Mid-week market update: I told you so. As I recently pointed out, psychology had become too stressed to the downside, which opened the door to a relief rally. The NAAIM Exposure Index, which measures the sentiment of RIAs who manage individual investors’ funds, fell sharply last week and below its 26-week Bollinger Band. Historically, theses signals have resolved in a tactical rally in stock prices.
Sometimes the anticipation can be worse than the event itself. Coming into the weekend, the market was focused on three sources of possible stress: geopolitical tensions from the Israel-Hamas war, excess supply putting upward pressure on Treasury yields, and Fed policy. Here’s how those fears have resolved themselves.
The sum of all fears
Ripe for a rally
We have exhausted selling, both systematic and fundamental, while downside hedges too are deep in-the-money [and] at risk of being taken-down and monetized, which could set off some reversal flow.
I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account. Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.