Here We Go Again
Igor Manukhov - Dec 20, 2024
The market has been overdue for a pullback of some sort. At this point, it should be treated as a short-term correction within a longer-term bull market.
After a remarkable run in November and continued strength in December, the market is experiencing a long-overdue pullback. Over the last couple of weeks, I have been calling clients with holiday wishes, and in many cases, people were asking about my opinion on US tariffs, wars around the globe, and their effect on the market. To many people’s surprise, I said that I did not believe any of those factors would have much impact on the market, precisely because expectations around those issues have already been factored in.
Markets do not tend to react strongly to news that people already anticipate, even if the news is something negative. If it met people's expectation, it not a big deal anymore. What moves the market is something that people do not expect or forgot about. I highlighted in a few of these conversations that I would be more concerned about inflation and the possibility that interest rates may not go down much from here—or that they might even rise if inflation picks up. That is because not a single person asked me about inflation or interest rates in more than one hundred conversations that I had earlier this week and last week. The hardest punch is the one that you do not see coming.
Little did I know that we would see a 3% loss in a single day because of a lower-than-expected rate cut by the Fed. This was news that caught people off guard —precisely the kind of thing I was referring to.
Now that the initial shock is behind us, what do we do? First off, do not sell into the weakness. One of my favourite momentum indicators, the RSI (bottom panel) is approaching an oversold level of 30 (blue oval). It is never a good idea to sell near that level. I have highlighted past occurrences with the vertical green lines. Notice how the market experienced some rebound after the RSI dropped so low. Also, notice that the long-term trend (150-day moving average, blue line) is still trending higher. So far, this looks like a short-term pullback in a longer-term uptrend. Historically, this is the time to be a buyer, not a seller.
