In order to appreciate where stocks head next

…we first need to understand how they got to where they are now.

The rise back to the all-time highs on Friday happened because of the following catalysts:

• China trade deal more likely to come together than before. Right now we are in the “no news is good news” phase awaiting them to sign the deal in November.
• Earnings season better than low expectations.
• Economic data pointing towards +1.8% GDP growth for Q3. Not great…but certainly not as terrible as it seemed when the last ISM Manufacturing report shocked the market. Also other manufacturing reports since then point to a rebound in this key sector.
• Bond rates are still very low making stocks the much more attractive investment by comparison.

OK…we are caught up with the reasons why we back up towards the record highs. Now let’s review the most likely scenarios of what happens next followed by my recommended trading strategy.

Most Likely Scenario

I believe stocks will continue to drift higher for the next couple weeks as I don’t think any of the above ingredients is going to change. So the lack of negative issues holding down the market allows it to float a little higher towards 3050…maybe as high as 3100.

The reason why stocks will not soar higher at this stage is that many investors want to make sure that the Phase 1 trade deal actually gets finalized. That’s because the risk of things faltering…or some last second adjustment that weakens the deal may be in the offing. That turn of events would obviously be a major negative for the markets. Thus, a dose of caution in the air prevents a runaway bullish market.

Second Most Likely Outcome

Settle into a trading range with upper limit of all time high (3027) and lower end of the 50 day moving average (2957…but possibly down to 2900).

This situation is similar to above where there is no real change in the key dynamics. The difference is that more investors may want to see the trade deal signed before putting fresh money to work in stocks.

Least Likely Scenario…But Still a Real Possibility

Stocks plummet because of a wrong turn on China trade. Note that there is still a lot of behind the scenes work taking place to get this deal ready for a signing in mid-November. It is quite possible that either side digs in its heels and the Phase 1 deal falls apart.

We all remember how quickly stocks tumbled when this happened the last time in late July/early August. The S&P fell 7% in just a few trading sessions. But more Risk On stocks saw 10-15-20% shaved off their price. So yes, that would likely happen again if the deal breaks down.

Trading Strategy

Most signs point to a deal being signed with China. And therefore most signs point to higher highs for stocks this year. However, the carnage from the late July trade debacle is still lingering in the back of most investor’s minds.

When you put it altogether is says that staying bullish is the most likely outcome. But maybe keep a little more cash on hand than usual or even a small inverse ETF position as downside insurance in case the “stuff hits the fan”.

It is OK to get back to some smaller, growthier, Risk On’ier positions than in the past. But no shame in racking up the easy gains that come from stocks with above average dividend yield stocks.

The links below should get you headed in the right direction:

6 Sizzling Growth Stocks

Top 20 High Yield Stocks Paying 11% Plus

Are These 18 China Stocks Ready to Rise?

Reitmeister Total Return portfolio

Wishing you a world of investment success!

Steve Reitmeister

…but my friends call me Reity (pronounced “Righty”)
CEO, Stock News Network

Editor, Reitmeister Total Return

SPY shares rose $0.09 (+0.03%) in after-hours trading Friday. Year-to-date, SPY has gained 22.36%, versus a 22.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...

More Resources for the Stocks in this Article