How to Solve the Market Puzzle
Editor's note: You need to understand the big picture...
As an investor, there's no better feeling than formulating a plan, executing it when the time strikes, and earning consistent returns by sticking to that strategy. But you must be aware of the state of the markets in order to create a sound investment plan...
That's why Ten Stock Trader editor Greg Diamond stresses understanding the backdrop of the market to stay ahead of the rest of the competition.
In today's Masters Series, adapted from the February 18 Weekly Market Outlook issue, Greg details how understanding this complex market setup can help you find ways to profit...
How to Solve the Market Puzzle
I'm as technical as they come.
But I also consider the market's broad signals. And right now, I'm reviewing potential highlights in the economic calendar...
For one, the latest Federal Reserve meeting minutes came out last month. And they weren't a surprise... Fed Chair Jerome Powell already confirmed his wait-and-see approach for interest rates.
The University of Michigan's inflation expectation, which came out on Friday, is a different story... It could be a market mover, as both inflation and tariffs have been on investors' radar.
With this backdrop in mind, I want to cover a few key areas – bonds, European stocks, and Big Tech. Together, they'll help us solve the puzzle of what the market is telling us in terms of price.
Let's start with the iShares 20+ Year Treasury Bond Fund (TLT)...
The February 12 TLT trade worked in our favor with a 35% gain.
Looking at the updated chart, you can see the broad downtrend in TLT... In the short term, it recently recovered from a move down and now it's rallying.
What does that mean going forward?
Is TLT starting to break out, signaling that inflation will come down and tariffs won't be as bad as folks initially thought? Or is this setup just a blip before bonds move lower again?
Part of this involves figuring out how the interest-rate environment will relate to both stocks and bonds...
Heading into the March/April time frame, we could see stocks drop, make a low, and then rally. Bonds would likely drop and rally as well, as interest rates and inflation come down.
This scenario would make the most sense to me, as stocks and bonds set up a big buying opportunity. I don't know if this will happen, but it's high on my radar.
The current setup in bonds reflects what I noted earlier about macro signals...
If the tariff headlines and inflation data become scarier, that could fuel the next new low, or simply a bottom, in TLT into the March/April time frame. After that, bonds could rally along with stocks after bottoming out, like they both did in 2023.
The other side of the coin is that bonds continue to drop due to massive economic optimism, and stocks begin to price in the higher-interest-rate environment. That could actually be good because it would price in growth.
We should get our answer in the next few months.
Now I want to highlight what's happening in Europe, via the German DAX Stock Index ("DAX"). It has been on an absolute tear higher...
The Composite Index ("CI"), at the very bottom of this chart, isn't making a new high with price. That's something we need to be cautious about.
Simply put, it's very unusual to see the DAX massively outperform U.S. stocks. It has been ripping to new all-time highs while the Nasdaq Composite Index and the iShares Russell 2000 Fund (IWM) aren't.
Looking again at the March/April time frame, it would make the most sense to see a correction in the DAX... That would complete the correction in other sectors, and then everything would rally together.
Now let's shift to Big Tech and look at the current setup in Microsoft (MSFT)...
MSFT is in a corrective environment with some messy price action. (MSFT and SMH have a similar type of corrective move.)
I've marked a "C" wave in the MSFT chart within the March/April time frame, which will be very important from a time-cycle perspective. It would make the most sense for both MSFT and SMH to correct into this time factor.
Our main focus, though, is figuring out how all the puzzle pieces – interest rates, inflation, bonds, U.S. and European stocks, and Big Tech – fit together and help us understand the big picture moving forward.
Best,
Greg Diamond, CMT
Editor's note: Greg expects many more swings in this volatile market... and he's more excited than he has been in years.
While most investors will be caught up in this violent up-and-down price action, Greg has a unique strategy that can help you use the volatility to your advantage – with the opportunity to double your money or more.
So he just went on camera to share all the details about how to take advantage of this rare setup. Learn more here...