Assessing probabilities for the Stock Market

What I am watching, thinking and doing.

I was waiting for the last CPI report to make up my mind on what to expect next.

CPI came at 8.2% for the last 12 months ending in September 2022. Looking under the hood, the report was worst than expected.

Bottom line: the FED will keep its agenda of raising interest rates to slow down the economy and demand.

For how long? Nobody knows and that’s the key issue.

The longer inflation will stay high in the US, the worst for the markets.

Let’s have a look at a few data points/charts:

NASDAQ

In my last update, I mentioned how the Nasdaq was trading within a box (range) and if that level was broken then we could expect further downside.

Well, we are right below that level and a new leg down looks likely. How much? Anything from -7% to -20% from current levels.

From November 2021 when the Nasdaq peaked, we are down -36% already. If we experience a new leg down, we can get to a -40% or -50% from that peak.

I am not predicting that this is going to happen. 

From a probability point of view, it may happen, because there are few chances that inflation will decelerate fast enough to make the FED to change its plans.

I am observing, assessing probabilities, not predicting, and getting ready for any scenario.

Scenarios are always three for the markets in the short term:

• UP (low probabilities)

• Sideways (medium to high probabilities)

• Down (higher probabilities)

The lower the market goes, the biggest the opportunities.

I am keeping a list of great companies to invest in as soon as the trend will change again in the upcoming months.

I am staying patient.

I’ll share here what and when I’ll be adding to the POTS again.

What if you are dollar cost averaging into indexes?

Assuming you are investing only money you don’t need in the next 3-5 years and you are buying once per month or every 2 or 3 months, I would stick to the plan.

OIL PRICE

Energy prices are key in predicting inflation. Lately, we experienced a spike in prices. This does not help either.

The Oil price is about the same as the price before the Russia-Ukraine war. We’ll keep an eye on it.

10-YEAR US BONDS

One more key data point to keep an eye on. The higher it goes, the worst for equity markets.

We want to see it start trending down again which would signal that expected future interest rates and inflation are trending down again.

No silver lining here yet.

OPTIMISTIC

I am an optimistic person. So my bias is that I look for the positive side in everything and this may make me blind to threats and obstacles.

There is also an optimistic camp. Here are some of the aspects to bring to the equation:

• we are in an era of profound innovation that will keep bringing higher productivity and making the world wealthier;

• we are managing an inflationary period created by too much money injected into the economy by central banks and governments soon after the COVID burst, combined with supply chain issues for a perfect storm mix;

• the current crisis is hence temporary and we’ll soon be back into a growth trajectory some described as the new roaring ‘20

• there is lots of money on the sidelines waiting to re-enter the equity markets;

• the war in Europe may end and could be a great catalyst for the markets and of course for the entire world!

• we do know a new bull market will emerge from this bear market.

Conclusion

I’m staying patient, not predicting and getting ready. Let’s see what the last part of the year will bring us.

Have a great day!

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Important:

this is not investment advice. Consult a licensed financial advisor before making any investment decision.