At the start of last week, the bulls looked firmly in control.
Both the Nasdaq and S&P 500 had slowly ground higher from their January lows. They took out their all-time highs midweek.
The recent mixed earnings season for Big Tech had shown that growth was slowing. Yet that was seemingly already forgotten. Nvidia (NVDA) had lost $600 billion in a single day a month ago. On Monday, even it had recouped all of its losses.
But by the end of the week, we saw how we can never take anything for granted.
Both indexes closed firmly in the red. It was a sharp turnaround in just two days.
So today, let’s look at the reasons behind this market whiplash… and how you can profit amid these contradictory signals…
Falling Sentiment
One of the reasons behind the selling was a big revision lower in the University of Michigan’s Consumer Sentiment survey…
The preliminary February reading of 67.8 points was lowered to 64.7 – its lowest level since November 2023.
That’s a long way below where it was almost a year ago. It was tracking at 79.4 points in March 2024.
A big driver of the fall was the potential impact of incoming tariffs. Sentiment plunged 19% on durable goods orders that will likely feel the tariffs… like cars, laptops, furniture, and televisions.
And that negative sentiment arrived alongside a big drop in the S&P Global Purchasing Managers’ Index (PMI) released the same day.
The Services PMI – a big driver of the economy – reversed sharply from just two months ago.
S&P Global U.S. Services PMI
Source: S&P Global, TradingEconomics.com
The Services PMI fell from 56.8 in December to 49.7 in February. A reading below 50 means that this sector is contracting.
This PMI data and the sentiment survey caused the Nasdaq and S&P 500 to lose around 2.1% and 1.7%, respectively, on Friday – their heaviest falls for the year.
Adding to the woes, consumers expect inflation to push higher.
That comes as Warren Buffett continues to sell Berkshire Hathaway’s holdings… adding to his ever-growing pile of cash (now estimated at $300 billion).
So at times like this, what can we do?
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Picking the Right Move
When there are all these conflicting signals, it can be hard to know the right path…
On the one hand, the market hit all-time highs only last Wednesday. Yet by Friday, it was swamped in confusion and a sea of negativity.
Trying to pick the right line between these extremes can be challenging for your average investor.
That’s why I prefer my mean reversion trading strategy. I’ve used it successfully for decades.
I look for a move that has overshot in one direction. Then I aim to profit when it snaps back the other way. It’s kind of like a rubber band. The more you stretch it… the more it wants to return to its usual state.
In moments when we’re seeing sharp swings, mean reversion can be a big help… especially if you use options.
Options let us profit whether the market is rising or falling… so you can profit even during pullbacks. And they allow you to closely control your position sizes… and therefore, how much you’re risking with each trade.
That way, you can aim for quick trades that take advantage of short-term moves… rather than trying to anticipate the market’s overall direction.
It’s a great strategy to not only survive market upsets… but even thrive.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict