3 Factors Favor the Bulls as Skeptics Await Economic Disaster
There is a huge crowd waiting for negative economic data to hit, but so far they have been dead wrong.
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Market action is choppy and mixed on Tuesday morning as investors contemplate a sharp drop in manufacturing activity in China and a cut in estimated growth rates for the world economy. Interest rates are lower on signs of a cooling economy, but the anticipatory bears still are seeing little shift in the price action.
There are three factors working in the favor of the bulls right now. The first is that there is a very large crowd of economic skeptics who believe that the market is near a top and ready to roll over as negative fallout from trade and tariffs hit.
These skeptics have been out there all year and been dead wrong so far about the health of the economy. There has been little economic data to back up their pessimism, but they are convinced that tariffs are going to trigger inflationary pressures and slower growth.
This negativity has created a "wall of worry" dynamic in which underinvested skeptics are forced to slowly put more cash to work out of fear that they will be left behind. They hold their noses and buy, which creates more upside pressure and sucks in more cash from the sidelines. When there are dips, there is strong support, and the selling does not gain traction.
The second positive that bulls have working for them are bullish technical patterns. The S&P 500 has been chopping around and is trading at the same level it was two weeks ago. There is very good support building above the 200-day simple moving average, and there have been multiple tests of the overhead resistance around 5970. Another dip and thrust higher would be an ideal setup for an upside breakout.
The third factor at work for the bulls is that there is the potential for positive news flow on tariffs. Every time the market grows worried about trade, there is some news that creates optimism again. For example, on Monday, there was news of difficulties in negotiations with China, but then later in the day, there were reports that President Trump and China President Xi would be talking soon. There are also reports of trade deal progress with many other countries, and the likelihood of further tariff delays is fairly high.
This is a difficult market to trade because there is no strong trend. There is a lot of choppy action, but neither the bulls nor the bears are making much progress. The economic news favors the bulls, but there is a huge crowd of economic skeptics waiting for negative data to hit and prove that tariffs are going to be a disaster.
I’ll be focusing on managing positions and don’t expect to put much new capital to work until there is greater clarity.
At the time of publication, Rev Shark had no positions in any securities mentioned.
