In this week’s copy of the Market Slice, we dive into market highs and lows, what recent trends could mean for your trading strategy, what a melt-up is and why it matters, and triple cost!
Making Heads or Tails of This Market
If you are old enough to remember this song, you also have enough experience behind you to understand what we are seeing in the markets today!
This week, the major indexes are once again approaching all-time highs. After two months of volatile sideways chop, the benchmark S&P 500 has broken through near-term resistance near 4450, and is on the way back to 4500 and, very possibly, beyond (4516 as we go to press on Tuesday.)
Since the bears have once again been routed, now a good time for traders to revisit the assumptions that direct our trading strategy.
Many very smart analysts these days are making very good cases for any combination of the following ideas:
- Market valuations are very stretched,
- Debt levels are unsustainable,
- Fiscal and monetary stimulus is responsible for the run-up of the past 18 months, and,
- Supply chain woes, continued COVID response issues, and reduced labor supply all point toward economic crisis.
These are all sound points. The problem is that the stock market is not the economy. We’ve heard that a bunch over the past 18 months. Here’s what it means.
No matter how large or persistent economic difficulties may be, stock market results are driven by interest rates, liquidity, and mass psychology. As long as investors have capital at their disposal and bond yields remain very low, they will continue to put that capital to work in the equities markets. Unless/until some “black swan” event upsets this equilibrium, or rates rise considerably, a favorable investment climate will continue.
While logic tells us that this situation cannot continue forever, our analysis indicates that the eventual reversal remains in the unforeseeable future. In fact, there is every reason to expect that the next major move will be to the upside.
Are you satisfied that you have the market all figured out? If so, good for you! If not, you might benefit from speaking with an FFR Trading Strategist. Our team has decades of experience navigating all kinds of market conditions. Call 1-800-883-0524 to speak with your personal Strategy Team representative today!
Melt Me Up, Melt Me Down
Technical traders use lines of support and resistance to define breakout market moves. When a price crosses one of these imaginary lines, the tendency is for prices to keep moving in the direction of the breakout.
Since false breakouts are common, it is unwise to place trades based solely on these indicators. A solid trading strategy uses several factors together to find trading setups that provide a real edge in the markets.
Nonetheless, macro analysts often consider momentum breakouts as the signal for a major market move. After bouncing off support around 4300 – a break below that level might have been the start of a real downturn, but it didn’t happen – the breakout is now clearly to the upside.
Of course, there is no guarantee that the uptrend of the past two weeks will continue… with the market in short-term overbought territory, the possibility of another correction is still significant. Again, this is why you need a robust, proven trading strategy.
Since the bears failed to sustain the downside break, though, we have reason to expect that a retest of the August highs is the most probable outcome.
Could This Be the Final Melt-Up?
A melt-up is defined as a sustained, often irrational improvement in the price performance of an asset or asset class, driven to a large extent by an influx of new investors. These “retail traders” are motivated by fear of missing out on what seem like “automatic” gains, rather than by fundamental economic reasons.
Last week, we talked about why it is unlikely that a serious downturn will occur when expert opinion is predominately pessimistic. History shows that major reversals occur when nearly universal optimism has everyone convinced that the market can only go up.
The steady rise of the stock market over the past 18 months is easily understood in terms of the massive liquidity generated by super-easy money provided by the Fed and the government. Now, however, even with “tapering” in the wind and economic challenges abounding, the market continues upward. The “irrational” part of the melt-up definition is increasingly obvious. What does this mean for your trading strategy?
Our professional Strategists are experts in both technical and fundamental analysis. When you call for a no-obligation Trading Strategy Review, you’ll gain the benefits of qualified, objective insights into the markets and your trading goals. Call (800) 883-0524 today to schedule a time for your strategy call.
The Triple Cost of Trading Against the Trend
There is always a temptation for traders to try to outsmart the market with their trading strategy. We think we see what’s “really going on”—and often we’re right! And yet the market moves against us, despite our brilliant analysis.Unfortunately, it’s not only our egos that are bruised when we bet wrong on market direction. Our trading accounts usually take a hit, too!It’s bad enough when our sensible, validated system produces a string of losses. But that’s understandable… losing trades come with the territory. Far worse is when we trade against the trend, anticipating a reversal that “just has to” happen soon.
There are actually three “prices to pay” for incorrect attempts to time the markets and predict reversals:
- You lose because you guessed wrong on market direction. One reason most trading advisors strongly recommend trading with the trend, rather than against it, it that most of the time stock prices keep going in the direction they are already moving. As Joe Duffy likes to say, “the trend doesn’t give up without a fight.” The strength of this directional move is called momentum; trading with momentum is a more solid approach.
- You miss out on gains that could be made simply by following the trend. Not only are you losing the capital you risk on the market timing idea, but you fail to take advantage of higher probability trading opportunities. And,
- You lose confidence in your trading plan. Not so much because of the loss, but because you pursued an ill-informed strategy.
Now with that said, there are professional traders who find success with market timing methods. If you are extremely disciplined and apply yourself diligently to learning these methodologies – seasonal analysis, macro alpha strategies, and/or esoteric studies like Kondratieff or Elliot Wave theory – you may be able to develop a winning method for market timing.
Whether to stake your trading strategy on this highly contrarian approach is your decision. Before you commit your trading funds to a market timing strategy, why not talk it over with a pro? FFR Trading has a team of Strategists with expertise in both trend following and market timing strategies. Get an impartial second opinion by calling (800) 883-0524 or contacting us. And if you know you want to trade with the trend, but aren’t sure how to do it, we can help. Call today!
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