Major averages traded in a tight range on Friday and finished roughly flat on lower volume. Following Wednesday's bearish reversal, the indexes have held tight in short bear flag formations. The S&P 500 is sitting just above its 50-day moving average, which puts it in a position to resolve in either direction. The main issue for investors remains the action of their long positions. Maintaining a strict adherence to trailing and absolute stops is a concrete approach to side-stepping the consequences of a severe sell-off should the market deteriorate further. Predicting a future that does not exist is unnecessary when your stocks should tell you everything you need to know.
That said, how markets react to news is more important than the news itself. The bullish and bearish camps both have valid arguments currently. On the one hand, the combination of news including a U.S. missile strike on a Syrian airbase, a terrorist attack in Stockholm, Sweden, and a surprisingly weak Bureau of Labor Statistics jobs report on Friday could have easily torpedoed the major market indexes. Yet markets reacted in a relatively quiet manner to the trifecta of negative news.
Markets also had another prior major news event on March 21 when they reversed on high volume on that day, marking the first time in 110 days that the indexes saw a 1% or greater decline. This was followed by three days of a weak bounce showing three days of small gains on low volume. Then on March 27, markets gapped lower at the open due to concerns that President Trump's tax reform proposals would be less likely to pass in light of healthcare legislation being pulled from a vote at the last minute.
Certainly, after much negative prior technical action, the assumption was markets would continue lower from here. Yet they did a fast about face and bounced higher over the next few days. This was an opportunity to capitalize on undercut-and-rally type price/volume formations in specific stocks we mentioned to members.
The markets may continue their choppy sideways action as the fate of tax reform legislation hangs in the balance. Part of the post-election rally is due to optimistic expectations of this bill being passed. Another part of course is due to the omnipresent quantitative easing which continues to find its way from the European Central Bank and Bank of Japan into the tallest standing midget which is the US market. With mild signs the global economy is on the mend, QE flow could diminish, but, as we have written, at no time in history have markets found a soft landing when this much global debt has been generated.
The question is when will a hard landing, ie, crash or major bear market, manifest. That asked, it does no good to try to predict such events as major tops can take much longer to form than expected. Think of Alan Greenspan's irrational exuberance speech in 1997. Thus it is far more productive to focus on a concrete approach whereby one simply adheres to their stops and acts decisively as necessary in order to sidestep any potential, further market deterioration if and when that occurs.