Traders Are Counting on the 'Trump Put' to Buy the Dip and Sell the Rips

Uncertainty surrounding global economic policies has surged in recent days. Over the past week, stock market investors have been rattled by several key developments, including shifts in the artificial intelligence landscape, monetary policy decisions from the U.S. Federal Reserve and European Central Bank, earnings reports from major tech giants like Apple, Meta Platforms, Microsoft, and Tesla, as well as unexpected policy moves and executive orders from the Trump administration. Given these factors, it's hardly surprising that market volatility has intensified.

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This environment poses a significant challenge for trend-following investors, as established patterns can quickly reverse. Price-momentum exchange-traded funds (ETFs), which invest in stocks with strong recent performance, have experienced sharp fluctuations. The unpredictability of policy decisions has only added to market instability.

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The Trump administration’s difficulties in executing policies smoothly have also contributed to uncertainty. One recent example is the executive order (EO) aimed at freezing federal aid, which had to be rescinded—similar to how the administration’s 2017 travel ban faced legal challenges and revisions. The latest EO was drafted without consulting relevant agencies, leading to a poorly structured directive that lacked clarity and implementation guidelines. As a result, it had to be withdrawn.

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Another controversial policy initiative involves ending birthright citizenship for children born in the U.S. to noncitizen parents. Even if such a measure were upheld in court, enforcing it would be highly problematic. For instance, how would an individual born in the U.S. prove their citizenship? A birth certificate alone would no longer be sufficient. Instead, individuals might need their parents’ birth certificates or naturalization documents—records that many people simply do not possess. This change could also create a scenario where some individuals become stateless, raising questions about where they could be deported.

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Additionally, the Trump administration recently imposed a 25% tariff on imports from Canada and Mexico. Many analysts believe this move was primarily symbolic and expect it to be reversed due to its high economic costs. The reasoning behind these tariffs was to curb fentanyl trafficking into the U.S. While a significant amount of fentanyl is seized at the U.S.-Mexico border, only 43 pounds were confiscated at the Canadian border in 2024.

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A study by the Bank of Canada assessed the potential impact of these tariffs and predicted a severe economic downturn, with Canadian GDP contracting by 6%—a level that would trigger a deep recession. In 2020, trade among the U.S., Mexico, and Canada accounted for 29% of Canada’s GDP, 40% of Mexico’s GDP, and 10% of U.S. GDP. If Mexico faced similar tariffs, the economic slowdown would likely be just as severe, if not worse.

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Given the close economic ties between these countries, a recession in Canada and Mexico would significantly dampen U.S. growth prospects and potentially push the American economy into recession as well. Such an outcome would be highly undesirable for Trump, particularly if his primary goal with these tariffs was political signaling.

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The Canadian Chamber of Commerce’s Business Data Lab conducted a separate analysis, which estimated that these tariffs would reduce Canadian GDP by 2.6% and U.S. GDP by 1.6%—both of which could lead to economic contractions. Furthermore, numerous American businesses with cross-border supply chains would be affected, leading to widespread job losses in the U.S.

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The ‘Trump Put’ and Market Strategy

Given these economic risks, many expect that market forces will pressure the Trump administration into reconsidering its tariff policy. The likelihood of a policy reversal presents an opportunity for traders to adopt a strategy of “buy the dip and sell the rips.” This approach involves purchasing stocks when prices decline and selling during market rallies.

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Earnings season has already delivered some negative surprises, and further bearish policy announcements could weigh on stock prices. However, investors should also be aware of the so-called “Trump Put,” a term used to describe the idea that the former president closely monitors stock market performance and may take action to prevent major declines. In the absence of a severe bearish catalyst, stock prices are expected to rebound when the market is oversold.

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Currently, the S&P 500 is hovering near overbought territory. Investor sentiment indicators, such as the put/call ratio, suggest signs of excessive optimism, which supports the case for adopting a more cautious or slightly bearish stance in trading portfolios.

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Another factor to watch is the relative trading volume of the Nasdaq Composite compared to the New York Stock Exchange. A downturn in this ratio is often a warning sign of potential weakness in the Nasdaq 100. The key question for traders is whether the broader S&P 500 can maintain its strength if the Magnificent Seven tech stocks experience a pullback.

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Additionally, the Citi Panic/Euphoria Model, which measures investor sentiment, is currently at extreme euphoria levels. While this indicator is not highly predictive over short-term timeframes, its readings suggest that the market could be at risk of a correction.

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Given these dynamics, traders should focus on short-term tactical positioning. When the market becomes overbought, it may be prudent to lighten positions or initiate short trades. Conversely, if stock prices experience a significant decline, investors should consider buying into the weakness, anticipating a rebound.

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While uncertainty remains high, history suggests that market forces will likely push the Trump administration to make adjustments if economic conditions deteriorate. Investors who can successfully navigate these swings stand to benefit from the opportunities presented by heightened volatility.

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