Hello Everyone,
Some general comments pertaining to investing:
When it comes down to examining the stock market (or other markets) only two things matter:
1. How much money is in the system (available)
2. How much of those funds are invested - what percentage. This will be more dynamic and subject to changes based upon investors sentiment and lead to more volatility (trading vs investing).
The primary reason for the major advance in equities has been the amount of money injected into the system (both monetary and fiscal) with the FED balance sheeting expanding rapidly over the past 10+ years along with government spending. The market has been uptrending since March 2000 as a result as seen on the SPX monthly charts. However, the rapid increase in the money supply (along with supply chain interruptions) has led to a substantial increase in inflation prompting the FED to alter course. They are now in the process of raising rates and have indicated they plan to reduce their balance sheet. These actions serve to provide a headwind to equity prices over time as easy money policies are being reversed. The saying "Don't Fight the FED" works both ways and now investors are so to say sailing into the wind instead of downwind. The real question is how quickly these changes are implemented and for how long (sustained). Only time will tell, but their actions will certainly have an impact on both number 1 and 2 above should there actions persist. Generally speaking, investor sentiment tends to become more cautious with this backdrop making it more difficult for investors to commit longer term capital.
With that being said, one reason for the US equity market remaining sanguine for the time being is that the alternatives are not great. Due to globalization, many markets are now moving in unison unlike many years ago. For example, Europe is facing even more inflation pressure than the US with energy prices in particular. Many emerging markets are also dealing with the same problems while others are being impacted by their government policies/actions that have wreaked havoc on investors (such as China and Russia). Then you look at Real Estate/Housing which has appreciated substantially despite tepid income growth (simply not sustainable when you do the math) and especially with rising rates (see mortgage rates of late). Most commodities too have seen big increases but many will be negatively impacted due to the Fed actions slowing demand. Finally, you look at Bonds (both government and corporate) which are already feeling the impacts of the Fed's plan to raise rates with the 2/10 inversion. You get the picture - this is not an ideal backdrop for investors.
Thus we need to remain flexible and adjust to the message of the market(s). As far as stocks, we are now upon the cusp of the next quarterly corporate earnings reporting season and it will be important to see how the market reacts to these reports. For example, do we see any pre-announcements or warnings this quarter? What will be the company guidance in light of the current backdrop? As discussed, seasonality tends to improve from Mid March thru April and thus far that has been the case with the SPX bouncing approximately 10 percent off its lows in line with our outlook. However, the indices did not see positive divergences on the cumulative Advance/Decline charts at the lows and we also had a clear symmetry break suggesting a retest is more likely than not in due time. For the bulls, many charts are reflect some sort of thrust higher off the lows. As we discussed a few weeks ago, both the primary view (a lower high) and the alternative (new highs) both were pointing to a the sharp rally we have witnessed. In the next few weeks is where I expect the the rubber meets the road and we will simply continue to trade what's in front of us in accordance with the evidence provided. Keep and open mind and adhere to your plan (Project, monitor, adjust).
Steve
Please take a moment to look at the trade ideas.
