The Lloyd Christmas Approach is not Dumb and Dumber

It is relatively easy to hypothesize but much more difficult to test theories in the real world in a timely manner.  Today we have an opportunity to test a couple of recent assertions about market behavior: (1) traders are so eager to seek buying opportunities that broad market dips are getting ever shorter and shallower, and (2) tariff news can be largely ignored if there is even the slightest bit of wiggle room about their implementation.

Last night at Yankee Stadium, while watching the home team struggle for its first hit, my friend and I got notifications that the Trump administration was planning to raise tariffs on Canadian goods to 35%.  Our next move was to check on overnight futures, and upon seeing they were more than -1/2% lower, we joked, “How long until they’re positive?”  Unlike the Yankees, who rewarded the faithful with a stellar comeback, the S&P 500 (SPX) has yet to venture back into the green as I type this before noon EDT.  But as is now typical, the index bounced off its lows shortly after the opening when no early follow-through materialized and seems to be trying to claw its way back into plus territory.  We’ll need the afternoon session to see if that comeback can occur.

ES September Futures, 2-Days, 2-Minute Candles, Including Overnight Sessions

Source: Interactive Brokers, Past performance is not indicative of future returns.

As for the market’s blasé attitude toward tariff threats, it is increasingly clear that traders view them as just that – threats, not actions.  The common shorthand for this mentality is the “TACO trade”, with the acronym standing for “Trump Always Chickens Out”, but I have never been a fan of that explanation.  It’s understandable, since the President did back off the initial “Liberation Day” figures after the market freaked out, but it is not as though they can be disregarded completely.  Tariff levels are already higher than before April, and it seems hard to believe that all the new demands will be either postponed or renegotiated before August 1^st.  But since most of the prior deadlines have been extended, it is quite logical for traders who’ve been profiting handsomely from their general disregard of tariffs to continue to do so.

I prefer to think of traders’ approach to tariffs as the “Lloyd Christmas” approach instead of the “TACO” construct.  In a famous scene from the movie “Dumb and Dumber”, Lloyd, as played by Jim Carrey, is told that his chances of success with a potential love interest is only one in a million.  His classic reaction is, “so you’re telling me there’s a chance… YEAH!”  No matter how remote the probability for a full tariff reprieve might be, as long as traders can visualize a remote possibility, then they will continue to remain bullish. 

For now, I’ll say that the real-world test of our recent hypotheses is incomplete.  We might know by 4pm EDT today, or then again, we might be proven wrong.  But until then, I’d say we have a chance.  Yeah!