Wednesday, 28 September 2022

Sommerfield: Uncertainty leads to stock market volatility

Volatility! The Dow has recently had several days with triple-digit moves. A high degree of volatility has hit the market given all the uncertainty around the apparent seizing in credit availability between financial institutions and the efforts of the government to relieve this tightening.


In the stock market, volatility may represent risk. The higher the volatility, the more difficult it may be to trade in the market; that is, it could be more risky. We will not try to buy into this market until volatility declines.


Our clients feel good about our Nestegg Trend Investing strategy and being in our money market funds as the Dow late last month moved down 505 points, up 142, down 449, up 410, up 368 (sourced at Yahoo Finance, Sept. 26, 2008). There are times in the past when this degree of volatility may have indicated that a significant bottom in the market has occurred. Since past performance is not indicative of future results, we’ll have to see if this plays out.


Did you also hear that your money market funds may now be insured by the Federal government similar to Federal Deposit Insurance Corp. (FDIC) guarantees for bank accounts? I believe this could increase confidence in the money market funds we are in while we are out of the market. Currently, money market funds are neither insured nor guaranteed by FDIC or any other governmental agency. Although they seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.


It's at times like these that we need to stick to our system. Our system needs to see the major indexes rise above their intermediate-term moving averages, and for those moving averages to turn up. More important, our system also needs to see the action of individual stocks and sectors show constructive technical action. And of course, how the large institutions are buying and selling stocks.


Shorter term, I think it is possible that investors will catch a buying fever and feed a rally. It will be important to observe the market relative to what institutions do. The big problems have not been erased. We still have rising unemployment, a credit crunch, a recession, and a weak economy that many analysts expect to weaken further.


All of this points to a high risk market condition that now appears to have band-aids stuck all over it. Solid rallies are all about earnings. Many analysts are not expecting a great earnings picture during the next few months. Earnings will bring reality back to the equation when the exuberance of government band-aids wear off. The Fed and government actions are some of the bigger gambles they have made. If this doesn't work, then what's left in the Fed arsenal?


My point is that if we do get a trend change to the upside, it will still be an up-move in a bear market. The next few months could be laced with dangerous risk levels. But first, we need to see if institutions will back a rally. So, I will carefully scrutinize what institutional investors are doing and keep you appraised if any opportunity arises.


Rian Sommerfield is a registered representative offering securities and advisory services through Independent Financial Group LLC, a registered broker-dealer and investment advisor. Member FINRA/SIPC. IFG and Nestegg are not affiliated. Nestegg Trend Investing program does not guarantee a profit or guarantee protection from a loss.


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