Summer is a time of rest for everyone but investors, especially this year.
The political world is in turmoil. The UK, Bolivia, France, the Middle East, Russia, Ukraine and the US are all facing turbulent elections and wars. China is in its own quandary and is expected to announce major new political and economic policies at its Third Plenary Session from 15-18 July.
The economic world is unreal. Inflation appears to be declining toward the 2% level needed for the Federal Reserve to cut interest rates. Of course, this good news may be illusory if future reports do not confirm the initial progress.
The stock and options markets, which reflect what is perceived as reality in the corporate world, enter the third quarter like an athlete marveling at how far he’s come but wondering if he’ll have the stamina to finish. A lot will depend on what companies say about the future in their earnings reports.
As the 10-year Treasury yield rises,
SPDR S&P 500,
of
Invesco QQQ Series Trust,
And that
iShares Russell 2000
It is crawling along the short-term moving average.
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The move suggests that some economic, political or corporate news could end this range-bound tension and send the market decisively higher or lower. Although many are betting on it, the outcome is by no means certain.
You may never have thought about market timing, but since many investors use technical indicators to time their entries and exits, everyone does it, even those who consider themselves long-term investors.
Look at the 5-day, 20-day, and 50-day simple moving averages as benchmarks. In an age of complex trading algorithms designed by mathematicians with PhDs, this view may seem overly simplistic, but the old-fashioned way will suffice.
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If the aforementioned ETFs start to lose their grip on the short-term 5-day moving average and weaken towards the 20-day moving average, traders, or the algorithms they monitor, may suddenly make big bets on the downside. If enough volume joins the trade, the market could make a decisive move. Of course, any good news could send the benchmarks higher.
This may seem like magic, but it’s a market reality.
Many people mistakenly believe that the markets are controlled by people analyzing stocks and making rational decisions based on earnings and valuations, but a lot of the action is driven by computers reacting to hidden patterns and technical triggers.
These data-dependent views are typically hidden from traditional investors, but some of them were highlighted by Chris Jacobson, a derivatives strategist at Susquehanna Financial Group.
He recently wrote for a client:
S&P 500 Index
The stocks that rose and fell the most in July over the past 10 years: Enphase Energy
,
HCA Healthcare
,
Alphabet soars, Mohawk Industries
,
Marathon Oil
,
and
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RTX stunned.
I mention this study not to suggest trade ideas, although some may use it to do so, but rather to highlight the list as an example of the kind of analysis in circulation that could prompt investors, both human and computer, to think beyond the small group of big tech stocks that have driven the stock market rally so far this year.
Before you rush into trading options for July’s winners and losers, take a moment to think about this: This information is almost certainly already factored into the pricing models of the major options dealers. Such is the power of computers.
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While it often seems like investors need to be constantly on the move, sometimes preserving capital is the best course of action, especially when the trajectory of major benchmarks is uncertain.
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