Stocks Place a Heavy Burden on Those Attempting to Time the Market

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Extreme market breadth is happening at a rate that hasn’t been witnessed in decades.
Debate rages on whether the Fed cycle provides indicators of the bear run.

Whether the market is bullish or bearish, the penalty remains harsh and quick.

The market has been moving in lockstep, one day up and the next down, as inflation-related anxiety alternates with confidence that the economy can withstand it. The S&P 500’s more than 400 businesses moved in unison on Tuesday, continuing a trend that has occurred 79 times in 2022—a record that, if maintained, would surpass any year since at least 1997.

Divergent perspectives on how to play the cycle are making things difficult for would-be timers in a market that is too hot to manage. While one research from Bank of America Corp. advises timing your entrance according to the first easing is a sucker’s bet, another from Ned Davis Research contends that an investor may rely on the Federal Reserve’s rate drops as a definite warning for a market bottom.

“Macro patterns change over time. And only a small number of individuals, in my opinion, can legitimately claim to be able to foresee that, said Brad McMillan, chief investment officer at Commonwealth Financial Network. “I respect the motivation, but I do wonder about the usefulness.”

2022 has more all-or-nothing days than any year since at least 1997.

The biggest stock market in the world is increasingly acting like one massive trade with an uncontrollable daily direction. A hotter-than-anticipated inflation report started Tuesday’s devastation, which was the worst in two years. After two straight sessions, more than 400 S&P 500 companies saw gains.

The S&P 500 lost all of its previous week’s gains, falling 4.8% over five days to 3,873. It has already had three weeks of opposing movement of at least 3%, the most volatile period since December 2018.

Fast-moving tales support the whiplash. The most recent market action highlighted adverse risk, particularly in light of FedEx Corp.’s withdrawal of its profit projection due to deteriorating business circumstances, which may be concerning for the global economy.

According to Larry Weiss, head of stock trading at Instinet, the topic quickly changed from “excellent profits despite the challenges” to “future earnings are going to be greatly challenged by increasing borrowing costs.” “We rapidly eliminated 4,100, 4,000, and 3,900.”

The S&P 500 fluctuates between weekly gains and losses of 3%.

Investors of all stripes are suffering costs. This week’s turmoil followed frantic short-selling covering, in which investors reversed bets from the previous week only to be forced to sit and wait as the market supported the bear argument.

Although active managers often perform best during times of uncertainty, it may be expensive to make even a small number of mistakes in a volatile and connected market. A metric that depicts an investor’s possible penalty for missing out on the highest single-day returns serves to underscore the risk of poor timing. For instance, the S&P 500’s yearly loss increases from 19% to 30% without the top five stocks.


The worst FedEx miss in 20 years, according to analysts at Deutsche Bank
One major issue that looms is whether the direction of interest rates provides any signals on the trajectory of this market retreat, given that the Fed’s monetary policy is likely the most significant influence in stock trading these days. The solution is not straightforward.

Savita Subramanian and other Bank of America analysts examined seven prior bear markets. They discovered that the bottom always occurred when the Fed lowered interest rates, on average, 11 months after the initial tightening. In other words, investors would be better off holding off on making new investments until the central bank changes its stance.

S&P 500 9/12/22 -9/16/22

The second week of September was turbulent week for markets

Using a similar strategy, Ned Davis Research strategist Ed Clissold plotted the time between the beginning of an easing cycle and the conclusion of a bear market to answer the issue. While the median bear market did conclude around the Fed’s lowering interest rates in 1955, his study revealed that the range had been enormous, sometimes years before or after.

Clissold stated in a report this week that “the evidence argues against using a single rate decrease to call for a fresh bull market.”

The fact that the Fed’s dynamic conduct adds to the situation’s complexity. The central bank is under increasing pressure to cool price hikes that have often come in hotter than anticipated this year after misinterpreting inflation as being “transitory.”

The fixed income market appears to be shifting its position on when the Fed will genuinely change direction, as the central bank is expected to boost rates by another considerable increment next week. A more assertive Fed fuels bets that a rate decrease will occur sooner. This week, the yield curve inverted across all tenors, with short-end Treasury rates increasing more than long-dated ones.

According to Paul Hickey, co-founder of Bespoke Investment Group, “the market has become increasingly macro-oriented when the Fed becomes the No. 1 focus of investors and their investment decisions.” This is uncharted ground. An unprecedented monetary constraint followed by an extraordinary economic stimulus has not been adequately addressed. It’s challenging to attempt to time events.

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