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We have a question from Obi asking how much longer the Nasdaq, S&P and Dow can keep climbing?
Thanks for the question Obi, I think it provides us with an opportunity to discuss the important of always remembering the bigger picture view as a trader, especially when we try to contextualize price moves.
The first thing to remember about the big picture, is that the market can remain irrational for longer than we can remain solvent, and that basically means that the market can always go much higher or much lower than we think it can or should go, and all of us do it, right? We look at the way a market has been trading and we think to ourselves surely this thing can’t continue the way it’s been trading, surely we need a pullback, and often times the market can continue onwards with that move for longer than we can hold on to a position against it.
So, it’s always important to remember that, the market can and often moves much more than we think it can and should. Now, coming back the bigger picture, and looking at your question about equities, the second question right now is whether the moves we are seeing really is irrational or not, does it makes sense for the equity markets to continue like this?
I want to show you a picture of a chart from The Market Ear, where they overlay the S&P500 after the 2009 market crash with the S&P after the 2020 crash, it’s quite an eye opener when you see it like this isn’t it, at least it was for me, it just again brought home that idea that the stock market is not the economy.
If we look at the economy, there is a handy site called tracktherecovery.com that has some useful charts, if we take a look at things like new job postings, or small business revenue or even small business openings, we can see there is still a lot of pain in the economy, I mean just think about employment, the market is excited that we have now seen a steady downtrend in initial jobless claims, but keep in mind these are new jobless claims, there are still 15 million people on the continued claims list, and with job postings falling there isn’t a lot of prospects of new job opportunities if we just look at this data, right?
But, the question we need to ask ourselves is whether this matters to the stock markets? The price surge in the S&P and Nasdaq and Dow has not been driven by the economy, yes to some extent the hopes of an eventual recovery has boosted it, but more than anything the actions of central banks and governments around the world is the reason why we’ve seen this surge in equities.
They have basically put in place the biggest fiscal and monetary policy stimulus measures in place that the world has ever seen, and the backstop provided by the FED is one of the main reasons why we’ve seen stock prices move higher. For thing like the Nasdaq of course it was more than that, it was also the dominance of technology in terms of innovation, with more people forced to work from home there was a reason for technology to outperform, of course it’s easy now to see that in hindsight as at the time back in April and May and June I didn’t expect this type of outperformance that we’ve seen in the Nasdaq.
So, with that in mind, there are reasons for this equity market to continue, but of course in the short-term looking at the way we’ve seen the market move higher surely we can argue that there needs to be a pullback at some stage, but even if there is, the question will be how deep can it really go if everybody keeps buying the dips.
I would personally like to get into the Nasdaq, but will wait for dips to do so, I bought yesterday’s small dip back down to the S1 pivot and traded it up to the daily pivot, but given how it’s moved recently I don’t have enough confidence to just buy it now and hold it, I too would like to see a pullback, but the point I’m trying to make with keeping the bigger picture in mind is that we might not get the pullback we are waiting for, at least the size of the one we are expecting, and if it does will we have the nerve to get back long, that I think is another question to ponder as well.
So, hope that helps Obi, any other questions don’t hesitate to let us know.
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