Are We in for Another Roller Coaster Ride in the Financial Markets?
Visible on the $SPY chart below, we started the month off with a steep drop, a short term bottom formed, and we rallied up to the February highs. The rally lasted 11 days, and was on decreasing volume. The momentum indicators like the MACD show the move starting to run out of steam. The CCI shows a divergence and is heavily overbought.
What is a Bear Market Rally?
When an old prevailing trend breaks after a long period of time (this market was in a 12 year uptrend) and finally comes to an end, it causes a trendline break. This latest market rally is the combination of 3 factors.
- A bear market rally, which is a deeply oversold market that springs back on low volume, filling the price void from a steep/sharp move down. Going from deeply oversold to deeply/heavily overbought within the matter of two weeks. (We can see oversold and overbought on the reading on the CCI above.)
- A trendline breaks and fades. When a trend line breaks it usually snaps back to the trendline that it broke. This is called a “trendline fade”.
- Window dressing: when Wall Street professionals buy the leading/lagging stocks of a month/quarter so that their ending statements reflect the winners of that period. Wall Street money managers want to show their clients that they bought the winner that month & want to drive markets up to lock in/claim profits so that they can earn their bonuses/goals. This period of time is usually the last three days of the month & the first two of the following month. As for the quarter it is the last week of the quarter and the first two days of the following quarter.
What About Rising Interest Rates?
The Federal Reserve is expected to raise interest rates by 50 basis points come May and raise rates at least 5-7 times more throughout the remainder of the year. This will be required to tame inflation. The more the stock market goes up the more likely they are going to feel safe in raising interest rates, which will have a negative effect on the markets. Without free money from the Federal Reserve, the stock market is likely to pullback to a lower valuation.
The pandemic caused worldwide supply chain problems; increasing prices. The overstimulation received from the Federal Reserve bank caused a demand increase, which is what has driven prices. An increase in demand and a decrease in supply will cause inflation. We see prices of all commodities rising; soft commodities like food products and hard commodities like gold, silver, and other metals.
We have also seen a drastic rise in energy prices. That rise in energy prices was happening before the conflict between Russia and Ukraine, but the war has exacerbated the issue. Additionally, the war may cause a potential food crisis. Ukraine and Russia provide about 20% of the world’s wheat and grain and Russia provides most of the world’s fertilizers.
In this chart of $OIL, you can see a steep rise in the price of energy. Energy prices will continue to move higher as the pullback is only caused by short term relief, due to the release of strategic oil reserves. Once this short term remedy wears out, demand increases, and the supply continues to be constrained; the price of energy will increase again.
Board of Governors of the Federal Reserve System. (n.d.). Recent Balance Sheet Trends [Graph]. Board of Governors of the Federal Reserve System. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
Another issue is the Fed’s balance sheet. The Fed is currently holding over $8 trillion in assets on its balance sheet. It is expected to start to sell or lay off some of these assets. As soon as that starts to occur, it is hard to gauge how the market will react, but we imagine that the reaction will not be positive.
Bitcoin and cryptocurrencies have been trading with technology stocks lately. So if there is a sell-off in technology, then crypto is expected to follow suit.Gold and silver are the only true hedge in inflationary times, as these currencies do not have any debt. Silver tends to outperform gold in bull markets and underperform gold in bear markets. Gold is currently forming a Bull Pennant, so we would expect higher prices in the near future.
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