Traders – expect the unexpected! In this article we discuss the difference between retreat and panic selling, bonds, and assets!
Orderly Retreat or Panic Selling?
The selloff rolls on this week, and despite the slight bounce as we write at the close on Tuesday, market weakness continues to challenge buyers and HODL investors.
Ironically, after weeks of proclaiming the arrival of a bear market, Market Slice is now suggesting that it may be time for the bear to take a breather.
Quite simply, it’s because when everyone is bearish, the market is almost certainly going up!
CNN’s Fear and Greed index is now into “Extreme Fear” territory, which means that selling pressure in the market is now fully developed
This tracks with the recent decline across the board in U.S. equities markets. The 3-month S&P 500 chart below shows a support/resistance line at 4300.
Since breaking through this support on April 22, the market fell to about 4060, before bouncing strongly to test the 4300 level, now serving as resistance. This test failed, however, and now the market is down to around 4000.
(Note: this chart uses open-to-close bars, so Tuesday, 5/10, shows as a down bar, although the market was up a quarter-point close-to-close.)
With the index so deeply oversold (see the RSI and Stochastics at the bottom of the chart), and fear running rampant in the market, the conditions are ripe for another strong bounce.
As you read this on Thursday, you’ll know whether this analysis hit the mark. Of course things can keep going down… after all, we’re in a bear market!
However, what we’ve seen so far is more of an orderly retreat, as opposed to a rout. This in fact is just what the Fed has been hoping for… a relatively slow unwinding of extreme overvaluation in stocks that can dampen asset inflation and suppress commodity demand, thus putting the brakes on price inflation.
Bottom line: when everyone is yelling “sell!” – it’s probably too late to profit on the short side. Watch for the bear market rally to begin soon – if not this week – and then be ready for the next big step down…which will come when it’s least expected.
This is why smart traders position their portfolios for any market, with longland and short strategies. FFR Trading’s Strategy Team is here to help you figure out how to win the trading game. Call (800) 883-0524 to speak with us today!
What About Bonds?
As discussed above, we are now witnessing the implementation of a designed recession.
Despite all protestations to the contrary – and in defiance of all the pundits who think the Fed will cave at the first sign of a market correction – current Fed policy is designed to bring down equities prices, bolster the bond market, and try to slow inflation by reducing consumer demand.
Understanding the importance of the bond market is essential to an accurate analysis of the macroeconomic situation.
2022 has been an epically bad year for bonds, as near-zero interest rates have given way to small raises in the Fed’s base rate, with even more pressure on long-term rates, as investors demand more return in the face of rising inflation.
This article from MarketWatch, which insists that the bond market turmoil so far this year is transitory (where have we heard that word before?), paints an accurate picture of the ‘wreckage’ we’ve seen in bonds recently:
It’s easy to feel queasy about bonds after a stunningly bad first quarter.
A sharp rise in Treasury rates this year has been a massive drag on fixed income, with losses feeling even more acute when coupled with a stock-market rout that landed the S&P 500 index SPX, +0.25% back in correction territory on Friday for the second time this year.
“Investors aren’t used to seeing dramatic losses in their bond portfolios, particularly when equity markets are also declining sharply,” Saria Malik, chief investment officer at Nuveen, the asset manager of TIAA, in a Monday client note.
How bad has 2022 been? The investment-grade corporate bond market’s total return was negative-12.3% on the year through April 29, compared with minus-8% for high-yield, negative-12.1% for convertibles and negative-12.9% from the S&P 500, according to CreditSights.
This chart shows the price action in the 30-year T-bond market over the past 6 months:
The problem is, when bond prices go down it means real-world interest rates – beyond the control of the Fed – are rising. Simply put, with bonds under extreme pressure, it will be extremely difficult to curb the runaway inflation that threatens the economic well-being of American families… and the Biden administration’s prospect for re-election!
Note how the three bars on the right of this chart are green. This shows us that bond prices have risen as the stock market fell over the past few days. This is exactly what the Fed wants.
With the bloom off the speculative rose in equities, capital is seeking safety, which (for better or worse) is still found in Treasury debt and the Dollar.
So squeezing some liquidity out of the stock market is part of the Fed’s plan to support the interest rate markets and keep rates down, with the implication that inflation will the slow down, and the economy will experience the cherished “soft landing.”
Our professional traders all have at least 20 years of experience trading these markets. You will benefit from putting their expertise to work on your behalf. Stop guessing what to do next! Speak with an FFR Strategist today… the call is free, and the benefits are immediate when you trade with the pros! You deserve the confidence that comes with knowing you are covered in any kind of market conditions. Call (800) 883-0524 or contact us here.
Understanding Speculative Assets
One of the biggest misunderstandings in stock trading is the idea that large gains can be reaped from a given asset class without applying accurate analysis.
Take the Bitcoin market, for example. We don’t talk about crypto currencies much because there simply isn’t enough data – these assets are too new – to apply a professional trading approach to these markets.
That’s why we say that cryptos, represented by Bitcoin, are a purely speculative asset, and therefore not the right market for professional trading.
Others disagree, of course. There are countless commentators with endless arguments pro and con for the long-term potential in Bitcoin, Ethereum, and even the so-called s***coins.
Regardless of these opinions, there is a strong reason to insist that investing in Bitcoin is a strictly a speculation. Look at this chart or Bitcoin and the NASDAQ over the past 3 months:
Chart courtesy of themarketear.com
As the tech index rose and fell, Bitcoin tracked it almost exactly. In other words, when traders went “risk off” and traded out of the NASDAQ, they also exited Bitcoin. And when it was risk-on time again, Bitcoin rose along with the tech stocks.
This is clear evidence that Bitcoin is a risk asset, and not a sound long-term investment, at least at this point. This means that the idea of reaping easy profits in cryptos – just because it’s a “hot market” — is bogus, and is being overhyped to extract money from naïve traders.
If the arguments for Bitcoin’s utility as a decentralized currency were valid, investors would be piling in as prices fell – buying the dip – and we would not have $31,000 Bitcoin today.
Of course, the same logic applies to stocks… much of the mania we’ve seen since the March ’20 crash, fueled by wild money creation, was driven by irrational exuberance, and not from sound investing strategy.
This is where smart traders make their gains.
Two weeks ago we talked about asymmetrical risk… that is, situations where there is a lot more potential reward than real (as opposed to perceived) risk. Macro analysis enables us to identify this kind of trading opportunity.
We find trades that present significant upside potential with limited downside risk. These situations escape the notice of traders who are captive to the predominant narrative, or who trade strictly algorithmic processes that neglect structural and fundamental factors.
Right now, there is an emerging asymmetry in the stock market selloff, as discussed above.
This doesn’t mean that you should blindly jump into a long trade… but it could indicate that while others are panicking and dumping their positions to avoid getting creamed by the long-term bear, you might be able to find tactical trades on the opposite side of panic selling by speculative investors who don’t understand the broader market forces.
FFR Trading is your partner in trading success. Call (800) 883-0524 for a free strategic portfolio assessment, or use the link below to schedule a time for your call.
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