Classic Stock Market Dilemma Presents 2 Starkly Different Choices for Traders

The S&P 500 is trading slightly lower on Tuesday morning after six straight days of gains that started with the reduction of tariffs on China. Although the S&P 500 has advanced in 17 of the last 20 trading sessions, there is still tremendous doubt that the economy will be able to avoid an economic slowdown.

This negativity and doubt have helped build a "wall of worry" that the market has steadily scaled. Investors who fear being left behind have been forced to put more and more capital to work, even though they still believe the impact of tariffs and trade turmoil will soon be felt. meanwhile, expectations of higher inflation have been building, which is preventing the Fed from signaling that rate cuts will be coming.

This presents a classic stock market dilemma. On the one hand, the technical action is very positive. Price action is strong, and there is clear buying momentum. On the other hand, the economic and fundamental arguments appear compelling. The seeds for an economic slowdown were planted long ago, and it is hard to see how the fallout from the chaos of tariffs can be avoided.

There are two basic choices for traders. You either stick with the trend until it ends, or you start anticipating a market turn. Typically, traders who try to anticipate a turning point have very poor timing. Trends almost always persist much longer than seems reasonable.

However, the danger of sticking with a trend too long is that when a turn does hit, the drop can be extremely fast and furious. It is often said that the market takes the escalator up and the elevator down.

My bias is to stick with the trend as long as possible but stay very vigilant and take some partial profits as things become more extended. The more that the bears warn us about impending disaster, the higher the market climbs the wall of worry.

At some point, there will be something that sparks some nasty downside, but currently, there isn’t any impending news flow that looks likely. The Moody's downgrade of U.S. debt helped to excite the bears but turned out to have no significant impact on the market action.

The best thing the market could do at this point is tread water for a while and build new support levels, but if there is some stalling, it will likely trigger profit-taking the longer it persists.

Since overall market conditions remain positive, I’ll be digging through the charts looking for new setups to buy.

At the time of publication, Rev Shark had no positions in any securities mentioned.