Stocks staged an impressive rally during the week on the back of hope that central bankers are closer to the end than the beginning of their rate rise rampage.
Is it time to jump on board?
Not so fast.
In a situation like this, it pays to have clear lines in the sand that you need the market to cross before you become even slightly bullish.
There is no doubt a bear market rally can get ignited from here. The strong buying that we saw is often a precursor to follow-through buying over the next few weeks.
Markets were oversold in the short term and resting on major support, so when the buying is ignited, it can cause a sharp rally as shorts scramble out of their positions.
But what exactly has changed from a fundamental viewpoint?
We had a crash in the UK bond market, which caused the Bank of England (BOE) to have a heart attack and start printing money to save their pension system.
The yield on their 30-year bond fell a full percentage point in a day, which is unheard of, but since then, the selling has returned.
US 10-year bond yields are also starting to creep higher over the last week and aren’t far from the 4% level. Above there, all hell could break loose.
The US Fed hasn’t come out to say anything other than that they are determined to get on top of inflation and will continue raising rates until they succeed.
Is that a set of circumstances that would lead you to start buying stocks with your ears pinned back?
I don’t think so.
If you were brave enough to step into the fray, you would want to get out if the S&P 500 heads below the low of the correction created last week.
A market like this is for the nimble short-term trader who can navigate extreme volatility.
Long-term investors should sit back and wait for more concrete signs that a low is in place before wading in.
In today’s ‘Closing Bell’ video, I show you what I need to see before I will increase my conviction level that a bear market rally may be in the offing.
Regards,
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Murray Dawes,
Editor, Money Weekend
