Hello traders
I hope you had a good week!
We have seen volatility emerge over the past few days as equity investors wrangle with the threat of the delta variant, rate hikes and the escalating situation in Afghanistan. With the business-end of earnings season now behind us, positive catalysts seem sparse ahead of the Federal Reserve speaking at Jackson Hole next week. This is apparent in the correction seen in the S&P 500 Index, below.
The million dollar question is whether the market will recover its previous peak and simultaneously record a new record high. In years gone by a ‘correction’ of this nature would have been embraced as an opportunity to “BTFD”, and were arguably more common as the world was at the time emerging from the Great Financial Crisis, European Sovereign Debt Crisis and many other events along the way. Today however it seems that investors have been conditioned to seeing the market only ever go up, and hence even a couple of down days tend to get blown out of all proportion.
Lets remind ourselves of the fundamentals represented by our Checklist this month. The score for equities was positive at +2.5, with valuation and leading indicators the only two negatives. This hinted at continued support for the major equity indices, and that any corrections this month could be short-lived might be considered as long setups.
This has (so far) held true, with the S&P 500 trading just above the level from when we updated our report towards the end of last month. The risk has clearly been skewed to the upside, with the index trading as many as 100 points higher through Monday when the current correction began.
Only time will tell how this plays out, but given the support of the fundamentals it would surprise me if this turns out to be anything more than a short-lived bout of anxiety amongst the fast money speculators repositioning ahead of the Fed.
As a reminder, the business cycle appears to be in a positive position for the stock market and the increasingly likely prospect of some tapering and rate hikes is testament to the strength of the economic recovery.
Don’t forget either that the US government has just committed to trillions of dollars of infrastructure spending which will likely have a big impact on the economy as an additional source of stimulus. So even if the Fed does announce a tapering as expected next week, it is only withdrawing part of its colossal support (and what’s to say that it wont simply be reversed at the first sign of potential weakness?).
Of course, there is always the possibility that the Fed surprises the market by not announcing any tapering at all – which would surely provide that bullish catalyst that the market has been searching for recently… when it comes to trading, never say never! To learn more about our methods, and join me for more analysis in real-time, check out our MDT course and Trading Club pages where you can preview everything that we cover.
In the meantime, why not head over to our YouTube Channel for our latest FREE videos which I will be bringing to you each week in 2021! As there’s no charge for this content, it would be great if you could support the channel by leaving a comment and subscribing.
Have a great weekend,
James
Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information.
© Copyright 2021 Lex van Dam Financial Education. Further distribution prohibited.
