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James Hyerczyk
Real State Risk

The major U.S. equity indexes have been on a tear since President Trump announced October 11 that the United States and China had reached a partial trade deal to be signed sometime in November. That event helped add to an already strong market, driving the Dow and S&P 500, up about 4% and the NASDAQ Composite about 5%, over the past month.

After hitting record highs on Tuesday, however, the price action now suggests the stock market may be moving into a holding pattern with investors trimming positions while waiting for more details to unfold over the progress of the trade negotiations.

In the cash market on Wednesday, the benchmark S&P 500 Index settled at 3108.46, down 11.72 or -0.39%. The blue chip Dow Jones Industrial Average finished at 27821.09, down 112.93 or -0.42% and the technology-based NASDAQ Composite closed at 8526.73, down 43.93 or -0.54%.

Recently, investors have been buying blindly, fed by a steady stream of positive rhetoric from high-ranking U.S. and Chinese officials and a Fed rate cut. In the meantime, the press has reported a “snag” in negotiations over Chinese agricultural purchases and another impasse tied to the rollback of tariffs.

With their blinders seemingly lifted, investors are now taking notice of the uncertainty surrounding Trump and his administration. Although the impeachment hearings haven’t led to any disruptions in the stock market, China may seize the opportunity to step away from the negotiation table to see how far the impeachment process goes before eventually making a trade deal.

If there is a correction in the stock market, then blame it on over-optimism driven by headline investors. Also place the blame on investors buying on the fear that they are going to miss a huge rally. This can only mean one thing for the market – a move back to value areas.

The only worry is, will a rally driven by over-optimism, end with a sell-off driven by excessive pessimism? In other words, we don’t know at this time if the correction will end with a soft-landing or a hard crash.

Investors Turning Defensive

On Tuesday, bad earnings reports from Home Depot and Kohl’s shared the blame for weakness in the Dow and S&P 500. On Wednesday, a 14% jump in Target shares on an earnings beat and a 3.9% rise in Lowe’s shares on stronger-than-forecast earnings, failed to fuel a rebound rally.

This tell me that investors may have finally realized that the broad-market is overpriced and there are larger events like the trade deal and impeachment hearings controlling the price action.

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