Is The Third Market Myth About To Be Exposed?

|
Includes: IEF, SPY
by: Chris Ciovacco

Summary

The market may gain some additional insight into Fed policy Monday.

Investors have given up on two market myths; the third may be in the process of cracking.

When the third market myth is not longer believed, what is the possible impact on stocks?

Fed Speaker Monday

After last week's Fed statement, the market will be looking for some additional insight when Fed Vice Chairman Stanley Fischer speaks Monday. From MarketWatch:

It is likely to be standing room only at the Council on Foreign Relations on Monday as the market strains to hear Fed Vice Chairman Stanley Fischer's latest views on the economy and interest-rate policy. "Obviously Fischer is going to get a fair bit of attention, coming so soon after the January statement and with a fair bit of question of what they meant," said Michael Hanson, economist at Bank of America Merrill Lynch.

The Most Important Story Of Our Investment Lifetimes

This week's video features the "three legs of the stool" story. The story focuses on three market myths and the impact on the psychology of global financial markets.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Video

Investment Implications - The Weight Of The Evidence

Given the damage done to the market's risk-reward profile in January, it is too early to determine the significance of Friday's big rally in stocks.

The charts below show similar points during the dot-com bear market and financial crisis bear market. Takeaway number one is each bear market (or correction) is unique. Takeaway number two is not too many good things happen when the 50-day (NASDAQ:BLUE) is below the 200-day (red) and the S&P 500 is below both moving averages. In the 2000-2001 example, stocks did not find a bottom for another 18 months. In the 2007-2008 case, stocks remained in a downtrend for an additional 9 months.

As noted in this week's video, ugly looking market profiles can begin to improve at any time, which means it pays to remain highly flexible and open to all market outcomes (bullish and bearish). Given what we know today, cash, some currencies, and bonds (NYSEARCA:IEF) continue to offer a better longer-term risk-reward profile relative to stocks (NYSEARCA:SPY).

Disclosure: I am/we are long SPY, IEF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.