There are times when observing markets is like watching paint dry.
Volume disappears, trends go off the boil, and you could flip a coin to guess which way the market may go next.
We are in such a market now.
In my experience, dull markets can be the most dangerous to your wealth.
We all want to be actively engaged, looking for opportunities to build wealth.
But when there aren’t many solid opportunities around, it pays to sit on your hands rather than enter mediocre trades that you could regret.
In a market that has sold off for a couple of years, bargain hunting is front of mind, and most traders fear missing out on the easy gains at the start of a new bull market.
As a bear market rally takes hold, more articles come out saying that the low is in, and since most people just extrapolate whatever the market has been doing for the last month or so, it doesn’t take much for animal spirits to reignite.
Then the music stops, and traders are left wondering how they got fooled by yet another bear market rally.
The short-term trend remains up, as I have been saying since the weekly buy pivot was confirmed in the S&P 500 on 21 October. So there is no need to panic yet, and there may still be further upside coming.
But the higher it goes, the closer it gets to stiff resistance.
The S&P 500 has already tested the first line of resistance at the 10-month EMA (exponential moving average). In bear markets, the 10-month EMA is often tough to get through, so I’ll be interested to see how this month finishes.
If weakness returns over the next few weeks, the charts can turn bearish very quickly.
The reason I built my own model of market behaviour was so I could define what state a market was in, which informs my decision-making.
Basically, it stops me (most of the time) from doing dumb things.
Therefore, I have to wait until a weekly sell pivot is confirmed before I can switch back to a fully bearish posture, and that may not happen for a while yet.
There are lines in the sand above and below the market where I will increase my bullishness or bearishness.
As I said last week, the way I see it, the market is in a short-term uptrend, medium-term downtrend, and long-term downtrend.
That is not a state of affairs where I want to be 100% long. The portfolio I run for Retirement Trader is 44% in cash.
Instead, I am picking up a few stocks here and there that I think have good long-term stories and are fundamentally cheap. But I am focused on taking part profits in those stocks as soon as I can, and I am prepared to dump stocks on the first signs of trouble if necessary.
If the low is in, then we will have picked up a few stocks at good levels, but if things turn bad again, it won’t hurt us too much because I will remain nimble.
Next year is shaping up as possibly a recessionary year, with property around the world feeling the heat of rising rates.
Tech companies are starting to dump employees to conserve cash, and unemployment rates will probably start to rise over the next six months or so (despite the fact we had a strong number yesterday, which will force the RBA to raise rates again by the end of the year).
Inflation does seem to be coming off the boil, but services inflation is still way too high, with little sign it will deflate quickly to desired levels.
The US Fed has been adamant that they are nowhere near finished raising rates, and a few speeches made during the week reconfirmed this view.
It is a brave investor that jumps into a market such as this with both feet.
There are pockets of opportunity, but there must be an overriding respect for the long-term downtrend that we are in.
Until next week,
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Murray Dawes,
Editor, Money Weekend
