Trading Points to Navigate Stock Market Volatility

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After sliding to its lowest levels since May, the broader U.S. stock market rebounded Tuesday, with the Standard & Poor’s benchmark index climbing 1.5%.

Still, chill winds blow across the equities sector. Even after Tuesday’s rebound, traders saw some trends as particularly disturbing. The S&P Materials Index, for example, has slid 10% from recent highs, which technically meets the definition of an index correction.

Peter Tchir, writing in Real Money this week, notes that lower price trends in the market still have “room to run,” with several key themes in play that could pressure any sustained market rebound.

Tchir says these themes are especially concerning.

COVID-19 is hitting Asia hard, right now, which threatens to negate the massive progress societies across the globe have made on COVID prevention, Tchir notes.

“We are seeing rapidly rising cases here, too. So far the Delta variant seems less lethal and not only do vaccinations help immensely, but treatments seem to be improving as well. However, I am concerned that so many people are still implementing plans for return to office, while also talking about this new wave of cases. That disconnect, hints that the market is not prepared and there is downside risk.”

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Fiscal stimulus: Any incoming future government stimulus may not meet investor expectations, as well.

Increasingly it looks like the stimulus will be smaller, won’t start soon, will be spread over a long time, and is likely to have inefficient spending. All bad for markets.

“D.C. is running out of energy on spending, particularly as many point to the record number of unfilled jobs as evidence that too much has been spent too poorly targeted. Not everyone agrees with that, but enough in D.C. do, that it is hampering negotiations,” Tchir writes.

Tchir also cites a stock market that’s ultrasensitive to larger-than-expected trading. Read more about what he says of the lack of liquidity, “a disturbance in the cryptocurrency force,” and more on Real Money: 5 Key Themes Playing Out

While he’s not overly concerned about inflation (the Fed won’t step in to “derail the economy,” Tchi said), he’s not a fan of any big market moves over the next several weeks.

“For now, discretion is the better part of valor. I’d nibble, but only nibble on dividend stocks and reopening stocks on weakness. I’d stay away from big tech and the high flyers with extremely high multiples (especially those with “cult type” status).”