Finally, the bears have something going on in the market. We have been waiting and waiting and waiting, and now we have a correction. Oh, maybe it is not a 10 or 20 percent correction, but it is a correction, albeit small. The S&P 500 is forty (more or less) points or so off its all-time high and the Dow is down four hundred (more or less) as well. And, maybe it is not over yet. Maybe we will get to 10 or 20 percent, but in the meantime, look at all the profit we made and look at all the profit the bears did not.
- One of the hundreds of psychological hurdles standing between individual investors and sound financial decisions is our inability to admit defeat. Our natural inclination is to never admit defeat. In fact, studies show that all things being equal a majority of people would rather stick by their guns than admit defeat.
The above is an apt description of those who have missed this rally because they kept telling themselves and some of them told the rest of us the market is headed for a major letdown. My point here is don’t fight the tape and don’t for Pete’s sake, get stuck in a stubborn mindset about what the market will do and not do.
Again, the market is confusing me. Although ADP is not the definitive word on employment, it still carries weight and it came in below expectations. Now, given the last two weeks of non-stop noise about the Fed, why isn’t the market rallying today on the bad news?
- Stocks opened lower after data showing job growth remained sluggish did little to ease concerns the Federal Reserve may slow the pace of its economic stimulus program.
Okay, maybe the market is waiting for the US employment report, and then it will rally if it too comes in under expectations, or maybe it will keep rebalancing while waiting to see what the next batch of economic indicators tell us about the global economy. In any case, consider the following thought if somehow you still believe the market movement over the last seven months, or four years for that matter, is an illusion, a propped up Fed bubble.
- The idea that stocks are somehow due for a pullback assumes rallies are independent of all other factors. Stocks being up or down for any given month isn’t a 50/50 shot, like flipping a coin. Rallies feed on themselves because the underlying conditions are bullish.
As I have written, historical patterns and historical cycles have their place in market analysis, but historical market patterns are unreliable for the simple reason that every market has to be seen in the context of its time.
For example, the unprecedented QE going on after an unprecedented financial collapse definitely has an influence on this market, so what it has done in the past under circumstances wholly different is not necessarily a prelude to what will come. Nevertheless, consider the information below if for no other reason than it is possible.
- After prior streaks of seven months, the average returns for the next three months were more than twice the average gains over other three-month periods. The same is true when the timeframe is kicked out to half a year.
I still believe the market is in minor panic mode from the constant noise about the Fed thinking about maybe tapering off QE sometime in the unknown future. Once selling starts, investors take profits from a huge rally to book them and then they sit back to see where the market lands. This is what we are seeing now – profit taking and waiting for opportunity.
Keep your eye on the ball, folks. Keep watching the fundamentals and making decisions based on what global and US economies are doing, or not doing. Don’t get fooled though by headlines and under analyzed data and information. Break the data down in context. For example, consider the following in context.
- The price of framing lumber on CME is barely over $300 per 1,000 board feet, down more than 20% since the beginning of April. The last time prices were this low was October of last year. Meanwhile, the price of copper is currently fighting back from its own 20% correction from February through April.
One might conclude from the above that the US housing rebound is not as substantial as many claim and some might conclude from the above that global economic momentum is in serious trouble, as copper is utilized in just about everything we manufacture and sell. Don’t be fooled.
Commodities are traded on the Chicago Mercantile Exchange (CME), which means myriad forces are at work creating the buy and sell prices. Speculation is one of the more powerful forces affecting prices. Traders speculate on the future, and since it is unknown, the true supply and demand price is subject to guessing.
To clarify, take a look at the price oil. Does supply and demand really support pricing between ninety and one-hundred-dollars per barrel? I don’t think so.
Trade in the day; Invest in your life …
