In last month’s newsletter, we spoke about how volatility has reentered the market and what has caused its reemergence. While many of those factors are still in play such as Trump and geopolitics, I feel the focus has shifted primarily toward technical analysis and interest rates.
Current Market Seems “Range Bound”
As you can see from the chart below, the 200-day moving average for the Vanguard S&P 500 ETF (orange line) has clearly been the support level from which we have bounced significantly each of the 3 times we have gotten there. There are many explanations as to why this happens (computer traders, chartists, money coming off the sidelines, etc). Each time we bounce from that level it proves to be more significant as more traders will pay attention to it.
However, we haven’t seen any real conviction to hold higher levels, which is slightly worrisome. The most recent rounds of earnings, while good, weren’t enough to warrant a further breakout.
So it appears to me like we are stuck in a very firm trading range for the time being until a major catalyst breaks us out. There are plenty of them looming now such as trade wars, political tensions, interest rates, corporate earnings and inflation to name a few. It does, however, seem that most of these issues should be reflected in asset prices given how much attention has been given to them.
Why Are Technical Levels So Important?
This brings us back to why I feel that these technical levels are so important. My take is that the market is really taking everything with a grain of salt at this point. Maybe it’s the effect Trump is having, but I think the market is starting to take a “sit and wait” approach to many of the bold statements that are coming from this administration. The question on everyone’s mind: Is he serious or is he just negotiating?
As mentioned last time, Trump has referenced the stock market at least 60 times since he was elected so it would be shocking to see him purposefully damage the market rally.
However, there are some things are out of his control which could also derail the rally.
What Could Derail the Rally?
Right now the most likely culprit is interest rates. The fed is currently walking a tightrope on a path to raise rates to prevent inflation but also not wanting to disturb the economy. But as rates rise not only does it cost more to corporations and individuals to borrow, which hurts economic growth, it also makes alternatives to the stock market more attractive (bonds, money markets, etc), leading to market outflows.
Still the fact remains that we are over 9 years into a bull market that has yet to see rising interest rates. I find it hard to believe we won’t see any more “tantrums” out of the stock market as it adjusts to higher rates. Don’t worry though; “tantrums” are just signs of irrationality and those are often the best times to buy, especially if the Fed is raising rates due to strength in the economy.
Stay tuned as we keep a close eye on the markets.
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Clint Kirby – Chief Financial Strategist
DreamWork Financial Group
Clint Kirby, DreamWork Financial Group, is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.