The best way to navigate the market ups and downs is to stay focused on the price action and watch for signs that the character of the action is shifting. It is much more difficult that it sounds, but if playing stout defense when the price action turns negative, like it has over the past six weeks, then you are likely to be in good shape.
While price action should be the main focus, it is also a good idea to be very aware of the big-picture arguments that exist for and against the market. These arguments should not be sufficient reason alone for action, but they will provide a framework for evaluating the market as price action develops.
Recently the negative narrative has taken hold of this market and is driving the action. This narrative is that a combination of trade war worries, higher interest rates, political chaos and the potential for economic slowing are driving the selling pressure. Apple (AAPL) is dealing with slowing iPhone sales -- and that is spilling over to suppliers and the technology sector, in general. Oil is under pressure and that causes concern about worldwide slowing in demand.
After a big run over several years, it isn't too surprising that the market is undergoing some corrective action. It is the normal ebb and flow that has seemingly been delayed longer than usual.
The bears are in control of the market at this point, and the price action demands a high level of caution -- but what is the potential bull case? What is the positive narrative that we should be watching for which will help to put this market back on track?
Foremost will be some progress in the trade war with China. The market has been highly sensitive to any news about this issue. Comments from Larry Kudlow boosted the market for a short time yesterday, but the selling pressure did not relent.
I expect to see the market become more hopeful about a trade deal in front of the meeting between President Trump and Chairman Xi Jinping in Buenos Aires on November 30 to December 1. There is the potential that the framework for a deal could be reached, which would set the stage for a run to conclude the year. Pressure is growing on the Trump administration to show some progress -- and there is likely to be some declaration of progress, regardless of what happens.
Problems in Europe with Brexit and Italian banks are a headwind, but any advancement on those two issues will also provide some fuel for the bulls. Improvement in economies outside the U.S. would help to weaken the dollar, which would help the trade situation and provide some market support.
The biggest positive this market has going for it is the strong economy. There has been some cuts in the GDP growth forecast, but it will still be over 2.5% next year with very low levels of unemployment and good growth in wages.
While there is much concern that President Trump is trying to pressure the Fed to take a more dovish stance, there is a good likelihood that Jerome Powell may decide based on economic data alone not to raise rates as aggressively. The Fed has made the mistake in the past of ignoring worldwide economic weakness and that has to be a concern again.
The bears have this market firmly in their clutches right now, but there is the possibility for a strong bullish scenario to take hold into the end of the year. There is no reason to act on that at present, but it is something to keep firmly in mind as we navigate the price action.
We have a minor bounce this morning, as oil finds a little support on talk the OPEC may be looking to cut supply again.