Stocks are trading in a tight range following Tuesday’s rebound to new highs.
Traders are indifferent to threats of economic sanctions against the largest oil producer in the world. Pretty crazy how inflation in Turkey sends us tumbling 100-points while hostile words between the US and Russia propels us to all-time highs. If the market made everyone would be rich.
It appears the market is calling Putin’s and Obama’s bluff, assuming neither one has the courage to escalate the situation any further. But if the market expect business as usual, that means there is little upside if this situation is resolved, yet it exposes us to huge downside if it deteriorates. Little upside and lots of downside, not exactly the best place to own stocks. Over the last year the market was afraid of its shadow, but as every predicted disaster turned into a buyable dip, traders are growing more apathetic toward risk. One of these days we will come across a situation that is worse than feared and that will be the catalyst for the next correction.
While reality is often not as bad as the market fears, that only occurs after it sold off and more than adequately priced in the risk. Here we have the opposite, real risk and uncertainty, yet we are making new highs. Making money in the markets comes from understanding the risk/reward. We need to know when to buy risk and when to sell it.
Owners are stubbornly holding on to stock and even conflict among the world’s superpowers is unable to shake their resolve. While this could end badly, prices won’t go down as long as confident owners keep supply scarce. It doesn’t matter what the market should do, only what it does.
For the short-term trader, there is little reason to own stocks here. We are at the upper end of the recent trading range and the market is indifferent toward geopolitical risks. While momentum can continue pushing us higher, the potential gains are dwarfed by the downside risk. Buy weakness and sell strength.
Plan your trade; trade your plan
Jani Ziedins (pronounced Ya-nee) is a full-time investor and writer who has successfully traded stocks and options for more than a decade. He earned a B.S. in Mechanical Engineering from the Colorado School of Mines and an MBA and M.S. Marketing from the University of Colorado Denver. His prior professional experience includes manufacturing engineering at Fortune 500 companies, structural engineering, small business consultant, collegiate instructor, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two young children.