The TACO Trade: Tariff Turmoil Strategy Explained

The new trading strategy reportedly enthrals investors despite its longevity remaining uncertain, as its potential to transform tariff turmoil into beneficial opportunities has captured the attention of traders.

Forget AI, Buy the TACOs

While tech stocks have steadily pushed markets forward in recent years, the erratic nature of tariffs has led to wild market swings. This on-again, off-again nature of tariffs has given rise to the TACO strategy, an acronym for "," a rather provocative way to describe US President Donald Trump’s actions around tariffs. Despite the President’s outrage at the term, its popularity among his critics, including notable Wall Street players, has only increased its relevance for traders.

The TACO phrase stems from against various countries, only to suspend or forgo their implementation. When tariffs are threatened, the market typically drops, then recovers when a suspension or deal is announced days later. In a way, this behaviour resembles a politicised version of "buy the dip." However, global tariffs are still in effect, such as the 10% levy on all countries, which suggests that the "always" in TACO may not be entirely accurate.

Decoding the Tariff Tactics

The benefit for traders lies in either or capitalising on lower prices. However, the "chicken out" part of the phrase implies that it is Trump who backs down from tariffs. The phrase gained national media attention when Trump threatened a 50% tariff on EU imports but did not follow through a couple of days later. In the lead-up to the tariff threat, White House officials had expressed dissatisfaction with the lack of trade negotiation progress with the region. In the aftermath of threats, however, a barrage of communications followed between Washington and Brussels, where both sides agreed to accelerate talks.

Meanwhile, after an escalating tit-for-tat with China, which resulted in a 145% tariff, tensions kept going for weeks until a deal was finally reached to lower the tariff rate. This pattern suggests that tariffs are a way to extract concessions from other countries, and once achieved, the tariffs are shelved. Understanding this dynamic can help traders anticipate the timing of market dips and rebounds. However, as, its impact on markets may fade if traders anticipate and preemptively price in the expected rebound.

S&P 500 Range-bound with Breakout Potential

The S&P 500 appears to be forming a range or some sort of consolidation pattern, with a floor near 5750 and a peak at the 6000 handle acting as breakout levels. A decisive move above the top could open the door to the record peak of 6150 and uncharted territories of 6250 and 6500. On the flip side, losing the 5750 support could expose further downside levels and bring into focus the 5500 and 5100 supports.

Source: SpreadEx / SPX 500

Key Takeaways

The TACO trade appears to be a trending term that characterises market volatility caused by the erratic nature of tariff threats that lead to eventual trade deals. Although the longevity of the trading strategy remains unclear, understanding its dynamics can help traders time entries and exits around tariff announcements. Still, as the phenomenon becomes more popular, its impact on markets might fade.