Markets rarely reward certainty. In fact, it’s usually the opposite.
By the time investors are convinced about what’s going to happen next, the market has often already priced it in. Last week was a perfect example.
Consumer inflation came in softer than expected. Producer inflation also surprised to the downside. Expectations for a Federal Reserve rate hike later this month fell sharply as traders reassessed the outlook around interest rates.
Yet despite the good news, stocks struggled to gain traction… then sold off sharply on Friday. That put the Nasdaq down around its June 9 lows.
In simple terms, the market is no longer reacting only to the headlines. And as a trader, you need to be able to pick up on the subtle shift.
A lot of traders spend their time trying to predict economic data or guess what the Federal Reserve will do next. But I’m much more interested in how the market responds once that information becomes public. That’s where the real clues lie.
When good news no longer sparks aggressive buying, that tells you the market is already fully priced in and struggling to meet increasingly unrealistic expectations. Similarly, when bad news fails to generate sustained selling, it’s often a sign that bearish sentiment is already fully baked in.
That’s why the adage “price is king” is true. What investors are actually doing with their money reveals much more than predictions or forecasts.
Friday’s action tells us that investors are becoming far more discerning. They’re no longer willing to blindly buy any dip. Renewed fighting in the Middle East, rising oil prices, and a cautious earnings outlook from Netflix tipped the market into “risk-off” mode, despite encouraging inflation data.
And now the market’s focus will shift to the rally’s next test: the real meat of earnings season.
Over the next couple of weeks, some of the market’s most influential companies will report, including Alphabet, Tesla, Apple, Microsoft, Meta Platforms, and Amazon.
Collectively, these stocks account for a large share of both the Nasdaq and S&P 500. Their results – and more importantly, the market’s reaction to those results – could determine the market’s next major move.
With valuations so stretched, investors are no longer rewarding companies merely for meeting expectations. They’ll want to see evidence that earnings growth remains strong and that the hundreds of billions in AI spending is beginning to generate meaningful returns.
As the reaction to Netflix showed, delivering solid numbers isn’t enough. Investors want confidence that future growth will justify stocks’ valuations.
Over the coming weeks, we need to focus on the market’s reaction to the headlines rather than the actual headlines themselves. The headlines tell you what happened. But the price action shows you how investors interpreted that information.
To me, the message from the market is becoming increasingly clear.
After a long period of momentum-based action, fundamental factors like valuations, earnings, geopolitical risks, and interest rates are beginning to matter again.
Successful trading is about recognizing when the market’s profile begins to change.
Right now, we’re seeing the early stages of a shift, and the traders who track the changes will be in a much better position to profit.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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