Optimistic Market Players Fall into a Trap After Positive Day

Money Trap

A late rebound prevented a complete disaster, but it was still a very ugly day with all the indices dropping and the DJIA posting its lowest close since early December. The Russell 2000 (IWM) was the big loser, as reflected in breadth, with only 28% of stocks finishing in positive territory.

I was concerned that Wednesday's positive action might be a trap for complacent and overly optimistic market players and that is exactly what it was. The late rally eased some of the damage but this is not promising price action.

The problem is not the news about the war in Iran, the economy or AI. There was plenty of positive and negative news throughout the day. The problem is that no one knows how any of those things will develop as we move forward. Bad news can be discounted quickly by investors. They price it in and then look ahead to what may come next.

Uncertainty like we have now cannot be effectively discounted. Any number of scenarios can develop and everyone has an opinion. Things won't be as bad as the worst-case scenario, but we have no idea if this will be just a minor period of annoyance or something deep and dark.

Even if you are optimistic like I am, that is not a good reason to rush in and put precious capital to work. A giant herd of emotional investors will determine what happens to prices and this crowd can be very irrational for an extended period of time. It doesn't pay to fight that sort of behavior.

That is my long-winded way of repeating what I have been saying lately, which is to stay patient, be cautious and don't rush to proclaim that a new uptrend is about to start. You can be late to the next party and it may actually save you some money if you avoid serial bottom calling.

TACO Trade and Trump's Tolerance

One thing I am contemplating as I watch the action is how much tolerance President Trump will have for a poor stock market. The way he handled tariffs gave rise to the acronym TACO, which stands for "Trump Always Chickens Out."

His critics have claimed he always reverses course after some poor market action. Buying in anticipation of his change of mind was a pretty good strategy. That may have been his plan all along but I wonder if there may be some variation of the TACO trade if the war drags out and the market stays under pressure. A weak stock market would make an already difficult midterm even more difficult. Trump won't be able to tolerate a weak market for very long.

Have a good evening. I'll see you tomorrow.

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