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"There is time to go long, time to go short, and time to go fishing." - Jesse Livermore

  • After a nice rally, uncertainty is climbing.
  • Economic data, an unfriendly Fed, and a market near resistance could create a 'nobody wins' tape.
  • Active traders can take a wait-and-see approach until a trend emerges.

The stock market rally that kicked off on June 17 is getting a bit long in the tooth. Yesterday, I showed why Top Stocks Helene Meisler thinks fast-approaching resistance and less-than-favorable sentiment could result in a "chop-fest" tape that leaves everybody unhappy.

In times like these, I'm reminded of Jesse Livermore, the early-1900s trader rumored to be the subject of the fantastic book "Reminiscences of a Stock Operator (it's a must-own book in any traders library). In Reminiscences, he suggests that sometimes, it's simply best to do nothing, a lesson he believed few traders embraced. This passage from the book nicely sums up his thinking:

“There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

Yet, traders tend to do what traders do, and that's to trade. In a trending market, actively trading long or short can produce substantial, ego-inflating gains. However, gains can disappear quickly in a "chop-fest" trendless market.

Real Money's James DePorre reinforces this point in "A Market for Sitting on the Sidelines" In it, DePorre points out the incredible uncertainty plaguing the market now. He writes,

“The bulls hoped the market would be able to build on last Friday's strong action, but the upside momentum fizzled out quickly on Tuesday and triggered another round of selling… all it took on Tuesday to send stocks back down was more concern about inflation, higher oil prices and debate about a potential recession. The bulls hope that this long list of negatives can be discounted by the market, but it will not be an easy task when there is so much economic uncertainty. [emphasis mine]”

In April, a negative 1.4% print on U.S. GDP surprised everybody because the Atlanta Fed's GDPNow outlook was modeling for growth. In May, the second estimate clocked in at a negative 1.5%. Today, the final reading for Q1 was revised lower to 1.6%. The Q2 GDPNow forecast has steadily contracted over the past two months. It finished last week at 0% but it increased slightly to 0.3% earlier this week. Don't blink, though, because the model gets updated again later this week when additional data is available, fueling uncertainty.

Similarly, the inflation data is frustrating. In April, the Consumer Price Index "improved" to 8.3% from 8.5% in March, but inflation roared back in May, lifting the CPI to 8.6%. In response, the Fed hiked rates by a more-than-expected 0.75% in June. 

That backdrop leaves investors wrestling with questions. Are we in a recession? Is it approaching? Is inflation peaking? Is it destined to remain stubbornly high despite growth-busting rate increases? And what's that all mean for earnings and stock prices?

It's little wonder investors' heads are spinning. Many came of age in the post-Great Recession world. As a result, they don't have experience navigating markets when a recession is looming, inflation is high, and the Fed's hellbent on being unfriendly.

Back to DePorre:

“While the market is very focused on the hawkishness of the Fed, many market players fail to understand how higher rates and the shrinking of the Fed's balance sheet will impact trading. We have not had this dynamic since before the recession in 2008-2009, and many traders have grown so used to the liquidity that the Fed provides that they have little comprehension of how much stocks have depended on the Fed.”

Many newer investors believe V-shaped recoveries are the norm, but that's untrue. In an environment where the Fed is pressing the economic accelerator, rip-roaring, lock-out recoveries are possible. However, that's far less likely when the Fed's yanking the economic e-brake. So instead, we're stuck with bear market bounces of questionable durability, awaiting clarity into whether each will prove to be "the" bottom. 

A bull market backstopped by cheap and readily available credit makes investors look smart for increasing their risk and buying pullbacks. However, there's little room for error in a market trying to find footing when credit costs are rising, and credit availability is shrinking. As a result, the chance you get "chopped," as Meisler suggests, is high if you're actively buying or selling individual stocks.

Back to DePorre:

“The biggest danger I see in the market right now is the desire to do something [emphasis mine.] The easiest thing to do is to keep trying to anticipate a significant market low. Calling for a significant low is what market participants will do when they want to do something. There is a natural inclination toward taking some sort of action, and after all the misery that has been suffered lately, it seems too late to sell...

There just isn't going to be much to do in this market for a while. There may be some short-term trades and perhaps a few buying opportunities in stocks that have really been hit hard for no real reason, but it just isn't the right time to be active. Stay patient. The time will come, and it will be glorious.”

The Smart Play

After the recent move higher, it's become a gambling tape, and honestly, that's not the best tape to trade.

If we churn sideways to down, popping and dropping on every news bite, it will be tough to carve out consistent trading profits. 

Therefore, perhaps it's time to take Livermore's advice and head off to your favorite fishing hole. A wait-and-see, sit-on-hands approach is likely best, especially if you actively trade individual stocks.

As Livermore says in Reminiscences, "The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages."

Sometimes, the best trade is no trade.

"There is time to go long, time to go short, and time to go fishing." - Jesse Livermore

  • After a nice rally, uncertainty is climbing.
  • Economic data, an unfriendly Fed, and a market near resistance could create a 'nobody wins' tape.
  • Active traders can take a wait-and-see approach until a trend emerges.
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