Defense First: The Foundation of a Resilient Investment Strategy

In the world of investing, success is often attributed to offensive strategies—picking the right stocks, timing the market, and riding the waves of growth. However, seasoned investors know that defense is equally, if not more, important. This is the essence of the "Defense First" principle, a cornerstone of the AMPD investment system. The idea is simple yet powerful: protecting your capital during market downturns is just as critical as growing it during upswings. By prioritizing defense, investors can navigate volatility with confidence, ensuring they are well-positioned to capitalize on opportunities when the market turns favorable again.

The AMPD system—short for Advanced Entry, Market Conditions, Psychological Analysis, and Defense First—emphasizes the importance of staying vigilant and adaptable. Defense First isn’t about being pessimistic; it’s about being pragmatic. Markets are unpredictable, and even the best-laid plans can go awry due to unforeseen events. By building a defensive mindset, investors can safeguard their portfolios from significant losses and avoid the emotional pitfalls that often accompany market declines.

Retail Stocks Are Weak: A Cautionary Tale

The recent market downturn has laid bare the vulnerabilities of retail stocks, providing a stark reminder of the importance of defensive investing. At the end of a tumultuous week, the market took a nosedive, driven in part by Walmart’s earnings report. While the retail giant beat expectations, its warning about the impact of tariffs sent shockwaves through the sector. Retail stocks, particularly those reliant on imported goods, are highly sensitive to tariff fluctuations, and this sensitivity was on full display.

The XRT, a widely followed retail ETF, broke below a critical support level, signaling further downside potential. This weakness wasn’t contained to retail; by Friday’s close, selling had spilled over into other sectors, leaving the broader market in a precarious position. The episode highlights how quickly market sentiment can shift and the interconnectedness of different sectors. For investors, this serves as a clear warning: staying attuned to macroeconomic factors like tariffs and their ripple effects is crucial in navigating today’s markets.

Flirting With Resistance: Major Indices Stall

While retail stocks bore the brunt of the selling pressure, the major indices painted a more nuanced picture. The S&P 500 (SPY) and Nasdaq 100 (QQQ) have been largely sideways since December, hovering near recent record highs but unable to break through resistance levels. This sideways action is a reminder that markets don’t always move in straight lines; sometimes, they pause to consolidate gains or weigh future direction.

The bulls made an attempt to rally early in the week, pushing the indices toward their recent highs. However, sellers emerged at key resistance levels, quelling the upward momentum and leaving the market in a state of flux. This back-and-forth battle between bulls and bears underscores the importance of patience and discipline. Investors would do well to avoid overreacting to short-term volatility and instead focus on the broader trend.

Weaker Action Beneath the Surface

Beneath the surface of the major indices, the picture is less encouraging. The mid-cap (MDY) and small-cap (IWM) indices have been underperforming on a relative basis, with both now trading below their post-election levels from November 2024. This is a concerning sign, as these indices represent the broader market and are often seen as a proxy for the health of the economy. When smaller and mid-sized companies are struggling, it suggests that the recovery may not be as robust as the performance of the large-cap indices would imply.

The divergence between the major indices and the broader market is a red flag for investors. While the S&P 500 and Nasdaq 100 remain near record highs, the weakness in mid- and small-caps indicates that the market’s strength is narrowing. This is a classic sign of a maturing bull market, where leadership becomes concentrated in fewer sectors and stocks. For defensive-minded investors, this is a signal to proceed with caution and keep a close eye on market breadth.

The Elephant in the Room: The Federal Reserve’s Role

No discussion of the current market landscape would be complete without addressing the Federal Reserve. The central bank remains the single most influential factor shaping market sentiment, and its every move is scrutinized by investors. In recent weeks, the narrative has shifted decidedly. Gone are the hopes of imminent rate cuts; instead, the market is grappling with the possibility that the Fed may pause its dovish pivot.

This shift in sentiment has been driven in part by the market’s strong performance in 2024, which saw the S&P 500 surge over 20%. While this rally was welcome news for investors, it has also led to concerns that the Fed may take a more cautious approach in the coming months. Any hint of tighter monetary policy is likely to send shockwaves through the market, as investors recalibrate their expectations for future growth. The Fed’s actions—and inactions—will remain a key driver of market activity in the months ahead.

Tariffs and Tantrums: Trade Policy’s Impact on Markets

Trade policy has long been a source of market volatility, and recent developments have reignited those concerns. Reports that the Trump administration is considering steeper tariffs on Chinese imports—potentially as high as 60%—have sent alarm bells ringing. The ghosts of the 2018-2019 trade war continue to haunt investors, and the mere suggestion of escalating tensions has been enough to unsettle the market.

The impact of tariffs extends far beyond the directly affected industries. Trade wars disrupt supply chains, raise costs for consumers, and create uncertainty that can ripple through the entire economy. For investors, this is a reminder of the importance of diversification and the need to stay attuned to geopolitical developments. As the market looks ahead, the interplay between trade policy and monetary policy will be a critical factor in shaping its direction.

Bottom Line: Staying Defensive Until the Dust Settles

The recent market action has left investors with more questions than answers. While the major indices remain near record highs, the underlying weakness in mid- and small-caps, coupled with the resurgence of trade and monetary policy concerns, suggests that the market is at a crossroads. For now, the bulls still maintain the upper hand, with the uptrend intact and earnings holding up relatively well. However, the bears are circling, and their influence is growing.

In this environment, defense is the best offense. Investors would do well to adopt a cautious stance, focusing on preserving capital until the market provides clearer signals. This doesn’t mean sitting on the sidelines entirely, but rather being selective and disciplined in your investments. The market’s recent weakness is a shot across the bow, a reminder that complacency has no place in investing. By staying vigilant and prioritizing defense, investors can navigate the choppy waters ahead and position themselves for success when the market stabilizes.