Momentum Monday - Avoid Broken Trends That Have Too Many Friends...

We saw a ping-pong price action in most stocks last week. First, Powell said that rate cuts are still on the table later this year despite rising inflation numbers lately and stocks rallied on the news. Then, Kashkari, who is a non-voting Fed member, opined that maybe there should not be any rate cuts this year. and stocks were slammed. Obviously, cutting rates this year matters to the market and the more the Fed waits, the more anxious and volatile the market is likely to become.

In the meantime, inflation expectations are rising. Gold, silver, and crude oil accelerated their ascent. Yields, economic activity, employment numbers, and wages are also perking up. 

Volatility has increased bringing more false breakout and breakdown attempts. Volatility tends to rise at turning points so I wouldn’t be surprised to see more of it as we are entering a seasonally weak period for US stocks. Granted, seasonality hasn’t played a big role so far this year and we certainly should not base our decisions solely on it. It is just something to be aware of. If enough market participants believe in it and take action, it can become a self-fulfilling prophecy. 

The tape has become choppier overall, offering great intraday trading opportunities and making swings more challenging outside the basic material space. I plan to remain nimble and focused in this tape. This is certainly not an environment where I want to be on margin or even fully invested overnight. The market is hot a few times of the year when almost any breakout works immediately. These are the times when it pays to be extra aggressive because they can easily account for 95% of our annual gains. We are currently not in such a market but things can change quickly.