Approx 2 months ago – it felt like markets were starting to hedge their bets. How could I tell? Whilst the market was trading near record highs (around 6100) – momentum was fading. I commented on both the weekly MACD and RSI falling – whilst prices remained high. Technicians call this “negative divergence”. Quite often it suggests prices are at greater risk of easing. Since then they’ve dropped ~6%. The week ending March 7th was the worst week for the year and the third straight week of losses… more to come? I think so…
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Ready for a ‘Growth Scare’?
We started this year with the market pricing in only “good things”. We had (a) the Fed ready to continue its easing cycle; (b) business friendly administration looking to cut taxes and lower regulation; and (c) the promise ‘limitless’ returns from AI. Investor expectations were very high – evidenced by the valuation multiples they were willing to pay (whether it was P/E; P/FCF; EV/EBIT etc). Traders were all leaning to one side of the boat. However, shares prices have lost all momentum the past 12+ weeks.
Markets Hedge as Momentum Wanes
As an investor – it’s very important to know the rules. For example, if the rules are constantly influx – it leads to uncertainty. With heightened uncertainty – you pull back. That’s what faces investors. For example, consider the following: (i) direction of monetary policy (e.g., as Powell raised concerns on inflation); (ii) A torrent of policy shifts from the White House; and (iii) major disruption with artificial intelligence – as investors question return on capital invested. Uncertainty in each of these buckets makes it hard to commit to stocks with conviction.