Shouldn’t the equity markets sell off because we just have to be in a recession? Earnings have been bad, shouldn’t the market crash? The Fed just raised the fed funds rate 75 basis points (0.75%), shouldn’t that be bad for the equity markets? Aren’t the media heads talking about how high inflation and a recession is bad???
Remember: There are all types of investors/traders in the market. That’s why the market can rally.
Read the Lesson on What Moves Financial Markets.
In the most recent rally in U.S. equities, the rally may have just been driven by market technicals. Simply: the S&P 500 (and other indices) rallied above its 50-day moving average. See the Lesson on Technical Analysis.
Here you can see the S&P 500 break above the 50-day MA (moving average) – the blue line, then sell off, touch the blue line again, then rally higher. For those traders that follow moving averages for technical trading purposes, this may just be the reason the markets rallied.
So if you ever see the markets or your particular investment rally or sell off for what you believe to be no particular reason, or if you believe it goes against your fundamentally-driven beliefs, check a trading chart. Maybe the market or your investment just had a technical signal drive the price higher or lower. Sometimes it’s just as simple as that.
There are other reasons for the rally to consider:
- extreme pessimism/bearishness so those that had sold were already defensive and didn’t have more to sell
- commodity prices coming down, which may result in future inflation numbers coming down, which may mean less Fed rate hikes
- valuations may have been more attractive for longer-term investors so they started to buy again at lower levels
- short squeeze for those short sellers that had to buy back positions so as to book profits or not lose anymore in a market rally
Just remember: Markets can move for any reason that may be different than what you believe. Don’t let it freak you out or make you believe the market is rigged or based on some other conspiracy theory.