The market is indicated to open sharply lower here on Friday morning as the pound and UK bonds are hit hard. The new UK prime minister, Liz Truss, announced a budget that includes tax cuts and new spending. This will require raising more funds in a bond market that is already under severe pressure.
The reaction in the UK illustrates the global problem of trying to tame inflation without killing the economy. As Fed Chairman Jerome Powell said on Wednesday, it is not possible to do that without pain, and the pain is becoming greater as new governmental efforts are made to fix the economic issues.
This news is hitting at the same time that the market has already taken a substantial hit and is oversold. As is typical, traders have been anxiously trying to catch an oversold bounce, but the counter-trend moves have been very limited. There was similar action after Powell's Jackson Hole speech when the Nasdaq sold off for seven straight sessions and became extremely oversold. That finally produced a bounce into the August Consumer Price Index report, which led to the single biggest selloff of the year.
The most important thing to do at this point is to embrace the fact that we are in the jaws of an ugly bear market. Recognize that reality and don't fight it. There is endless speculation from pundits in the business media about how much longer this bear market will last. No one knows, and everyone is just guessing. The best course of action is to stay patient and let the market action tell you when things are improving. It will be very obvious, and you do not need to be fully invested at the exact low to profit.
If you are going to trade this market, the most important issue is your time frame. There will be counter-trend moves that are tradable, but trade them and don't let a failed trade turn into a long-term investment.
I'm quite sure there will be some bottom fishers anxious to catch a bounce into a big gap-down open this morning. If you are playing, just make sure you manage the trade very tightly and are ready to exit quickly if it doesn't work.
If you are a long-term investor, this is the time for patience. There is no reason to rush to put precious capital to work right now. I will have an article this weekend about managing risk while building long-term positions.