President Trump's move to escalate the China trade war, rather than end it, comes just as big investors were letting down their guard. Stocks' remarkable climb from the December depths hurt plenty of investors who entered the year in a bear-market mindset and a defensive investment posture. It's hurt their relative portfolio performance and their egos, at least. For most of the run, the bulls could rightly say "The pain trade was higher" — meaning continued strength would confound the majority, something the market often likes to do. Yet as the resolute rally of 2019 has carried into its fifth month, it's no longer clear that higher prices from here would be the least expected, most uncomfortable move. All else held equal, this tempers the outlook for stocks a bit. Professional investor positioning and sentiment now reflects a broad acceptance of a resilient U.S. economy, a mere pause in corporate-earnings growth and the chance for further upside in the indexes through the year. At the same time, the crowd is not observably over-excited by the gaudy 17.5% year-to-date ramp in the S&P 500 and individual investors have mostly refused to chase the rally higher. Taken together with market action that has been impressively steady so far, this all suggests the risk-reward bargain is more balanced right now — just as seasonal factors turn less friendly and the direction of surprise on trade and Fed policy arguably tilt to the negative side.

'Positioning is long'

Strategists at Deutsche Bank track various segments of institutional investors to track their stance toward stocks. For months, this work has shown plenty of room for tactical funds to keep adding stock exposure. Last week, Deutsche pretty much says the Street is pretty fully in, though not at over-bullish levels: "The list of positioning indicators that suggests positioning is long: equity futures net longs have risen for the last 4 weeks and are now at the top of their range, though not quite at the extremes reached in Jan 2018; cash equities short interest is at 10-year lows; and vol control funds are at max equity allocations. Risk parity funds have been buying equities in recent weeks with exposure now in line with their historical average." The Daily Sentiment Index of professional traders finished last week at 86% bulls, and had nosed above 90% in prior weeks. The avid embrace of several recent zeitgeist-channeling IPOs — from Beyond Meat to Zoom Video to Pinterest — hint at the speculative juices flowing faster. The approaching 3000 with unemployment at a 50-year low might speak to some as "mission accomplished" moments of culmination for the rally, at least for a short time. Just in time for Uber's hefty and controversial IPO, with WeWork and perhaps even SoftBank's aggressive Vision Fund to follow. Market peaks don't simply develop because more investors are in a good mood about stocks and are riding the rally. And a strong IPO market would have to get much sillier to represent a major warning sign. But with the market as a whole no longer demonstrably cheap (as it briefly was in December) and 2019 profit forecasts stubbornly flat despite most companies beating first-quarter earnings estimates, bullish positioning and psychology can leave the market less able to absorb an unforeseen challenge to the upbeat case - such as a new round tariffs on China imposed by the White House, say.

1987 comparison

The most constructive factor in handicapping the market this year has been the behavior of the market itself. It has until now refused to succumb to much profit-taking along the way, limiting dips to about 3% this year. Clear leadership of large-cap growth/tech stocks has been complemented by phases of strength in consumer, industrial and financial names. And of course the history of years that shot higher in the first four months as this one did is somewhat positive for the ensuing eight months. Even in 1987, the last time the S&P had a similar January-April gain, the infamous crash happened only after the index was up 40% year to date by August. Still, it's become easier to quibble in recent weeks with the character of the market's advance. The break to a fresh high last week was tentative and marginal, by a mere few points, with Friday stopping a whisper shy of early-week record levels in the S&P. The number of daily new 52-week highs has not expanded much, notes Bespoke Investment Group. Some leadership areas have tired or faltered — software, semiconductors, emerging markets and home builders. And risky-credit spreads have stopped improving during the last little spurt in stocks.

Retail investor still on sidelines