Rev's Forum: Trump Stock Dump Start of a Major Slump or Just Another Bump?

 | May 18, 2017 | 7:12 AM EDT
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"The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty."

--Winston Churchill 

The bears have been anticipating a Trump-related market disaster for quite a while and finally were rewarded yesterday with the biggest sell-off since last September. Indices look to gap down further this morning after news that a special prosecutor has been appointed to look into connects between the Trump administration and Russia.

Are we finally seeing the long-awaited market top? Is the uptrend that started back in 2009 coming to an end?

I don't know how deep this pullback may go, but at this point there is little choice but to cut some positions, raise cash and be ready for the possibility of more downside. What is important in the market isn't prediction but reaction as conditions change, and we definitely have a change in conditions occurring.

Playing defense can be quite frustrating when the market shrugs off its worries and concerns and goes right back up. It has happened so often in recent years that the reaction of many traders is to hurry up and buy any pullback or dip. The bears never seem to generate any sustained momentum, so buying weakness has worked very well.

The bearish argument here is obvious. The Day of Reckoning is upon us and is being fueled by Trump's troubles, which will delay the fiscal policy that was creating so much economic optimism. When that is combined with other negatives such as valuations, seasonality, a hawkish Fed and the fact that the market has not had a substantial correction since early 2016, it makes sense to anticipate further downside.

The bulls' response to these arguments is that the appointment of a special prosecutor allows the Trump administration to shift its energy back to other policy concerns. However, there is going to be endless speculation about what might be found. There is already a story this morning about 18 undisclosed contacts between the Trump campaign and Russia.

The biggest positive the market has going for it is the fact that it has pretty much ignored the political drama up until yesterday. The pundits have been very wrong about the reaction to Donald Trump since the day he was elected, and you have to wonder how much political bias is impacting the predictions that a major top is about to occur.

My game plan right now is to not commit to the idea that this is a major top. I've had to play defense and am quite comfortable with how I am positioned in the event of more downside, but the more difficult question is to what extent do I start to buy some of the stocks that I favor. If this is the start of a major downtrend there is no rush to put money to work, but if it is another quick bounce you don't have much time to jump in.

I plan on reducing some of my index shorts into weakness this morning and will nibble a bit more at some long positions, but I am not going to do any major buying yet. I want to see how the market is acting after the first hour or so. I think we will bounce fairly soon, but that the bounce will fail and we will see some lower lows.

From a trading standpoint this market action is ripe with possibility. I don't know how it is going to develop, but we have some significant movement and even some emotions at play and that is a refreshing change. Now we just need to stay vigilant and reactive as we look for setups.

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