I’ll come right out and say it: seasonal trends are masking worrying market signals. Market indices are still moving up and to the right and volatility remains subdued, but if you are long this market you might want to rethink your strategy.
Seasonal trends are masking worrying market signals
Poor breadth remains a problem, especially now that cumulative breadth hit an all time high. When the indices hit all time highs simultaneously that augers well for more upside, but breadth has been leaking since the start of November.
Volatility is starting to rise a bit and it would be troublesome if it moved above 22. Oscillators are quickly approaching oversold, which is interesting; they are not reflecting the strength in market indices. This is a divergent market indicator, and it’s not one to ignore.
The bulls often come out to play aggressively this time of year. History shows us that from now until the end of the year, markets typically move higher. But if we see some no bid days and higher volatility during the last few sessions of 2021, we can expect some bearish action into the new year that will have many of the bulls on their heels.
On top of these worrying signs, investors and traders continue to wait for the Fed to shift gears and adopt a more hawkish monetary policy.
Waiting on the Fed
Fed Governors have been rather transparent about where they stand with regards to the economy and inflation, but so far they have taken no action. Fed Funds Futures project at least two rate hikes in 2022, and I believe that is being generous. With the onset of higher inflation, I have to wonder if two rate hikes in one year will combat higher prices. Lifting the rate from zero to .50 is unlikely to be helpful (or happen), but then again, we don’t know if this inflation is transitory or not. (Transitory inflation is an ideal excuse to delay rate hikes any longer).
With only six weeks of trading left in the year, my advice is to practice good risk management and take winners when you have them. Should things go south, it’s perfectly fine to take a break from trading.