You are currently viewing Markets Unlocked 11/14/22: Is the market wrong?

Markets Unlocked 11/14/22: Is the market wrong?

The market had a stunning reaction to the CPI number this week, with one of the largest gap openings on record (to regular session hours), and a historic uptrending day on Thursday.

Of course, this raises many questions. Many traders are seeking reassurance of their strong buy the dip mentality (footnote here: I’ve made this point many times but it must be repeated—over the very long term it absolutely makes sense to be bullish on stocks and to be an optimist. If you aren’t a short-term trader, then you should probably simply focus on being long stocks and riding out the waves. But some of those waves can be much larger and more devastating than you’d expect…)

Other traders might points out that this move in the market is nonsensical, and even that it might be “wrong”. This is something worth thinking about.

Is the market wrong?

Over the years, I’ve seen many traders lose a lot of money (sometimes all their money and possessions) fighting the market. Traders usually have a natural tendency to contradict anything and anyone else. Speaking personally, if I just put on a trade and tell you about it and you say “that looks like a good trade”, I’ll probably immediately reevaluate my trade. The fact you agree with me makes me like my trade a little bit less!

Traders love to stand apart from the crowd, and fortunes have been built on standing apart from the crowd at the right time. But there’s the rub—the crowd is not always wrong. The mob is not always stupid. And, even if they are, they are powerful and they will run you over.

A practical tip

In this case, the minor “improvement” on CPI could effectively be a rounding error. It certainly doesn’t seem to justify a 250 point one day rally in the S&P, and the idea that the world hangs in the balance depending on whether the Fed raises rates or not is, to not dice it too finely, a stupid perspective.

But none of this matters. All that matters is that you identify the dominant forces in the market and you do not fight them. It’s great if you can align yourself with them. The real money is to be made joining the crowd while they are pushing the market and getting off the train before it derails.

To do that, I find it helpful to never ask if the market is “right” or “wrong”. Of course, in a business school mindset we could parse that question and probably come to answers. But those answers would not help you make money. The trader’s mindset is that this is simply an invalid and meaningless question. You may as well ask me what the color of circle is, or how philosophy tastes. Not only are these questions unanswerable, they don’t even make sense and are a waste of time.

This is why we focus on a disciplined technical process and why every position or trade comes with a firm stop point. If you live your life like this, a lot of pieces will click into place. You won’t have any patience for the nonsense spouted by the talking heads on TV or the idiocy on financial social media, but that’s probably just fine because you will actually be making money.

Focus on what is happening and how to align yourself with it. When your position is wrong, you are wrong and need to change. Nothing else matters.

Yield curve update

As the chart above shows, the yield curve continues to invert, with our model pressing more into negative territory. Based on our analysis, inversion often tend to be persistent, but even momentary touches of inversion have been remarkably effective in forecasting market stress.

This remains one of the strongest and clearest indicators, and points toward a high probability of seeing more stress, more volatility, and broadly lower stock prices over the next 6 months to 2 years. We are advising our MarketLife members to focus on defense.

The week ahead (potentially market-moving data releases)

  • Monday: none
  • Tuesday: PPI
  • Wednesday: EIA Crude Oil Inventories, Retail Sales, Industrial Production
  • Thursday: Jobs numbers
  • Friday: Existing Home Sales

Earnings season is winding down, with about 500 names reporting this week


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.