Times are weird.
That might be the understatement of the decade, but it’s true.
I don’t remember what it’s like to eat at a restaurant. I’ve adjusted to slippers being part of my work attire. Every time I watch T.V. and I see characters open a door without a squirt of Purell afterwards, I cringe just a little.
These are unprecedented times for everybody, including us traders.
Back when COVID-19 caused the market to tank 35% back in March of this year, big companies faltered, and nobody knew what was going to happen.
After the dust settled, a new sector of “stay-at-home” stocks rose like a phoenix from the ashes. In fact, on Monday, the Dow index had its best day in over a month, soaring over 900 points before market close.
But it has everybody asking one question: Is it a good time to buy stocks?
And I have the answer for you.
(If you want to avoid stocks altogether, then check this out. These readers didn’t touch a single stock – and they had the opportunity to double their money in two weeks.)
Find out how these five specific factors can determine where the market is headed next…
How to Use Different Economic Conditions to Determine the Stability of the Market
When it comes down to it, trading and investing involves predicting the future. Of course, it’s impossible to predict the future with 100% accuracy, but we can definitely gain an edge with basic market analysis.
Ultimately, demand drives the stock market.
Higher demand = higher stock prices = rising market.
Lower demand = lower stock prices = falling market.
Overall demand for stocks is influenced by the following five economic conditions:
- Employment
Of course, for the masses to buy stock, they must have money, which typically comes from some sort of income.
High employment = Higher Demand = Rising Stock Market
Low employment = Lower Demand = Dropping Stock Market
Current: U.S. unemployment rate is at highs not seen since the Great Depression (14.7%).
- Interest Rates
Another way to think of “interest rates” is the cost of money. Lower interest rates make borrowing cheaper and increases money flow in the economy… meaning there’s more money to buy stocks.
Lower Interest Rates = Higher Demand = Rising Stock Market
Higher Interest Rates = Lower Demand = Dropping Stock Market
Current: U.S. Interest rates are very low.
- Earnings
A company’s profitability and expected profitability directly impact demand for its stock. Profitability is determined by revenues and efficiency (costs). Profitable companies with increasing profitability and expected growth will usually rise in price. The opposite is also true.
Of course, revenues are impacted by economic conditions.
Current: Earnings for most companies are poor.
- Gold
Gold is considered a safe, “risk-off” asset. When the going gets tough in the stock market, money tends to flow from stocks to gold and other “safe-haven” assets.
Therefore, gold tends to be inversely correlated with the stock market, particularly when the market is crashing.
However, the price of gold is also affected by the strength of the U.S. dollar.
Gold is typically inversely correlated to the dollar. As the USD strengthens, the price of gold typically drops and vice versa.
Interest rates also affect the price of gold due to the fact that they are inversely correlated to gold. As interest rates rise, the price of gold typically drops and vice versa.
All of this said, keep your eye on the price of gold. If it starts dropping as the market is rising, the probability of an extended run up in the market is higher.
Current: General correlation holds. Gold is bullish, suggesting market bearishness.
- Bonds
Similar to gold, bonds are considered a “risk-off” asset. Government bonds are considered the safest. Generally, bonds are inversely correlated to the stock market.
Current: Bond prices are flat and not showing an inverse correlation.
Although there are other factors we could consider, these are the big ones.
With all of the above established, we can get a general feel for where the market could be going:
Employment: Bearish
Interest Rates: Bullish
Earnings: Bearish
Gold: Bearish
Bonds: Neutral
Overall grade: BEARISH
All of this suggests that the market should be dropping… but here’s the thing.
It isn’t. It’s risen 35% over the past two months.
It’s important to realize that the stock market isn’t the economy. Demand along with these other indicators help to determine the market’s next move.
So, the question remains. Is it time to buy?
To answer this important question, we turn to technical analysis, which we can find with stock charts where demand is visible.
Now, the easiest way to determine demand is through volume. Volume is the number of shares traded during a given period, typically one day. It reveals demand and market conviction.
Let’s take a look at a volume chart of the SPDR S&P 500 ETF (NYSE: SPY):
Notice that conviction is much higher on the left than on the right.
Red bars reflect a down day and green volume an up day. Notice the size and number of red volume bars that are on the left. Whatever happened on the chart happened with a lot of conviction, and the opposite is true on the right.
Now, let’s overlay the stock chart of the S&P 500.
As you can now clearly see, the selling demand (or conviction) was very high during the recent crash and has been lower on the recent rise.
Also, take note of the resistance level at $295. Support and resistance levels are “lines in the sand” that tend to stop stocks from rising (resistance) or dropping (support).
The SPY has failed to break above this level five times, including on May 18, 2020 when the Dow jumped 900 points, making it one of the best days the index has seen in over a month.
Despite deplorable economic conditions, the SPY has risen. It has done so without the benefit of strong conviction. The current economic conditions show no sign of short-term improvement. This could be a house of cards, and the market could keep going up in the face of them.
So, again, what to do?
Use basic technical analysis. Wait for a higher volume break above $295 resistance and ride the trend. Consider stocks that have performed well in this environment. Here are a few examples:
Walmart Inc. (NYSE: WMT)
Netflix, Inc. (NASDAQ: NFLX)
Amazon.com, Inc. (NASDAQ: AMZN)
Moderna, Inc. (NASDAQ: MRNA)
SPDR Gold Trust (NYSE: GLD)
And lastly and most importantly, exercise caution. Be ready to bail should this apparent house of cards come tumbling down.
Now, when it comes to the microcurrency market, you don’t have to worry about what stocks are doing. See, since mid-March, the market’s top coin has jumped over 96% – all while the broader stock market has been stuck on an up-and-down rollercoaster that never seems to end.
And thanks to these tiny coins, my readers have had the chance to score profit after profit. I’m talking eight 100%-plus profits in 2020 alone – five of which were after the coronavirus tanked the stock market.
My newest recommendation is coming next week, and it has the potential to hand you a major windfall – no matter what stocks do. Learn how to get all the details straight to your inbox right here.
Talk soon,
Tom Gentile
America’s #1 Pattern Trader
