Stock Market Takes a Break From All Time Highs

Natural profit-taking that’s often seen at highs or the start of something more sinister? That’s the question investors will be asking themselves as they head towards the back half of the first week of the month.

After watching the S&P 500 tack on a solid 10% over the past two months, the last two sessions have given investors cause for concern. Monday’s action saw the benchmark index fall over 1%, its worst day in a month and Tuesday’s open was even worse, with an ugly gap down raising eyebrows on Wall Street. The selling was sparked by President Trump’s comments regarding the ongoing trade war with China.

Despite months of growing optimism that a trade deal was on the cards, Trump intimated that he might rather delay a deal until after the 2020 presidential election. This sent investors running for the door as the recent all-time highs have been largely driven by hope surrounding this deal. Much of the market’s action over the past two years has been dictated by ‘he said, they said’ headlines and investor’s fears concerning the trade war being inflated and then assuaged.

There was talk that this could be classic Trump. His comment displayed an air of indifference about the whole thing but could also be planned to be a bargaining chip.

Trade War So Far

In the grand scheme of things, China appeared to be the first to blink last month when their officials announced that the two sides were close to a first stage deal. Washington was unusually quiet but in a way, their silence was deafening when they didn’t row in behind the optimistic comments. In recent weeks Trump’s team has reigned in the optimism by saying the two sides are still at odds and his latest comments could be seen as an extension of that strategy.

Whatever his motives, investors weren’t hanging around. This week’s selling has sent the MACD into a bearish crossover for the first time since September. When it happened that month, the S&P 500 fell over 5% in a week. That’s not the only bit of recent history that investors will be hoping to avoid.

Could History Repeat Itself?

Markets were about to enter freefall this time last year has been wobbly since October. Over the course of December 2018, the S&P 500 fell 15% before bouncing into 2019. While the trade war was a factor at the time, most of the downward momentum came amid a worsening economic outlook that has reared its head from time to time this year too. On that note, as recently as this Monday, December’s ISM report showed that manufacturing has now contracted for the fourth month in a row.

Were we to see a similar sell-off this year, it’s hard to know which index is most exposed. There’s an argument that with any risk-off sentiment that tech companies will be the hardest hit and indeed the NASDAQ has gained the most this year out of the top three. It’s currently up 35% for 2019 compared to the S&P 500’s 26% and the Dow Jones’ 21%. However, with concerns over the trade war and the US’ economic outlook, the consumer discretionary, industrial and manufacturing companies that comprise much of the other two indices will be hit too.

Staying Positive

However, it’s not all doom and gloom. Tuesday’s opening dip was quickly bought and stocks finished at their high of the day. For the optimists, this bit of weakness is nothing but profit-taking and could be an early Christmas present. This past year has seen virtually every single trade war-inspired bout of selling reversed in the days afterward.

The fundamentals and the technicals remain strong. Notwithstanding the bearish MACD crossover in the S&P 500, RSI is back to 50 which should assuage any concerns that things were getting a little hot last month while the 3,025 level remains as strong a line of support as it was a line of resistance over the summer.

First things first, let’s see if investors can close Tuesday’s gap.