Another Leg Down?
Certainly the fear of market bulls is that the market will make a U turn and head south into the abyss. There really is not denying the recent strength, up nearly 7+% from the the lows just a month ago. However, there are signs the market is tired, at least in the short term. The question becomes....if volatility picks up (and it may have started on Monday), how will the bulls handle some heavy selling. Moreover, will the bears help to push prices even lower than we've seen recently?
PAIN is not just a four-letter word
I can think of many words to describe a trader's pain, but since this a 'family-type' column, I'll refrain (use your imagination). As an options trader, I'm always looking for volatility...some kind of movement that I can take advantage. Volatility is the mother's milk for traders...we want prices to go up AND down! However, the recent flattening of volatility and slow trade makes for a more challenging environment. Trends are quick to change, and we see shifts happen intraday! You can like a trade first thing in the am, but you'd better sell it by midday or you'll be in a loser by day's end!
The Bond Market and Fed Conundrum Returns
Lately, the bond market is showing us a different side. With yields coming down, it's clear they are not too worried about inflation. In fact, their expectations are nascent! It's hard to believe with elevated oil and commodity prices the paranoid bond traders are so complacent about inflation. In fact, the Fed has been harping about such elevated inflation for weeks.
But is the Fed really more concerned about inflation or growth? Fed funds futures are diminishing, which means lesser chance of rate hikes. In the most recent statement, there was a dovish tone, which tells us the Fed is still not concerned about rising inflation. Perhaps a slowing economy will dampen inflation expectations, time will tell. However, the Fed is not likely to cut rates, which seems to be what the bond market will be screaming for next with lower yields. Spreads have widened considerably between corporates and treasuries, generally a good sign of recession. We haven't seen it yet, but could be in it right now.
Bottomline for the Markets
With lighter trade in the late summer, it's hard to make a commitment to direction. The charts tell us we could be in a new bull trend, or perhaps a bull trap. After Labor Day we may have more answers. Keep it light and tread carefully, you'll be far ahead of the game when a new trend is established. PPC mode is not a bad thing (Protect Precious Capital).