U.S. markets suffered some of the ugliest action in months on Wednesday, but, as is so often the case, the pain is being quickly forgotten. Indices are rebounding this morning as worries over Turkey diminish and news hits that China is sending a delegation to the U.S. later this month for trade negotiations.
There is a faction of the market that refuses to believe that there could be a positive outcome to the trade issues. The narrative is that crazy Donald Trump is going to destroy the world economy with his illogical and unjustified efforts to rework trade agreements. This attitude has more to do with the dislike of Trump than a careful evaluation of the trade issue, but it is hanging over the market and provided a wall of worry that creates a dynamic for a positive spike anytime there is even a little progress on trade.
It is nearly impossible to find any pundits who discuss the possibility of some positive outcomes on trade. It is not something that the market is discounting and that presents a huge obstacle to the bears, who are convinced that the market is on the brink of a major turn.
Recent action has given the bears some comfort. The action has been choppy and inconsistent for weeks and there are cracks appearing in some technical indicators, but the indices are still holding above key levels of support. It is easy to understand why an increasing number of market players feel that the market is closing in on a major turn.
They may be correct, but the greater likelihood is that the market is just undergoing a bout of corrective action during a seasonally weak time of the year. Earnings season is over and we are now faced with the two months of the year that are historically the worst-performing months. If the market is going to rest, then this is a good time to do it.
In addition to seasonality, the news flow is providing convenient reasons to be more negative. An emerging market blowup has caused previous market corrections and the trade war headline provides endless reasons to believe that disaster awaits.
My game plan here is to treat this action as a trading-range market with a negative bias. There isn't anything yet to suggest that a major collapse is about to occur. If things don't suddenly fall apart, then we have some good opportunities developing as corrective action now creates a good setup for a year-end rally.
I did a little buying of some select names yesterday, but I'm taking my time at deploying capital as this corrective action plays out. We have a respite this morning as the market contemplates some favorable trade news, but there isn't much appetite for chasing strength and I am not counting on sustained upside.