A lot of the evidence suggests that stocks should be under pressure.
The Federal Reserve just hiked rates for the first time in more than three years. The 10-year Treasury yield has been flirting with the 5% level. Oil prices are still high, while inflation remains stubborn.
Yet against that backdrop, the market doesn’t want to go down.
Granted, we’ve seen some selling lately. But whenever it looks like the selling is about to turn into something bigger, buyers appear and drive the market higher.
We saw that last week. The S&P 500 sold off following the Fed’s rate hike, only to recover on Friday.
It’s a reminder that when it comes to trading, you can’t take anything for granted…
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In theory, it’s easy to build a bearish case right now.
Higher interest rates increase borrowing costs and can weigh on economic growth. Higher Treasury yields also give investors a solid alternative to stocks, which can drag on stock valuations.
Then you have oil. If energy prices remain elevated, that can feed into inflation and add pressure on the Federal Reserve to raise rates.
And this isn’t just a U.S. story. Rates are rising in other major economies, including Europe and Japan, as central banks struggle to get inflation under control. What’s more, the Fed’s hike last week could be just the first of a rate-tightening cycle.
And it seems like many at the Fed agree. Last week’s rate hike decision was unanimous. Sixteen of the 18 policymakers who submitted projections expect at least one more hike before the end of the year.
Put all of that together, and you might reasonably expect stocks to tank. But stock prices are telling us something else…
To be clear, rising interest rates and persistent inflation are creating significant risks for this market. Those pressures don’t disappear simply because stocks are proving more resilient than expected.
The bears might ultimately be right about where the market is heading. But if you’re too early, you can lose a lot of money before the market finally moves your way. Shorting stocks or an index simply because you expect those pressures to eventually catch up with the market can be a dangerous way to trade.
That’s why price action matters.
If stocks should be falling but buyers keep stepping in, we have to respect what the market is telling us. There are no prizes for being the first trader to call the market top.
Rather than betting that the next selloff will finally be the big one, we need to wait for the price action to confirm that something has changed.
Maybe buyers are no longer rushing in to buy every dip. Perhaps a rally fails to take out a previous high. Or maybe the market finally starts reacting negatively to the rising yields and inflation pressures it has been shrugging off.
Those are the kinds of clues that can tell us the market’s character is beginning to change.
And if the underlying pressures eventually catch up with this market, rest assured there will be plenty of opportunities to capitalize on it.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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