Managing Editor’s Note: Every four years, something strange happens in the market. Our colleague Jeff Brown calls it “the million-dollar cycle.”
You definitely won’t hear about it on the evening news. Most financial advisors couldn’t explain it if you asked. And yet, like clockwork, it’s shown up again, and again, and again.
Most people don’t notice until it’s already played out. But a small group of investors knows exactly what to watch for. And each time this shift has taken hold, they have had the chance to turn a single $1,000stake into six figures…
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Just about every time this market looks like it’s ready to roll over, buyers come charging back in. We saw that again this week.
The 10-year Treasury yield climbed to its highest level in 24 years. Higher yields make it more expensive for tech companies to borrow to fund AI. They also make future profits look less valuable today.
Instead of falling, however, the Nasdaq punched out another all-time high.
This market has an insatiable appetite for buying. Every pullback – no matter the cause – is met with another wave of money looking for somewhere to go.
It’s a powerful phenomenon – you can’t just blindly bet against it because you believe stocks are way overpriced.
But it can also become dangerous when investors start believing that every dip is going to recover…
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Several factors are driving this relentless buying demand.
Clearly, the first is the enthusiasm around artificial intelligence. Investors still believe tech leaders like Microsoft and Meta can grow fast enough to pay for their huge AI spending.
Then there’s good old fear of missing out (FOMO).
When a market repeatedly recovers from selloffs, traders start to become conditioned to buy each dip. Some traders wait for a bigger drop before buying. Then they watch the market rally without them. So they’re eager to jump on the next pullback.
That can create a self-reinforcing loop. The rally attracts more money into index funds, which then direct those inflows toward the market’s largest companies.
Then, of course, there are options. When traders pile into call options in anticipation of a rally, market makers may need to buy the underlying shares to hedge their exposure. That buying can help drive prices even higher, encouraging others to start chasing the move.
Before long, investors aren’t buying because stocks have become cheaper or their fundamentals have improved. They’re buying because doing so in previous pullbacks has been repeatedly rewarded.
The biggest trap right now is assuming the market has to fall just because the risks seem obvious.
Sure, Treasury yields are high and rising, stock valuations are stretched, market breadth is narrow, and geopolitical risks clearly remain.
But these factors aren’t enough to trigger a sell signal on their own.
The price action ultimately tells us whether these concerns matter to the market. Until the leading stocks start breaking support and selling pressure gains traction, fighting the prevailing trend can become very expensive.
At the same time, that doesn’t mean blindly buying every pullback simply because the previous ones have recovered.
The danger comes when traders stop assessing each setup on its merits and assume that every dip is another buying opportunity.
I’ll be watching closely how the major technology leaders respond to the next setback. If they break support and can’t bounce back even after the selling eases, that’s a sign buyers may be running out of steam.
Market breadth is also something I’ll keep close tabs on. If the indexes keep climbing while fewer stocks participate, the rally will become increasingly dependent on a shrinking group of companies.
The overarching lesson is to respect the trend without becoming complacent.
Don’t fight the market simply because you believe it appears overvalued. And don’t buy every pullback purely because the strategy has worked multiple times.
For now, the market is swallowing every piece of bad news thrown at it. But that’s not something that lasts forever.
Our job as traders is to look for evidence that buyers are finally starting to lose their appetite – and be ready to act decisively when the price action confirms it.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
Reading Trading With Larry Benedict will allow you to take a look into the mind of one of the market’s greatest traders. You’ll be able to recognize and take advantage of trends in the market in no time.
