You knew it was coming, right? After more than two months in which the S&P 500 inched its way higher nearly each and every day, and stock market volatility looked to be a thing of the past, the bears came out of hiding on Friday. With a fresh round of trade tit-for-tat between China and the U.S., traders decided it was time. Time to sell the stock market darlings. Time to run to the safety of bonds. Time buy vol. And time to push the fear narrative to anyone and everyone who would listen.

Frankly, I'm a little surprised that traders bit on the news of the day. From my seat, there really wasn't much in the way of new news. With a meeting coming up between Xi Jinping and Donald Trump, some posturing on both sides was to be expected. So, when I read that Beijing said it will start putting export controls on rare earths, begin levying fees on US cargo ships docking at its ports, and increase customs scrutiny for NVIDIA chip imports, I chalked it up to just that. Posturing. You know, an attempt to improve your bargaining position before a big meeting by reminding the other side of the table that you too have some cards to play.

However, the President, who never met an argument he didn't like to escalate, decided to up the ante. Trump first took to social media deeming the Chinese trade attitude "hostile." Fair enough. My first thought was this was a fairly measured response from the administration.

But next came the threats of "massive" increases in tariffs on Chinese goods. And then the President said it didn't look like there was a reason to meet with Xi later this month after all. And finally, there was the threat of 100% tariffs starting November 1st. Serve returned deep to the back right corner.

Personally, I found the whole exchange somewhat amusing. Boys will be boys. You mess with me, I'll mess with you. And so on. Everything will likely work out in the end, right?

However, traders didn't see it that way. Nope. Instead of brushing off the exchange and continuing to look on the bright side - as the market had been doing for quite some time - the sell programs hit. Over and over. Again, and again. Until the S&P had plunged -2.7%, the Small Caps had fallen -3%, and the NASDAQ had cratered -3.6%. At the end of the day, the S&P had managed to relinquish all those daily gains enjoyed since September 1st - in a single day.

Why Did Traders Care This Time?

I'm not exactly sure why the market took this tit-for-tat exchange so badly. But I had been saying for a couple weeks that the market was "set up" for a spill of some degree. I had opined on several calls that given the way the market had acted lately and the froth that was seen in some areas, "something" was sure to come out of the woodwork to cause the market to "go the other way" for a while. This is just the way the game is played.

Trees (even those powered by cool, new nuclear systems and/or AI technology) don't grow to the sky. The stock market is not a one-way street - or a saving account. No, even the best bull markets are generally two-steps-forward-and-one-step-back affairs.

So, in a market where: (a) the S&P had enjoyed the fastest rebound from a 20% decline on record, (b) stocks had avoided even a modest decline for more than four months (and hadn't seen a decline of even 1% in 33 days), (c) the indices had become very overbought, (d) investor sentiment was excessive/frothy, (e) arguments about bubbles occurred on a regular and more frequent basis, and (f) even the most bullish investors would readily admit that valuations were in nosebleed territory, well, the bottom line is, it was time.

Time for the bears to get up off the mat and have a day (or three) in the sun. Time for all the new bulls to question their thesis/resolve. Time for fund managers to "sit on their hands." And time for the fast-money masters of the universe to "go the other way."

The Big Question(s)

For me, the big question is, did anything change on Friday? Will 2026 earnings, which are expected to grow by more than 17% in 2026, be negatively impacted by the "news?" Is the economy at risk here? Will a renewed trade war (IF it materializes, of course) impact inflation or the Fed's path?

From my perch, investors have been guilty once again of "pulling forward" gains in relation to the anticipated earnings growth in the future. How else can you explain the current state of valuations except to argue that big-time growth is coming?

And the problem with such a game is that if anything comes out of the woodwork to trigger doubt as to those anticipated earnings, well, some adjustments need to be made. And this, dear readers, is what stock market "corrections" are all about.

With that said however, my take is that Friday was more of a trading event than investors changing their tune. More of an overbought/overdue pullback than an adjustment to the macro backdrop.

But we shall see. Given the magnitude of Friday's latest trade tantrum, I wouldn't be surprised to see some additional "price exploration" to the downside - especially in some of the hottest momentum names. Oh, and don't look now fans, but the earnings parade starts this week, which could add some spice to the near-term action.

What's Next?

As for the question of where to from here, we will be watching the key technical levels, the "big" moving averages, the Fibonacci retracement levels for signs of support, and of course, the news - you know, just in case one of the players changes their tune.

On a more fundamental basis, we will be listening intently to the tone of the earnings calls.

And we will be watching to see if retail investors continue to buy-the-dip.

And finally, there is the calendar. Lest we forget, the seasonal winds start to move to the bulls' back in the next couple of weeks. So, if the bears can't get something going here, as in right here and right now, I'd expect to see the bulls regain control of the reins on the back of some FOMO and year-end window dressing.

Thought for the Day:

Economists were invented to make weathermen look good - Anonymous

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: NVDA - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES