Larry’s Note: Before today’s essay, I’d like to share a brief video message with my readers…
As I’ve been writing this week, I see a market shock that’s coming up in just days. And I don’t want anyone to get caught off guard.
Instead, I want to help all my readers prepare so they can take advantage of the volatility… and profit.
Please take a moment to watch this video. Then, read on to learn more about where I see the market – and inflation – heading…
It’s amazing how quickly a new narrative can grip the market… only to evaporate just as quickly into thin air.
That’s never been truer than in these last two months.
Back in June, the market was close to freefall. And in early August, the S&P 500 was gapping down nearly every day.
After the major indices tried to rally in May, a fresh wave of selling saw them struggling to hold their yearly lows.
But then, selling momentum started to dry up. And gradually the market was able to find a base through July.
After such a heavy fall, the market was looking for a reason (a new story) to bounce.
From One Narrative to the Next
Sentiment suddenly turned bullish when battered stocks beat Wall Street’s forecasts during earnings season.
Despite rising rates and strong inflation, companies were generating healthy profits. The market responded with a nice little bounce.
If that had been the end of it, the rally would have petered out and left the market trading at around fair value.
However, the Consumer Price Index (CPI) numbers forced the rally into overdrive in early August.
With the CPI at 8.5% – well below the previous month’s 9.1% figure – the market pounced on its next narrative.
Not only were companies far more profitable and robust than first thought, but now a softer inflation number meant the Fed would surely slow down on increasing rates – the so-called “Fed pivot.”
As more investors bought into the story, the market propelled itself higher, rallying 20% in just six weeks.
But even before last Friday’s summit, the market had already begun shooting holes in the Fed pivot story. With the market way overbought, it peaked eight days before the Jackson Hole meeting began.
Fed Chairman Jerome Powell’s stern comments that the Fed would not ease up on rate hikes confirmed what the market already started to suspect…
It wasn’t the Fed that had pivoted.
Instead, the market had pivoted on a story about lower rates that simply wasn’t true.
Now, yields are on the rise again and stocks have continued their fall.
With the next Fed meeting just weeks away, the market is itching to latch onto its next narrative.
What We Really Know About the Market
Regardless of what the market does between now and the next Fed meeting, there’s one clear truth that’ll ultimately drive this market…
With inflation at the highest it’s been in more than 40 years, it’s not going down anytime soon.
Anyone who believes the Fed can get inflation down to its 2% target in less than five years without blowing up the economy is kidding themselves.
Interest rates will continue to rise, tightening the screws on both the consumer and the economy.
And the next narrative will likely be all doom and gloom, as the Fed plans to raise rates by another 0.75% this month.
However, we know that markets always overshoot.
Investors who shorted the market in June and July had to bail out of their positions when the market bounced.
And more recently, those who bought into the Fed pivot story did so right before the market reversed.
Our job as traders is to avoid buying into any narratives. Because when it comes to the markets, the next story is never far away.
Instead, we need to be ready when that narrative causes the market to overshoot in either direction.
Then, we’ll be ready to pounce when the market inevitably reverts to its mean.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. And there’s one story the markets don’t see coming yet…
Next week, I’m preparing my urgent warning about a market event just around the corner. As much as $1 trillion could change hands in a single day.
And with that surge of volatility, we could have the chance to get our accounts in the black for the year – but only if we’re ready ahead of time.
So please plan to attend my briefing next week on Wednesday, September 7 at 8 p.m. ET. You can RSVP right here.
Reader Mailbag
What narrative do you think the market will spin next?
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