Surprised by changes in the market? Let’s talk about Market Trading – what goes up must come down. In this issue we’ll tackle market fluctuation and more!
The Long View
Markets rise and fall. This is a truism, but it has been mostly forgotten in the heat of the late decade-long bull market.
This is a 100-year chart of the Dow Jones Industrial Average. The second sharp drop, going left to right, is the stock market crash of 1929-’32, which fell the fastest but also reversed within a three-year window. (There was also a crash at the start of WWI, when the market lost 40% of its value.)
The second longer, more gradual decline covers 1965 to 1982, a 17-year bear market.
Chart courtesy of macrotreands.net
And the third is the dot-com/global financial market crisis, which extended from mid-1999 into 2009.
Today, of course, we are in the early stages of what could be the next bear market, and as a brief look at previous cycles shows, these downturns typically last anywhere from a few years to a decade or longer.
Chart courtesy of themarketear.com
When we went out on a limb in February and called the end of the bull market, it wasn’t a popular opinion. Most analysts said we were looking at a bull market correction. And for a while, it appeared that they might be right, with prices rebounding sharply from those lows.
A couple weeks ago, we looked at this chart of the S&P Year to Date superimposed on a chart for 2008. Below we see the same chart, updated to this week. As you can tell, the market now seems to be “front-running” the pattern.
While prices rebounded briefly to break out above the early February highs at 457 on the SPY, these levels were not sustained, and Tuesday’s big selloff drove all the indexes toward cycle lows. This week appears to be testing support at 4150, and if that breaks, it could be a long way down, as indicated by the trendline connecting the December and March lows.
Of course, the Relative Strength Indicators show a highly oversold condition, and a bounce is almost certain. Nonetheless, we continue to insist that the general direction of this market is down, and traders are taking inordinate risks on the long side of the indexes – and most stocks — at this point.
Do you have a clear view of where the market is going, and what it means for your trading? FFR’s Strategy Team is here to help you think it through. There’s never any cost to speak with one of our Strategists, and you’re sure to come away from the call with new insights that will help you be a better trader. Give us a ring at (800) 883-0524 today to speak with a professional.
Shooting the Generals
This is a phrase pundits use when they’re speaking of market leaders losing the support of investors. And right now, they’re shooting the generals, which is why we are seeing such weakness in the markets.
Here’s what we wrote in February, when discussing the lack of breadth in the leading indexes:
Considering that this kind of narrowing of market breadth is usually followed by below-average returns in the S&P 500, the possibility of a selloff in these growth stocks could be in the cards for 2022.
The prospect of rising interest rates in the year ahead points in the same direction. These companies tend to be sensitive to rate hikes, and — with valuations far beyond historic norms — the likelihood of investors reassessing the value of those future profits could mean a drastic drop in stock prices, which would almost certainly sink the entire market.
What is now unfolding is the loss of confidence in the biggest stocks, which until now have buoyed the market, even as the majority of equities were declining in value. This chart shows how the FANG stocks are falling, leading the NASDAQ lower.
Chart courtesy of themarketear.com
Without the support of big institutional investors driving the FANG stocks higher, there is even less reason to believe that a strong turnaround in stock prices is on the horizon.
A crack-up boom remains possible
One of the biggest factors working to take this market lower is the continued “tightening talk” from the Fed. After months of proclaiming “transitory” inflation and delaying action on lifting near-zero interest rates, Jerome Powell et al have found religion, and now seem intent on finally doing something – anything! – to rein in inflation.
As even the most dovish Fed voices proclaim the need for higher rates, the tepid 50 basis point bumps already announced are clearly not going to be enough.
The market may have priced the announced increases into stock prices but the obvious truth is only now catching up to equities…it’s going to take a lot more than that to slow the inflation train.
So far, the goal of an orderly unwinding of excess valuations in the market is going according to plan. But if Tuesday’s selloff turns into a rout, the Fed will be challenged to stick to its guns. Especially with this being an election year (never forget that Fed appointees are politicians), the political pressure to head off a recession will be enormous.
In January, we quoted Peter Schiff’s assertion that, faced with a market crisis, the Fed will fold like a lawn chair. The possibility that the Fed will back off from interest rate hikes and Quantitative Tightening holds the very real potential of a manic buying spree when the current hawkish stance is reversed.
While remaining bearish, it’s important to always be alert to forces that can change the market’s trajectory. Keep an eye on Fed policy, and never forget the rule that markets will always create maximum pain for the maximum number of participants, whatever that might mean at any given point.
FFR Trading works with some of the best traders in the business to help clients ride the tides of rising and falling markets. If you have not yet taken steps to hedge your buy-and-hold investment and retirement accounts, it’s a good time to consider adding long/short trading strategies to your portfolio. Call (800) 883-0524 for a no-risk strategy call today.
Understanding Asymmetrical Risk
One of the most important concepts for traders is asymmetrical risk.
“Symmetry” refers to similar proportions on both sides of an axis. Symmetry is considered a hallmark of beauty and perfection in form… but in markets, there is no opportunity in symmetric risk propositions. Imagine a roulette wheel with no green numbers. You could bet on red or black; the chances would be even, whichever way you go. But what if the red bet paid 3:2, while the black was 1:1? Anyone with any mathematical sense would bet red all day long. And you’d be bound to come out ahead over time.
Sometimes, we can find asymmetrical risk in the financial markets… and when we do, it only makes sense to increase our “bets. The challenge is to find those situations, with reliable information that delivers a dependable edge. Since everyone in the market has access to the same information, at least theoretically, this can be hard! Hard, but not impossible.
In January, and again a few weeks ago, we pointed out that the S&P Volatility Index, the VIX, was at a cycle low, with basically nowhere to go but up. Here’s what we said:
Today (Tuesday April 5), the VIX is at 21.04, up two and a half points from a cycle low of 18.58 on the 4th. Once again, we can only take note of the large potential upside in the VIX relative to the much lower probability of a sharp move down… even under the best circumstances, VIX is unlikely to fall below 16, while any unexpected shock could send it back over 30.
As of today’s close (April 26), VIX is at 33.51.
It didn’t take a lot of insight to see the asymmetrical opportunity in this trade. It was plainly inherent in the situation…there was far greater risk of something upsetting the market’s apple cart and sending VIX higher, than the likelihood of events stabilizing and the VIX going lower, or even remaining flat.
Sure, the VIX dipped a bit after we wrote that three weeks ago… but macro analysis is not for day traders. It’s for serious, profit-minded traders who can see through the smoke and haze of talking head blabberjab and market noise, to find asymmetrical profit opportunities hiding in plain view.
Our expert traders combine the best of technical and fundamental systems, to identify asymmetrical trading setups that offer much more reward than downside risk. To put this team to work for you, just call (800) 883-0524 and ask for a Strategy Team analyst.
Thank you for tuning in for yet another issue for Market Slice! Be sure to check out our Instagram, Facebook, and Twitter for more frequent market updates, trading news, investment inspiration, resources, and more! Happy trading, everyone!