Predicting the Stock Market’s Next Move Has Rarely Been Harder
Summer is a time of repose for everyone but investors. Especially this year.
The political world is on fire. Britain, Bolivia, France, the Middle East, Russia, Ukraine, and the U.S. are all dealing with tumultuous elections or wars. China, facing its own struggles, is expected to announce significant new political and economic policies during its Third Plenum from July 15 to 18.
The economic world is surreal. Inflation seems to be declining toward the 2% level the Federal Reserve needs to lower interest rates. Of course, the good news could prove illusory if future reports fail to confirm the initial progress.
The stock and options markets—which reflect what passes for reality in the corporate world—are starting the third quarter like athletes who are amazed by how far they have run and unsure if they have the energy to finish. Much will be determined by what companies say about the future when they report earnings.
As the 10-year Treasury yield moves higher, benchmark exchange-traded funds like the
the
and the
are belly-crawling along their short-term moving averages.
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The activity suggests that some bit of news—economic, political, or corporate—is poised to end this range-bound tension and send the market decisively higher or lower. The outcome is far from certain, even though many will gamble on it.
Market timing may never enter your thoughts, but so many investors use technical indicators to time entries and exits that everyone is a market timer, even if they consider themselves long-term investors.
Look at five, 20-, and 50-day simple moving averages for the benchmarks. The view is simplistic in the era of complicated trading algorithms designed by mathematicians with doctorates, but the old ways get the job done.
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If the above-mentioned ETFs stop hugging their short-term five-day moving averages and wilt toward 20-day moving averages, traders—or the algorithms that they babysit—might suddenly spark big wagers on a decline. If enough volume joins the trade, markets could make a decisive move. Of course, good news could push benchmarks higher.
This might seem like voodoo, but it is market reality.
Many people mistakenly believe the markets are dominated by people analyzing stocks and making rational decisions based on earnings and valuations. But much action is triggered by computers that react to hidden patterns or technical triggers.
These data-dependent views are usually hidden from traditional investors, but some were just highlighted by Susquehanna Financial Group derivatives strategist Chris Jacobson.
He recently identified for clients the 20 stocks in the
that have rallied or declined the most in July over the past decade.
and
have surged, while
and
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have swooned.
We mention the study not to suggest trading ideas, though some will use it for that. Instead, we highlight the list as an example of the type of analysis that is circulating that could push investors—both human and computer—to think beyond the small gang of big technology stocks that have led the stock market’s rally so far this year.
Lest you rush to trade options on July’s winners and sinners, take a moment to reflect. The information is almost certainly already reflected in the pricing models of major options dealers. Such is the power of computers.
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Though it often seems that investors must be in perpetual motion, sometimes the best action is capital preservation, especially when the path of major benchmarks seems uncertain.
Email: editors@barrons.com
