It has been more than 22 years since the Nasdaq went up in flames as the Internet bubble burst and companies of all shapes and sizes watched as their share prices crashed. During that time, I was trading on a floor in Austin, Texas, and I can still remember listening to folks on CNBC predict that the worst was behind us when the Nasdaq was only 20% or 25% off of its record-setting highs.
My favorite metric of all time, price to eyeballs, was used by more than a few money managers and analysts to justify some of the insane valuations we saw. And while anyone with a basic understanding of math knew these talking heads were both insane and trying anything imaginable to justify their investment decisions, we went along with the charade because, for several years, stocks would double in value for almost no reason at all.
A similar situation occurred leading up to the financial debacle in 2008. A little common sense told us that folks earning $45,000 per year shouldn't be given loans in the high six figures and seven figures, but still, it was commonplace. And most of us invested as though everything was OK.
Fast forward to today and we face a situation where a surprising number of folks are already assuming that inflation is no longer an issue, interest rate hikes will soon turn into reductions, and a recession, well, that's great news because it forces the Fed to cut rates. Last I checked, recessions lead to declines in profits. And during the early days of top- and bottom-line reductions, stock prices tend to move lower, not higher.
Most of us recognize the value of following the trend and keeping momentum on our side. But after nearly 25 years of trading and investing, I've accepted that as a community we'll march to the beat of almost any drum if it means making profitable trades. This will sound odd coming from a guy who almost exclusively follows trends and price, but it's a good idea to stop, think for yourself (while tracking the herd) and recognize when the market's prevailing narrative isn't adding up. This, in my view, is one of those times.
No, I'm not predicting some 2008-style market collapse. However, I am suggesting that investors embrace the idea of not fighting the Fed. Until Federal Reserve members stop pitching a hawkish narrative, significantly more caution is probably warranted.
Put another way, trade the bear market bounces, but don't assume every bounce is the beginning of a new bull market.
I have no idea what the July Consumer Price Index report here on Wednesday morning will show. If we're to believe the analyst community, inflation will tick down from last month's multi-decade high reading. Frankly, I'm not sure it matters what the number is, because with stocks well off their mid-June highs the market may have already priced in a better-than-expected inflation reading.
The bottom line is that from a trading perspective, I will continue to look for long opportunities when whatever I'm trading is in an uptrend and above its 21-day exponential moving average (EMA). But, and I've talked about this recently, I will not press long-sided trades into an overbought condition with multiple areas of nearby resistance. I'm content to carry significantly reduced long exposure until prices reset and stabilize near support of the 21-day EMA or 50-day simple moving average.
I'll be back Thursday with a few downside areas of support I'm watching, but for now I'm sitting on my hands until I see how the market responds to this morning's CPI report.