Investors Might Not Be Scared, But Ugly Action Is Wearing Them Out

US-ECONOMY-MARKET-STOCKS

The minor strength on Monday morning was an invitation for nervous investors to reduce positions. Unfortunately, the selling pressure picked up steam the rest of the day as it became clear that there was unlikely to be any positive news to attract hopeful bottom fishers.

Oil jumped higher again, but what was more troubling was that bonds also strengthened as interest rates fell. Lower rates are typically a market positive, but in this case, they reflect growing concern that the economy is slowing. When the economy slows, demand for capital falls, which causes interest rates to fall.

The Stagflation Trap

The net result of inflationary pressure from oil and a slowing economy is stagflation. Stagflation is one of the most difficult economic maladies for central bankers to deal with. If they cut rates, that increases inflationary pressures. If they raise rates, that slows growth further.

Stagflation in the current situation is further complicated by uncertainty about the Iran conflict. We have no clue how long this will drag out or how high oil prices will go. There is no way to price this into the market right now, and there is an inclination to worry about the worst-case scenario which is many months of stagflation.

Worn Out, Not Scared Out

I often write that bad markets don't scare you out, they wear you out. The action on Monday was a perfect example. This has gone on long enough that many investors are just giving up out of disgust and dismay. Valuation is totally meaningless right now, and brave buyers are racking up steady losses as they try to increase their market exposure.

The irony of this sort of market action is that it entices many folks to keep trying to predict when it will end. The serial bottom-callers never seem to capitulate, but they do eventually run out of cash if they push too hard.

Patience Is the Only Edge

While it is easy to argue that we are technically oversold and the negativity is too extreme, that doesn't mean we can time a bounce with any great degree of precision. The best course of action remains what I have been preaching for a while now: extreme patience while you build a shopping list and wait for better technical action and some signs of strength. The worst course of action in this sort of market is to try to predict the turning point. Let someone else play that game. Just sit tight for now. I promise you that great opportunities await.

Have a good evening. I'll see you tomorrow.

At the time of publication, DePorre had no positions in any securities mentioned.