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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Right now, investors are confused about the true state of the economy and markets.
And with the market counting down to next week’s Federal Reserve meeting – where it’s expected to announce a 0.5% rate raise – uncertainty among investors is only likely to grow.
After an already turbulent start to 2022, today I want to give my take on what to watch out for next…
Because everywhere you look, there are conflicting data and signals.
And that is feeding directly into the markets.
A Sea of Conflicting Data
We’ve all seen how inflation is currently running at a 40-year high.
Yet within just days of last month’s 8.5% annual CPI print, we saw consumer sentiment jump.
After March data showed the University of Michigan’s Consumer Sentiment gauge hit 11-year lows, April figures saw it bounce back and beat expectations by around 18%.
This wasn’t the only example…
Earlier this week, a key part of durable goods data roared back into life. Business spending on non-defense capital goods (excluding aircraft) came in at double market expectations.
Yet, just last week another gauge – the Philadelphia Fed Manufacturing Index – showed that manufacturing activity was slowing.
No wonder so many people are confused!
But mixed data like this right now shouldn’t be a surprise.
In fact, it’s exactly what you should expect when the economy and markets are in transition…
A transition from a low-interest rate – almost free-money – economy, to one where interest rates are on the rise.
Whenever monetary supplies start to tighten, it doesn’t initially affect all industries and sectors the same. Some feel the pinch much earlier than others.
That’s why we’re seeing this conflicting data.
However, over time the screws start to tighten. And that reduction in liquidity eventually finds its way across the entire economy.
Although we’re still early into the tightening cycle, we’re already seeing a drop in the number of IPOs. ‘Early-stage’ companies are also finding it harder to lock down new, or additional funding.
We’ll see other corporate activities like takeovers slow down too.
An expectation of slowdowns has driven the market this year…
What the Market Will Do Next
So far, the market has had three distinct phases.
As soon as 2022 began, we saw stocks tumble from a heavy sell-off. From January to mid-March, the Nasdaq fell by over 20%.
Then, we had the bounce from mid-March. After peaking later that month (and bringing the second phase to an end), the market rolled over and fell back down to its yearly lows.
Right now, the market is trying to figure out whether this third down phase has also come to an end.
Yesterday we saw exactly how this might play out…
I mentioned how vital this week’s earnings results from Microsoft, Alphabet (Google), Amazon, and Facebook are to the Nasdaq holding support.
These mega-tech stocks – the drivers of the two-year rally ending in 2021 – bore the brunt of the selloff this year.
And it’s these same mega stocks that will decide what the market does for the rest of 2022.
Rampant inflation and the prospect of higher rates has thrown the kitchen sink at the markets this year.
Then, there’s the disaster unravelling in Ukraine. And on top of that, there’s the ever-growing number of COVID cases in China.
Despite all the bad news, both the Nasdaq and the S&P 500 have held support after the huge selloff, so far.
That’s why this next week is crucial…
If the Nasdaq and S&P 500 hold support again – even after the Fed raises rates – the broader market could consolidate before going on to rally higher.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
In today’s mailbag, Opportunistic Trader members share their thoughts and thank Larry…
Dear Larry, it’s amazing how you pack so much wealth of knowledge between red, blue, green, and orange lines (the 10-day MA, 50-day MA, and RSI). I never want to miss your emails!
– Avjit P.
Larry, keep up the good work! I like the S&P 500 trader. I like the updated strategy as well.
– Steve G.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].