Pessimistic Bears Thwarted Again as European Tariff Delay Sparks Market Rally
Technical conditions are messy, but there is one problem for the bears right now.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
Over the Memorial Day holiday, the European Union announced that it will fast-track tariff negotiations with the United States. President Trump welcomed the news and announced that he would delay the imposition of additional tariffs until July. Like the announcement of the delay of tariffs on China that took place on May 12, this news is producing a gap-up open on Tuesday morning.
In addition to tariff news, there is also some relief in the bond market. Interest rates have been rising steadily since early April but are reversing on Tuesday morning following news that Japan is considering a reduction in the amount of bonds that it will issue. The cut in bond supply is boosting U.S. Treasuries and putting pressure on interest rates.
The good news hits just as technical conditions have been deteriorating. The S&P 500 tested support at its 200-day simple moving average on Friday and also started to partially fill the gap that was created by the China tariff delay. Technicians have been looking for that gap to be filled totally. It is unusual for gaps to be only partially filled. The Russell 2000 IWM small-cap index totally filled its gap at the open on Friday and is now rebounding.
This action creates some messy charts, and now the question is whether there will be sustained momentum. Many folks are out of position on this surprise news and will want to add exposure, but will they be willing to chase strength when there is still much uncertainty about how the tariff issue will be resolved?
The most significant market theme recently has been a high level of negativity about inflation and economic growth. There has been much speculation that tariffs would trigger stagflation. The argument is that it is just a matter of time before consumers and the broader economy feel the impact of tariffs.
There is one problem for the bears — there has been no data to back up this argument. Economic news continues to be solid, and there are only mild signs that inflation is rising. Later this week, PCE inflation will be reported, and there is Consumer Confidence number on Tuesday morning, but the predictions of a Trump-driven economic disaster have been dead wrong so far.
We’ll see if there is selling into the big jump on Tuesday morning, but due to the high level of bearishness and poor positioning, it is likely that market players will be trying to add some exposure rather than reduce it.
At the time of publication, Rev Shark had no positions in any securities mentioned.
