The indices have been running nearly straight up for over two and a half months, there is substantial overhead resistance, concerns are growing over economic slowing, the Fed is already firmly dovish, political battles over the funding of a wall will intensify, seasonality is turning negative and earnings season is over.
The bearish arguments are clear and compelling -- and the easy thing to do is to be more cautious and take some defensive action. If you have had some good gains in recent weeks, the prudent move is to protect them. After the misery of the fourth quarter of 2018, holding onto gains seems like a particularly good idea.
There is only one problem: The market continues to hold up quite well and the potential for a breakthrough on China trade is providing support. Friday morning, there is news that negotiators have wrapped up for the week and are making progress. They plan to meet in the U.S. next week and hope to narrow some significant differences that will be hammered out in a meeting between Trump and Xi maybe before the end of the month. While some major issues remain, there seems to be cautious optimism that a deal can be made.
There is no doubt that a headline announcing a trade deal with China will produce a significant positive reaction in the market. Whether it is lasting is a different issue, but no one wants to be caught on the wrong side of that news. That is why this market is unlikely to see any significant downside in the near term. The promise of a trade deal is just too strong.
It is very likely that the bears will become more aggressive after a positive announcement on trade, but they are smart enough to wait for the good news to occur before they try to fade it.
In the meantime, we have trading-range action. As I've been discussing, there has been some good trading action in individual stocks -- although the indices have traded in a lumpy fashion lately. The S&P 500 is trying to hold significant technical support at the 200-day simple moving average, while the Nasdaq 100 (QQQ) is just barely under it.
The bearish argument is very easy to make, but the problem is the timing. The China trade issue can spike this market up at any time, and we can't ignore that risk. Instead of being a growling grizzly, the prudent move is to be a fleet-footed trader. Find some short-term opportunities and focus on them, rather than trying to predict a major top in the indices.