If there’s anything I’ve learned from trading this market over the past decade…
It’s how narratives will stay quiet for most of the time, but when they shift… markets move fast.
We will normally see this to the downside. Take the fiscal cliff from 2011 as an example:
The S&P pivots around 1300 for an entire year… and then we see about a 20% correction in about a week.
We normally see these “repricings” to the downside.
After all, traders are more sensitive to selloffs than rallies.
But sometimes we’ll see it in market rallies.
Right now is a great example.
Think about it… what has been the major risk in the market over the past few months?
China.
Trade voodoo.
Investors are scared that an escalating trade war will cause a global recession.
Rates plummeted, and the yield curve inverted.
And all those industrial stocks that have major exposure to the global growth narrative have looked like hot garbage.
At least they did, until last week.
I’m calling it the Chinese Undertaker Trade.
Global industrial stocks, back from the dead.
Funny thing is, there wasn’t any kind of massive newsflow. There are rumors of trade talks, but nothing has been signed.
It’s all rumor and speculation.
Yet these names are trading like a deal is already done.
Take CAT (Caterpillar) for example:
Up 16% in 10 days.
Or CMI (Cummins):
Up 15% in 10 days.
Same thing with FDX (FedEx):
It looked like it was ready to break down under 150, then all of a sudden things are looking great… up 15% in 10 days.
Now here’s the big question...
The money making question...
How much good news is getting priced in?
After all, if these stocks are moving in anticipation of good news, how much upside can we bet on if the good news actually happens?
Because we haven’t seen any deals get signed. Just speculation and tweets.
And what happens if trade talks are delayed or fall through?
Those risks were shown in the price action of the market just 2 weeks ago…
My answer to this question is that a TON of energy has been spent pushing these stocks higher… and that energy is about to run out.
I’m not expecting an outright crash… just retests of previous levels.
That’s why I’m scaling into bear call spreads in these names as they push into key resistance levels.
I could be wrong, and I’ve got my stops in place just in case I am.
Yet I think this offers good risk/reward if you’re willing to fade these names.
Hope this helps you find some trades this week!