President Donald Trump's tariffs have sparked heavy losses on Wall Street over the last two months. And IBD's risk management rules helped investors avoid big drawdowns. Now, equity and ETF investors face the question of how to get back into stocks. And just as important, how aggressive to be in the wake of the Trump tariff sell-off.
IBD has a long history of recognizing shifts in market direction early on to help investors maximize gains in uptrends and avoid losses in downtrends. We developed a simple way to trade market index ETFs based on the current market outlook, and now we've refined the strategy to leverage our suggested Market Exposure level, or percentage of your portfolio to invest.
Invest in a market index ETF and size your position based on the Stock Market Exposure shown on our home page (and also shown in the Market Pulse graphic in The Big Picture feature). Adjust your holdings when we change the exposure.
Risk Management And The IBD Methodology
Risk Management Rules
To give more guidance and insight, our five-tiered exposure system equates to the percentage of your investing portfolio that's invested in stocks:
- 0%-20%: The most cautious level. Put very little, if any, of your investing capital at risk.
- 20%-40%: Remain cautious, with your portfolio tilted toward cash. But you might try out some of your stock ideas when the market starts to improve. If the market is pulling back from higher levels, this might suggest a correction is near and more defense is necessary.
- 40%-60%: The stock market is showing more signs of improvement, so you might put more of your portfolio to work in stocks. In a weakening market, a drop in exposure to this level means you should be raising cash and avoiding new stock buys.
- 60%-80%: The market shows more signs that an uptrend is gaining steam. In a weakening market, a drop in exposure to this level means you cut back on stock buys and take profits on at least some winners.
- 80%-100%: An uptrend is well in place. (But always remain on the lookout for signs of a change in direction.)
Trump Tariff Sell-Off
Over the last two months, Wall Street has been struggling with the Trump tariffs and the potential economic impact on the U.S. That has sent the major stock indexes reeling from their record highs.
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On Feb. 19, the S&P 500 made a new high and, as such, IBD's recommended exposure level held at 80%-100%.
One day later, IBD cut its outlook to 60%-80% due to the weak action among top growth stocks. A number of stock market leaders, namely Axon Enterprise, Klaviyo, Reddit, Royal Caribbean, Samsara and Shift4, ran into trouble and even triggered sell signals. That was the first shot across the bow.
The following session, Feb. 21, the Nasdaq plunged 2.2% to break below its 50-day moving average, a key bearish sign. As a result, IBD further reduced its recommended exposure level to the 40% to 60% range.
On Feb. 27, the Nasdaq tumbled below its January lows, falling further under its 50-day line. And the Nasdaq wasn't too far from its 200-day line either, which was an important level to watch. Due to the persistent weak action among top growth stocks, along with a high level of distribution days, IBD reduced its recommended exposure level to 20%-40% from 40%-60%.
Finally, on March 3, the Nasdaq's bounce from the 200-day line faded with a big downside reversal day. That pushed IBD to again cut its recommended stock market exposure, this time to 0% to 20%.
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Effectively, this lowest-possible level means the market is in a correction. Investors should avoid buying stocks and instead take profits, leaving only the strongest holdings in their portfolios. Cash will be investors' friend until bottoming signals start to appear. More than ever, it is paramount to follow sell rules.
Failed Follow-Through Day
Throughout the middle of March, the major stock indexes struggled to hold above their correction lows and gain traction.
But on March 24, the stock market rallied on news that Trump's tariffs may not land on targeted sectors such as automobiles, pharmaceuticals and semiconductors.
The Nasdaq retook its 21-day moving average and nearly finished the day in higher volume. Had it ended trading with higher volume than the previous session's triple-witching session, that would have been a remarkable achievement. You could say that strong rally resulted in a follow-through day in spirit. That lifted the exposure level to 20%-40%.
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But that bullish spirit quickly disappeared. Two days later, on March 26, the specter of a trade war, concerns on how it could hit the economy and lingering worries on inflation sparked another stock market sell-off. So, IBD decided to downshift the recommended exposure to stocks to a 0%-20% range where it currently sits.
What To Do Next: A Follow-Through Day After Trump Tariff Sell-Off
Following the failed follow-through day, IBD readers will need to wait for the next confirmed uptrend.
When the market is in a correction, look for at least one major index to attempt a bottom. The first day the index closes higher counts as Day 1 of its attempted rally. The action on Day 2 and Day 3 is irrelevant as long as the index doesn't undercut its latest low. If it is undercut, the rally try is done and the market needs to try again.
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On Day 4 and later, look for the Nasdaq or S&P 500 to rise sharply in higher volume than the previous session. That's a follow-through day and the short covering has run its course. It gives investors the green light to start buying leading stocks breaking out past correct buy points. It should put your portfolio and mindset in sync with the stock market action by gradually committing capital to leading stocks.
Use each purchase as feedback on the current strength of the market rally. Don't panic if you miss the first couple of breakouts. If the stock market uptrend is real, there will be plenty of time to buy stocks and make money. This is an important strategy because the previous follow-through day failed. While no rally has ever begun without one, not every follow-through succeeds.
In the current market, Monday will be Day 10 of the rally attempt, so a follow-through day is possible anytime now.
