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Uncertainty Creeping into Stock Markets – And That’s Bad for Traders

By:
James Hyerczyk
Published: Aug 23, 2018, 14:43 UTC

U.S. equity markets are trading mixed early Thursday as investors digest the latest move by China to escalate the trade dispute between Washington and Beijing.

stock markets

Uncertainty has hit the markets with investors concerned that President Trump’s potential legal problems could keep him pre-occupied enough to prevent him from following through on several of his economic programs. Of major concern for a few is whether Trump will remain in office for the rest of his term.

Uncertainty is bad for traders. It usually causes long, drawn out sideways moves on extremely low volume, making it very difficult to determine the trend in the market. During these periods, investors don’t want to pump more money into stocks and a few decide to trim the positions they have. Often it starts with a steep sell-off. This is usually caused by herd trading which occurs when all the professionals decide to sell at the same time and there is usually one exit point.

The purpose of the steep break is to establish the trading range. Then as uncertainty sets in, the markets just drift inside this zone until the professionals gather enough information to create a strategy to hedge away the risk in the market. The problem at this time is I’m not sure anyone really knows what they are hedging against so it’s going to be difficult to develop a strategy that protects the downside.

Basically, if Trump stays in office, the trend is likely to continue. If he’s removed from office then I have to agree with the President. Earlier today, in an interview with “Fox and Friend,” Trump said:  If I ever got impeached, I think the market would crash. I think everybody would be very poor.”

This isn’t crazy thinking if you’ve looked at the stock market the last four years – two years of sideways, two years of rally.

The two years prior to Trump’s election were miserable for stock market investors. The markets were churning because of uncertainty over the election. Even with Hillary Clinton leading by 7 to points in the polls, investors weren’t willing to buy with both hands. Rallies were sold and breaks were bought. The markets were stagnant.

Since Trump’s victory in November 2016, the stock market has sky-rocketed. Even with the Fed raising rates five times since December 2015, the bull market continued. This is because the Trump administration has been able to deflect much of the bad news that has surfaced during his presidency. But this time the hole he may have to dig out of may be a little too deep.

I’m not saying that Trump is bigger than the market. I’m just saying that at this time uncertainty is creeping into the markets so prepare of a sideways trade. Markets don’t go from bullish to bearish overnight. But there is enough handwriting on the wall at this time to suggest we may be starting a big churn.

There are a few factors that could lift the markets from current price levels, namely the announcement of a new NAFTA agreement and the end of the trade war with China, but once those events have passed, there are going to be very few bullish events. At that time, the focus will probably shift to Trump especially if the Republicans lose the November elections.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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