The TACO Trade Is on the Menu Again

NYSE Trader

Following the rescue of a downed airman in Iran, President Trump issued fresh ultimatums over the weekend. If Tehran fails to fully reopen the Strait of Hormuz by Tuesday, he threatened widespread destruction of Iran's power plants and infrastructure. Trump will hold a press conference at 1 p.m. ET, which will be the market's primary focus Monday.

The TACO Pattern

We have heard these Trumpian threats before, and each time they have been walked back, which has rallied the market and led to the acronym "TACO," which stands for Trump Always Chickens Out. That is probably an unfair description of Trump's negotiating approach, but the pattern has been quite tradable for crafty traders who anticipate these shifts.

The question now is whether it is different this time or whether Tuesday is a hard deadline. There are currently talks about a potential 45-day ceasefire, but the odds of reaching even a partial deal appear slim. One interesting development is that the UAE says it is willing to partner with the U.S. if a maritime force is needed because the Strait cannot be held hostage by one country.

Oil's Tipping Point

Oil is slightly lower Monday morning but has stayed sticky to the upside. There is growing concern that supply is approaching an important tipping point. If the Strait does not reopen soon, the ramifications will intensify and be prolonged. It becomes increasingly difficult to fix the oil issues the longer they last and the more they flow through the world economy.

The market appears sanguine about the longer-term impact. The S&P 500 has inched higher after Tuesday's big jump and has shrugged off concerns about oil, higher inflation, and slower growth.

Friday's employment report helped ease some of those concerns, but it was not as strong as the headline suggested. The economy added 178,000 jobs in March, well above the consensus of around 57,000, but the household survey showed 64,000 fewer people actually holding jobs and the drop in unemployment to 4.3% was largely driven by people leaving the labor force. The three-month average is running around 68,000 jobs per month, and wage growth came in below expectations at 3.5% annually.

The Technical Picture

Early Monday, investors appear optimistic about positive progress on Iran, but headline risk is substantial.

Technically, the key issue is strong follow-through. The market needs another large jump on elevated volume to cement a change in trend. Tuesday's bounce was the first necessary step. Now it needs confirmation with a powerful follow-through. If that happens, it will be a risk-on event and pull substantial buyers in from the sidelines.

The biggest obstacles to a new trend are oil, inflation, and slowing economic growth. Those issues are not going to go away quickly or easily, and it is difficult to see how a new uptrend gains momentum with that mountain of uncertainty overhead.

My Game Plan

My focus is on individual stock picking. There were signs of better action in leading sectors and names last week. Groups such as opticals, data storage, and telecoms are attracting interest, and there is some stronger speculative action in select areas. I am keeping some powder dry and will stay selective with new buys.

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