Wall Street has learned the "TACO trading": shorting US stocks after Trump goes on a rampage, then going long five days later

When Trump once again wields the tariff stick, Wall Street has already formed a mature profit model for the market effects of his policies—"TACO trading".

Research by Nomura strategist Charlie McElligott shows that since early February, every time Trump issues a trade threat, shorting S&P 500 futures immediately and then going long five days later has yielded a hefty return of 12%.

In contrast, investors who simply held the benchmark index experienced a series of nerve-wracking fluctuations and gained almost no substantial returns.

Other Wall Street institutions have also designed similar strategies, all based on the same judgment: the "intensification-relaxation" cycle of Trump's trade policy will continue, and each cycle presents an excellent opportunity to harvest the panic of ordinary investors.

"The Secret to Harvesting U.S. Stocks"? A New Wave of Tariff Shock is Coming

This trading theory is about to face a new test. Trump, angered by "TACO", has seen market uncertainty rise again.

Just as the S&P 500 index completed a strong rebound, Trump once again wielded the tariff weapon: According to CCTV News, on May 23 local time, U.S. President Trump stated on social media that he suggested imposing a 50% tariff on the EU starting June 1. He then extended the implementation deadline.

Gareth Ryan, founder and managing director of investment firm IUR Capital, has sensed an opportunity. He indicated that the S&P 500 index might be at the upper end of its range and has established a short position on the SPDR S&P 500 ETF Trust.

"The current pattern is that you first see very bad tariff news, followed by a retraction or easing, and this back-and-forth will bring volatility back."

Looking back at the market performance in the first few months of this year, "TACO trading" has shown a cycle from euphoria to panic time and again. At the beginning of the year, expectations for Trump to relax regulations and cut taxes upon returning to the White House drove the stock market to soar, with the S&P 500 index hitting an all-time high in February.

However, the good times did not last long. When Trump began prioritizing tariff issues, investor enthusiasm quickly cooled. By mid-March, after Trump first announced large-scale tariffs, the S&P 500 index fell into a technical correction, dropping more than 10% from its peak.

The subsequent plot unfolded as Wall Street expected: Trump paused or eased some tariff measures, leading to a market rebound. But this rebound was extremely short-lived—after Trump announced the so-called reciprocal tariffs on April 2, the benchmark index was once again pushed to the brink of a bear market Traders who boldly bottom-fished during moments of panic have reaped substantial rewards: the cumulative increase has reached 20% from the levels at that time to the current levels.

Is market immunity forming?

Stuart Kaiser, head of U.S. equity trading strategy at Citigroup, has observed an interesting phenomenon: investors' reactions to soaring volatility have fundamentally changed.

"Whenever the VIX index spikes, what we actually see is that people want to downplay it rather than chase it."

According to news from the Wind Trading Desk on May 28, Deutsche Bank also believes in its research report that a significant structural misalignment is currently occurring in the global market. Despite the ongoing fermentation of tariff threats, market performance has been contrary to expectations: since April 2, U.S. inflation swap prices have remained "unchanged," and the assets of countries most affected by tariffs have performed strongly. This indicates that the market has fully adapted to the new normal of the erratic tariff policy.

This change has been confirmed in the latest market performance. In the face of Trump's latest tariff threats, the S&P 500 index has remained relatively calm, only dropping about 3.4% from recent highs, far from the level of extreme volatility seen previously.

Joe Mazzola, head of trading and derivatives strategy at Charles Schwab, has also noticed changes in the options market, where current bets do not reflect extreme bullish or bearish sentiment:

"Trump's tariff news no longer has the shock effect it used to; you no longer see that kind of extreme volatility."

As the market begins to develop immunity to policy threats, trading strategies that rely on panic sentiment will also face a reshuffling. For Wall Street, the next harvesting opportunity may require finding new triggers