Holidays are for Volatility

So it’s the start of Q3 and we get to kick it off with a Holiday-shortened trading week. That’s a recipe for volatility.

Of course, you need to no further than the latest headlines to quickly find everything wrong – heck, even some stuff that isn’t wrong – with this market. Clearly, the end of the world is about here (I’d use the sarcasm font here if I had it).

The question is, how much more bad news isn’t yet baked into this market? None of us truly knows. But one has to ask: stocks are anywhere from 20-to-80% off in many cases. Was everything really that mis-valued? Or do we think maybe this is an overreaction and things will start to normalize again?

In this mass-psychology game where we all get to figure out a) what does someone else think the market is worth? and b) do they have a cash or credit situation that forces them to take action? Somewhere between the ‘want to’ and ‘have to’ the markets discover price.

For most out there, ‘have to’ is the more compelling driver. If you ‘have to’ meet a margin call, you’ll be forced to sell. If you ‘have to’ pay for other stuff in your life, you may be forced to sell.

If you’re afraid things will get worse, that’s not a ‘have to.’ That’s a ‘want to.’ You want to feel better, so you make adaptive moves.

Will one call be right while the other is wrong? Time will tell. In a functioning market, there are two sides – the buy side and the sell side. Both have their reasons.

Why the basic lesson here? Because some have forgotten what markets are. It’s an exchange of equity in different parts of the economy. Buyers and sellers each have their reasons. We can parse the numbers all day long to try and figure those out. We can rationalize things, or create a narrative to try and explain them. But in the end, human decision-making (or programmatic machine trading for that matter) are either rational or irrational. It’s built on a reason – one we often only guess at – and there are simply too many variables to calculate to get it perfect.

So… we take educated guesses. We use history. We make projections. We tell ourselves stories about why more people will ultimately be willing to pay more (or less) for an investment in the future. And we use those guesses to drive our own behaviors.

This, by the way, isn’t a bad thing. It just is what it is. Folks want to explain the markets when, at times, there isn’t a great exlanation.

Should we fear the markets will go significantly lower? Perhaps. Or, perhaps markets are so steeped in fear they’re already priced at a low point.

Consider this: we are likely already in recession. Interest rates are rising. The US dollar is strengthening (not good for trade balance). GDP is falling. Companies are warning of economic headwinds. War continues. Supply chains remain damaged. Globalist ties appear to be weakening.

But ask yourself… how much of this doesn’t the market already know? And what other things must investors, on a mass-psychology market, price in?

We’re already seeing day-to-day swings as the news reports come out. It’s mostly bad. The question is, at what point does bad news become good news? Might the Fed have to change course? Turn the printing presses back on? Might Washington try Universal Basic Income? Might we get dragged into World War 3?

Consider these. And consider, unless the markets print new lows, this may be exactly what capitulation looks like. And, long-term, the stock market remains undefeated.

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