I will be trading stocks like Grubhub and Palo Alto Networks full out bullish. Stocks like Apple are best played with trades like diagonal call spreads that allow for some slow trimming of the cost basis over a few weeks, says Kerry Given, PhD, founder of Parkwood Capital.

We suffered a down market this week with the S&P 500 Index (SPX) opening Monday at 2791 and closing Friday at 2752, down 39 points for the week.

In fact, we lost five points in the last two minutes of trading Friday afternoon. That gives us something to think about this week.

Is this a residual effect of the correction? Or is this a market reaction to the discussion of trade tariffs?

chart 1
Standard and Poor’s 500 Index (SPX)

Chart courtesy of StockCharts.com

The healthy effect of a correction is to adjust prices to more reasonable levels. Maybe the market is sending us a message something like:

--The market high of 2873 toward the end of January was definitely over-valued.

--Recovering over 70% of the correction by the end of February was too much, too soon.

--Trying for that high again last week was still too much, too soon.

Perhaps the recent market range for SPX from the low this month to the high last Friday represents the trading range for the near-term future?

Or are all these market gyrations just a trade tariff tantrum?

Trading volume in the S&P companies this week was well below the 50-day moving average (dma) with the exception of Friday’s trading, but it was expiration Friday, so a spike in volume is quite normal. The soaring market March 9 didn’t spike volume and that was the first signal of this week’s market softness.

SPX closed March 9 at the upper edge of the Bollinger bands. I wondered last week if we were beginning another long run along the upper edge of the bands, or were we getting ahead of ourselves?

We have our answer.

chart 2
Standard and Poors 500 Index (SPX) with Bollinger Bands

Chart courtesy of StockCharts.com

chart 3
Russell 2000 Index (RUT)

Chart courtesy of StockCharts.com

The Russell 2000 Index (RUT) has outperformed SPX handily since the correction and came very close to matching its previous all-time high March 9. But last week took the wind out of RUT’s sails, closing Friday at 1586 after opening the week at 1602.

The NASDAQ Composite was even more bullish than RUT last week, breaking its previous all-time high March 9 and then again on March 12. But NASDAQ just settled lower the rest of the week, closing Friday at 7482.

chart 4
NASDAQ Composite Index
Chart courtesy of StockCharts.com

The volatility index of the S&P 500, VIX, was essentially flat this week, opening

chart 5
CBOE SPX Volatility Index (VIX)
Chart courtesy of StockCharts.com

March 12 at 15.5% and closing March 16 at 15.8%.

Most analysts attributed the market weakness two weeks ago to trade tariff talk and fears of a trade war. Then they declared tariffs old news and cited the excellent jobs report as the driver of the strong market March 9. Last week’s market weakness is now blamed once again on fears of a trade war.

I saw the Secretary of Commerce Wilbur Ross interviewed last week and his analysis of the proposed 25% steel tariff claimed it would only add about $150 to the cost of the average new car. That seems pretty innocuous.

But then I saw a congressman claiming his study concluded the proposed steel tariffs would result in the loss of five jobs in our steel consuming industries for every job gained in our steel industry.

Both of these conclusions can’t be true. Perhaps we have another case of the statistics being manipulated to suit the particular audience.

Of course, we can’t forget that Trump is the consummate negotiator. Perhaps the end result of all of this tariff talk will be some relatively palatable tariff adjustments and all of the fear mongering was unnecessary.

The alternative explanation might be simply the market’s ongoing correction: first the market overshot to the downside and bounced hard, but overshot on the upside, and swung back lower, and so forth. If this explanation holds any water, we should see the market oscillations slow in amplitude, resulting in a range bound market for a few weeks with the ultimate result of a more reasonably priced market.

If I stand back and look at the big picture of the market, this explanation appears quite reasonable. The S&P 500 price chart does look like oscillations that are dampening on each cycle. If we accept that hypothesis, what market posture should we take?

The underlying bullish strength of this market is undeniable.

Given that premise, I will be trading based upon sideways to slightly bullish expectations. Stocks like Grubhub (GRUB) and Palo Alto Networks (PANW) have been largely unaffected by the market uncertainties and can be played full out bullish.

Stocks like Apple (AAPL) are best played with trades like diagonal call spreads that allow for some slow trimming of the cost basis over a few weeks.

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