Over the last month and a half, we have seen the most-volatile market action in years.
It has been nothing short of a worldwide sell-off. The major U.S. indices traded down to two-year lows as investors kept trying to speculate about what is happening globally.
That speculation, however, became the very same thing that sent stocks higher early this week. That is, before they returned back to their familiar "down" territory yesterday.
Several countries now have negative interest rates to try and spark their economies. Last week during Janet Yellen’s testimony to Congress, members asked if our country could also see negative interest rates.
This brought the sellers out in full force late last week, and down stocks went — straight into bear territory.
But some Wall Street analysts now say markets may be near a short-term bottom. They predict a bounce in the coming month — perhaps bigger than the one we saw this week.
This year’s bearish action aside, the longer-term trendlines are still pointing higher. This suggests we are still in a bull-market correction, rather than an actual bear market.
For now, anyway.
Some tactical indicators are again signaling that equities are getting oversold in the short term. This could argue for a near-term bounce — potentially a bigger and more-durable one than the 6%-8% up move we saw toward the end of January.
But will this happen? Nobody really knows.
Traders are using any rally as an opportunity to sell. That’s the opposite of what we were seeing last year, when traders were using the dips to buy.
What has changed so much since December, when the market was rallying to new highs?
Simply put, investor sentiment has changed.
Growth stocks fell out of favor for dividend stocks and bonds.
There is simply not enough liquidity to handle all classes of investments.
Investors want safety now vs. taking risks.
Global headlines and lower oil prices have spooked investors out of the markets.
Look at gold prices, for example.
A year ago, economists were talking about gold dropping to $800 per troy ounce. Last week, it hit one-year highs.
The big sell-off in gold was attributed to lower demand due to weak global economies. Yet, gold is headed higher while the global economy is slowing.
Makes perfect sense, right?
Far from it, but these are the types of markets we are experiencing.
Investors are worried and there is no real direction. The one positive that we can take away from the markets is U.S. companies’ earnings.
Earnings have been better than expected during the fourth quarter. Companies have given guidance that has exceeded expectations. The U.S. dollar has gone down, which is good for companies exporting to foreign countries.
So, it’s not all doom-and-gloom. Again, for now, anyway.
Longer term, the jury is still out.
Our economy is improving — slowly, but still improving. Our job growth is one that leads economists to think we are not in a recession, nor will we see one in the near future.
So if the global economies can improve, we could see this market move back up.
As we have seen, this market is looking for any bit of good news to rally. Late last week, an oil minister supposedly said they would consider cutting oil production, and the market rallied 250 points.
Imagine what could happen if we get credible news!
We would like to see some kind of baseline put into place, and the market to find a near-term bottom. This would give technical traders a platform to either short or go long from in the near term.
Expect this market to remain volatile. The stock market cannot do a 180-degree turnaround and head higher without volatility.
It’s just not healthy for a market to have a "V"-shaped pattern where it goes straight down and then straight up.
This goes back to finding a baseline. The baseline gives traders an idea at what point to buy into the markets or short into the markets with a degree of safety.
So far it has been "sell first and ask questions later." This is extremely bad for the market … and for traders who can take only so much motion sickness watching these kinds of moves.
On the technical side, if the S&P 500 could find a way to cross over the 2,000 mark, we could see many momentum players buy back into this market.
Several algorithms are buying and selling based on a channel range. This needs to be broken.
If you watch the financial news networks, you will hear traders talk about "fading the rally." This means selling when the market goes higher.
The key area to sell is 1,950 on the S&P 500, according to most technical analysts.
So this number becomes a self-fulfilling prophecy, because this market trades with the masses. Meaning, everybody buys and sells at the same time.
This is why breaking above 2,000 would be extremely bullish. If not, we can see the market go back down and retest the lows of this month.
Like we have said, there are positive catalysts for this market to go higher. But are there enough believers to buy and hold?
As we approach the key resistance levels, we will see investors’ mindsets more clearly. Until then, continue to be careful out there.
The Uncommon Wisdom Daily Team