Trends almost always persist much longer than seems reasonable. However, the danger of sticking with a trend too long is that the drop can be swift and furious when a turn does occur. My bias is to stick with the trend as long as possible, but remain vigilant and take some partial profits as things become more extended. The more bears warn of impending disaster, the higher the market climbs the wall of worry. Although something will eventually trigger a significant downside, there isn’t any imminent news flow likely to spark that. Moody’s downgrade of U.S. debt briefly excited the bears but had minimal impact on the market action. The best outcome for the market now would be to tread water for a while and build new support levels. However, if there is any stalling, it will likely trigger profit-taking the longer it persists. Since overall market conditions remain positive, I’ll scrutinize charts for new buying setups.