Market Pullback or Bear Market?
The comments below are an edited and abridged synopsis of an article by Lance Roberts
There are many issues confronting investors currently, and the many tailwinds that supported the markets’ rapid rise from 2020 to the present have begun to reverse. The roughly 120% advance from the March lows should not be surprising given the massive liquidity surge from the US government.
Also not surprising is the subsequent surge in inflation, which is always a function of the government printing too much money. In this case, with $5 trillion directly injected into the economy, inflation should be no surprise.
Now, the financial markets are starting to reflect the risk of a more aggressive Fed working to reverse that artificial surge in liquidity, but therein lies the risk of a policy mistake.
The hope is that the Fed can navigate tightening monetary policy and increasing interest rates without creating financial instability. Unfortunately, their track record is unimpressive.
While the weight of evidence suggests that the bears are gaining control of the financial landscape, outcomes are not guaranteed. As investors, betting on predictions can have unintended consequences as market dynamics change.
Therefore, we must be aware of the risks and navigate markets accordingly.
While the break of the 200-dma is notable (chart included), we also broke that level in January. If you sold that break of support, you missed the reflexive rally back to the 50-dma.
The message of ‘derisking on the rally’ has been consistent for the last couple of weeks.
Notably, other than the decline from extreme overbought conditions, so far, the market has not violated important support or bullish trends. In other words, we are simply working through a market pullback.
Up for discussion: Market pullbacks can become bear markets, and investment guidelines.