5 Things The Market Is Telling Us Right Now

Learning to listen to the market is a crucial investment skill. The stock market will tell you what to do if you know what to listen for. The following five things are what the market is saying right now.

1. Volatility Is Here To Stay
Short-term traders rejoice! After years of ultra-low VIX readings, volatility is finally back. Spiking into the 50 zone during the February stock market chaos, the VIX has stayed above its 200-week simple moving average (SMA).

#-ad_banner-#The surging VIX has resulted in more than a few hedge funds and other money managers throwing in the towel as their “bread & butter” short-trade volatility blew up in their faces. At the same time, long-suffering bullish volatility players are being rewarded handsomely for their patience. In fact, one Denver-based hedge fund, Ibex Investors, managed to turn a $200,000 trade into over $17 million during the explosive move.

Although the VIX has dropped since the 2018 highs, I have little doubt that we can expect additional spikes and continual relatively high volatility over the next few years.

The reason for my long volatility thesis is the fact that politically, economically, and socially, the global structure is being thrown into disarray. The United States and the world are experiencing changes across the board. Everything from Trump’s itchy Twitter finger and trade war fears to climbing interest rates and geopolitical tensions have increased uncertainty — and uncertainty fuels volatility. The market hates nothing more than confusion and the one thing we can expect is uncertainty in spades!

2. The Market Top Is In
I am not suggesting that many stocks will not hit all-time highs this year. What I am saying is the major indexes will not surpass their 2018 highs for at least the next 18 months.

Using the Dow Jones Industrial Average as the proxy, I expect the all-time high hit in late January 2018, at 26616, to hold the title until at least October 2019.

I am basing this projection on the increase in volatility, technical factors and the general unease of the macro picture.

The volatility equation was explained in reason one above. Taking a look at the daily Dow Jones Industrial chart, price action is screaming bearish with little hope of a sustained rally.

Price plunged off the highs, falling thousands of points in just nine trading days before finding a bottom. Next, price pushed higher, then again falling back to near the low. Each plunge was met with buying as the computer-driven trading machines went into overdrive snapping up shares at a discount. All sounds bullish, right?

Well, the truth is, each buying surge has been weaker than the previous one. Price has descended in a stair step-like fashion since the initial surge off the plunge lows. Although price remains above the 200-day SMA, the price pattern is overwhelmingly bearish to support in the 23550 zone.

3. Fundamentals Remain Bullish
Despite the volatility and failing technical, the market fundamentals appear bullish.

The average revenue growth in S&P 500 companies is 7.4% for the first quarter. Material stocks led the advance with a very positive nearly 21% revenue growth, energy stocks took second place with 15% plus increase, and technology wrapped up the three top revenue performers with the growth of just over 14%.

At the same time, over 70% of S&P 500 firms have beat sales estimates crushing the five-year average sales estimate beat of 57%.

Earnings have been painting a bullish picture with an average of 17% plus growth in the S&P 500. 17% marks the highest increase since 2011, when earnings growth reached over 19%.

The obvious question here is: Why the disconnect between the bullish fundamentals and bearish technical picture?

The reason is the stock market is an anticipatory mechanism. Price moves in the direction that it expects the fundamentals to be in the future. In other words, the market had already priced in the positive fundamentals that are happening right now. The current volatility and bearish price action is telling us that the market is expecting fundamentals to decline from here.

4. Geopolitical Fears Weigh
The market hates uncertainty in the world. Right now, with Syria, Russia, and internal tensions in Washington, confusion reigns supreme on the global stage.

The evidence is clear that the day to day chaos will likely continue in both the United States and the world. The disorder leads to uncertainty which stifles any bullishness.

5. Interest Rates Are Moving Higher
It is no longer speculative: interest rates are moving higher. The Federal Reserve fears inflation thus may resort to more aggressive rate increases to counteract inflationary worries.

Controlled rate increases combined with the improved fundamental picture should have limited adverse effect. However, a surprise rate increase could send the market into a tailspin.

Risks To Consider: Anything can and does happen in the market. The above projections are based purely on my experience and observations; the opposite could easily happen with the market hitting new highs this year. Always be ready for the unexpected and consider all possibilities when investing.

Action To Take: Consider moving some assets in your portfolio to a defensive posture.

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