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Analytics, 06 August 2020

Navigating the current stock market rally

In the past few months, several stocks, mostly technology stocks such as e-commerce (Amazon), and communication (Microsoft, Zoom, Apple, Netflix) that have benefitted from the pandemic have rallied the market. The coronavirus stock market rally has been dubbed the most hated stock market rally in the history of financial trading. Despite the stellar rally we’ve seen from the U.S. stock market, speculators believe that this stock market rally will crash once it runs out of fiscal and monetary policy support.

The present rally was fueled by the fiscal packages extended by the US government, and analysts now believe that without another stimulus support, the U.S. stock market will be like a car without gas, especially under the current circumstances. In the last few weeks, investors parsed a trove of quarterly results from U.S. corporations and have been waiting for a resolution to a stalemate between congressional Democrats and Republicans on a fresh fiscal relief package for Americans that have been put out of work due to the COVID-19 pandemic.

This week, we have not seen much progress in Dow Jones’s index, and the Dow’s price remains within the previous week’s highs and lows. This shows that traders aren’t certain about the Dow’s bullish trend, and there are genuine concerns. Pessimism about this stock market rally is nothing new: we heard this message echoed in 2007 during the financial market crisis. Some stock investors didn’t believe the U.S. stock rally, and what happened? Just before the Covid-19 turmoil, we had the most extended bull rally in history.

Stock market crashes do happen. But the question is, what will lead the stocks to crash this time, or at least revisit the levels experienced in March this year? One of the stock market crash signals came at the end of July when the U.S. jobs benefit program expired. Well, Congress is currently discussing the second stimulus, and the negotiations do not seem to be going anywhere.

Moreover, a handful of technical trends could be enough to justify traders taking a more defensive stance this month, according to Bank of America analysts. The stock market’s backdrop remains bullish, the team led by Stephen Suttmeier wrote in a note to clients. August could put the market’s rally on hold before it resumes in the fall. August kicks off a historically bearish three-month period, where the S&P 500’s average loss hits -0.03%. The upcoming US presidential election stands to add even more risk, as past elections show summer surges giving way to fall declines. For investors weighing whether to secure gains, August may be the time, the bank said.

Furthermore, the gauge now sits at its lowest since June 2014. If history repeats itself, sentiment will quickly turn less optimistic and investors will kick off a wave of selling. Though tech giants have pushed major indexes back to year-to-date gains and recently soared on rosy earnings, the rest of the market isn’t faring as well.

Previously, the Federal Reserve supported the stock market crash via its loose monetary policy. This time, the Fed has started to buy corporate bonds — something the Fed has never done before. This Fed move has saved this stock market crash, but it has only one bullet left now—apart from pushing the interest rate below zero — which is buying stocks the same way it did with U.S corporate bonds.

Manage your risk. Risk management is one of the most important steps for any trader or investor. A lot of events that directly affect the markets and the global economy can happen out of the blue.

Every investor has heard references to Kenny Rogers’ “The Gambler,” with its lessons on folding, walking away and not counting your winnings early. But you also have to “know when to hold ‘em.” Sometimes just sticking with your portfolio is a good idea.

While there are always exceptions, growth stocks are generally doing well right now. But right now, there aren’t many stocks in buy zones without earnings coming up. The overall stock market rally, with the Nasdaq near some yellow flags and the S&P 500 having room to run, also doesn’t suggest big new moves into or out of the market.

This is where buying early in a stock market rally pays off. Getting in quickly after a follow-through day lets investors jump into some of the eventual big winners of the new stock market rally. Along the way, you might add new stocks or add a few more shares to existing positions. But having those initial early holdings lets you ride through pullbacks and avoid the need to make big bets after the rally’s initial burst.

The stock market rally and your individual holdings can change in a matter of minutes. You need to be ready to raise your bets or cash in some chips. Continually review your existing holdings and update your watchlists.

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