There’s one fact about markets that most investors don’t quite understand… The stock market is a creature whose personality mimics the psychology of the investors who give it life.
If investors are calm and optimistic, the market reflects that positivity.
But, when investors are unsure about the immediate future (like now) and have to juggle their apprehension about politics, interest rates, economic growth, and whether the tech leadership stocks they believed were the Holy Grail are about to be subject to all kinds of new regulations (thank you, Facebook Inc. (NasdaqGS:FB)), their nervousness manifests itself as volatility, mirroring their fears.
That’s where the market is now. That’s where it’s been since February. The market’s turned from Steady Eddie into Nervous Nellie.
When that happens, the market does what it always does; it takes the path of least resistance.
What Happens Now
It was an easy ride on the way up. And a very long one, too. Everything that mattered was contained in a giant, magical vault.
The Federal Reserve, leading the charge of global central banks at the forefront, slathered free money on big banks after the financial crisis, throughout the Great Recession, all the way up to last year.
The Fed (as other central banks continued their handouts) drove interest rates so low that the only yield game in town was out on the “stock market risk” limb of the “investment” tree.
It doesn’t matter now if the Fed should have done what it did for as long as it did it.
It happened, and it worked to drive money into the market. Mission accomplished.
In front of all Steady Eddie investors now is the prospect of the punchbowl being taken away and the party ending.
That’s the big unknown; how will markets react to having to stand on their own two feet?
What unseen support mechanisms might come crumbling down as interest rates are “normalized?”
Then there’s the political football. As decisive as the 2016 presidential election was, partisanship is worse now. It’s crazy. Divided government and checks and balances are one thing, but not knowing what’s fake and the truth is something else altogether.
The stock market zoomed higher after the election on prospects of tax cuts, deregulation, and infrastructure spending.
We got the tax cuts, we’re getting more deregulation, and, eventually, maybe some infrastructure spending.
All that means is the good news has happened.
What’s left to see now is whether earnings can continue to grow, whether tax cuts will spur more supply-side growth, whether consumers will get more in their paychecks and spend more, and how much capital spending we will see in the next couple of quarters.
It’s understandable why the market’s nervous. Investors are nervous.
The message from the market is that it, too, is scared and nervous.
Now is the perfect time to stop listening to analysts and talking heads and start listening to what the market’s been saying – and what it’s been doing. Because the market does what it does; the way water seeks the path of least resistance.
And right now, that’s down.
The Nasdaq Composite, with all its tech leadership stocks, has broken down. It’s saying, “Help, I’ve fallen, and I can’t get up.”
Since September 2016 (I could go further back, but the channels are so perfect since September 2016), the Nasdaq has been in a perfectly defined upward bullish channel, making an all-time high in January 2018. It then decisively broke through the lower up-trending support channel in early February. That was meaningful.
Then, the Composite made another higher high in March, right to the top of the upper up-trending channel line. That was great. Until, that is, it almost immediately broke back down, again decisively breaking through the lower up-trending channel line.
Now, that lower up-trending channel line is resistance.
By breaking down through the lower up-trending channel line twice, the Nasdaq formed a double-bottom. That’s a warning level, for sure.
If the Composite breaks that new double-bottom around 6,777, it could be curtains.
The Dow Jones Industrials were trading in a similar up-channel since September 2016. They made all-time highs in January, too. And then broke right through their lower up-trending channel support, decisively.
In fact, the Dow’s action, since breaking down in February, is downright ugly.
Every time the Dow tried to rally off its February lows, it’s made lower and lower highs. In other words, it could never get higher than the last rally before breaking down again.
And worse. The Dow is facing a double-bottom, too.
If you’re looking at the technical of the market, they’re talking to you. They’re telling you there’s no positive energy in the market. There’s no optimism, other than the hope that we don’t break below the double-bottoms the Nasdaq, the Dow and the S&P 500 have all made.
The market’s telling us, showing us, that the path of least resistance is down… For now.
I can tell you this much…
- The markets have been more volatile than anyone participating in the rally run-up expected…
- There’s no reason to expect this to change any time soon…
The best course of action for you is to take volatility by the horns, and prepare yourself for the current The Fed has created against you.
I’m not saying the market is going to be easy, I’m saying you need to make sure you’re prepared regardless how choppy it gets…
You’ve been warned.