There Are Three Reasons Why This Market Is So Difficult

Monday’s index is fairly flat, but the current market environment is very difficult to navigate.

While there are the usual bulls and bears who will tell you why things are moving in the direction you predicted, the market is currently very uncertain for most traders and investors.

There are three reasons why conditions are so tricky.

Markets are fighting the Fed

There is an old saying that has been very effective over the years. Don’t fight the Fed. It worked in 2008-2009, and it worked very well during the height of Covid, but it’s gotten much harder since the central bank turned hawkish and started raising interest rates.

This is due in part to the general market bias towards bullishness. Market players want to be positive, which is easy when the Fed is dovish, but harder when Fed Chairman Jerome Powell is uncooperative.

Right now I am going through one of the biggest discontinuities I have encountered in my 25 years of trading. The Fed has made it clear that it does not expect a rate cut this year, but the market thinks it is all but certain.

Powell has indicated he thinks the recession could remain mild, which is probably the main reason why he doesn’t think the Fed will cut rates. Still, the market is confident that there will be a rate cut, which would either exacerbate the banking crisis or weaken the economy.

This war with the Fed over rate cuts is illogical and makes the market very difficult to navigate going forward.

data dependent

The second reason why the market is so difficult is related to the first reason.

The only way to resolve disagreements with the Federal Reserve is to evaluate the published data points. Powell said the Fed relies on data and will change policy as data evolves.

If market participants want to navigate effectively, they have no choice but to do the same. Someone has to change their view on the direction of interest rates and it is the data that will force it.

This data dependency makes it very difficult to be confident in establishing a position. For example, the CPI report will be released later this week. This report could move the market and significantly change interest rate expectations. Betting on the outcome is not an easy trade.

breadth/contradiction

The third issue facing the market is one that I discuss frequently. This is a mismatch between the index and what is happening in the broader market.

Mega-cap stocks such as Apple (AAPL) and Meta (META) were the most responsive to earnings calls this season. The index has rebounded strongly in these reports, but the breadth has been chronically weak and the banking crisis pushed him to a 12-month low last week, with over 600 names.

This poor width makes for poor charts. There aren’t many great technical setups. While there are plenty of bulls celebrating the index, stock pickers have a very different view of the health of this market.

Metrics fall short in reflecting reality, but they do influence sentiment. Its disconnection and deception make it very difficult to trade effectively in the market.

I would like to be more optimistic, but picking stocks and trying to build positions can be very difficult. Many market participants are discouraged and exhausted, reflected in declining trading volumes and apathy.

Trading conditions change, but if you’re struggling to move forward in this market, it’s important to understand why. This market is painful right now, but it will change.