Last week, three of the major indices hit new, all-time highs. It stands to reason the stock market sees better times ahead – but what’s next? Is the next major move down into a correction or a sharp upside breakout? The answer is yes.
Why the stock market can go up and down at the same time
Wait – what? How can I call for the markets to go up and down at the same time?
It’s really not that complicated. Markets don’t move upward into the sky unimpeded. Pullbacks of every shape and size occur all the time (and often when least expected). They aren’t necessarily bad, as they can set up great buying opportunities.
When the stock market is elevated, the chances of a pullback or even a correction are higher than normal. Plus, this bull market is old. When a correction occurs, the echo chamber gets loud. “This is it! This is the big one! Get out of the way! We are going to crash!” These statements often set off emotional and irrational responses. I used to fall victim when I began trading, but I learned to manage my response.
Where the markets currently sit
Currently, we are being told the road to riches is up, up and away. But with uncertainty still out there (Fed policy, US/China trade, a slowing economy and weaker earnings), I’m not buying it.
The stock market is in a complacent state but with a bit of worry, too. The worry stems from FOMO (fear of missing out): “What if the markets keep rising and I get left on the sidelines?” That is a valid concern of course, and it is often reflected in the media (who then get hysterical about getting in before it’s too late).
With earnings season just around the corner, we might see some strong trends continue and/or become more established. It might also be a good excuse for the stock market to take a respite. Volatility is low, and technicals are showing an overbought condition. Play it safe for now.