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Stocks May Pause: 5 Reasons to be "Strategically Inactive"

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Jesse Livermore and Paul Tudor Jones are two of the most successful investors of their time. Livermore rose to prominence in the early 20th century while Paul Tudor Jones made his fortune in infamous “Black Monday” crash of 1987. Though both investors hail from completely different eras, interestingly, they both share the same view of markets in on respect – adaptability.

“You adapt, evolve, compete, or die.” ~Paul Tudor Jones

“There’s a time to go long, a time to go short, and a time to go fishing.” ~Jesse Livermore

Both of the above quotes encapsulate the essence of market timing in trading, suggesting that in the dynamic world of financial markets, savvy traders discern the most opportune moments to be bullish, bearish, or sit on the sideline. In a world of instant gratification, it’s the latter that is the most difficult for amateur investors. “A time to go fishing” underscores the importance of patience and refraining from active trading during certain market conditions. In studying these successful investors, I have found that strategic inactivity is one of the most integral components of a well-rounded approach to navigating the complexities of financial markets. Below are five reasons investors should take their foot off the gas pedal at this juncture:

Interest Rates May Not Decrease as Fast as Anticipated

Interest rate policy can significantly impact market liquidity and thus returns. Though the CME FedWatch Tool and the market has been discounting multiple interest rate cuts in 2024, it appears that they will not come as soon as investors initially thought. For example, in December, there was an 85% chance that the Fed would start cutting rates in March. Now, the odds favor a 40% chance of a cut.

Fib Extension Hit

Fibonacci retracement levels help traders identify potential support or resistance levels in a price trend. The 1.618 Fibonacci extension level often acts as resistance in financial markets as traders use the level to sell or take profits. This week the Nasdaq 100 Index ETF ((QQQ - Free Report) ) reached its 1.618 Fib level – an area where markets tend to stall.

Zacks Investment Research
Image Source: TradingView

Sentiment is Red Hot Again

The CNN Fear & Greed Index is flashing “Extreme Greed” levels. The past three times extreme greed signals flashed, the S&P 500 Index ETF ((SPY - Free Report) ) and the entire market experienced multi-week pullbacks.

Zacks Investment Research
Image Source: CNN

Election Year Seasonality

Historically, Presidential Election Seasonality trends tell us that stocks tend to have a choppy first half of the year before rallying into year-end.

Extreme Tick Reading

Tick measures the minimum price movement of a security or basket of securities, either up or down. The indicator represents a change in the last traded price of a stock and is used to gauge the intensity and direction of market movements. This morning the NYSE Tick flashed a +1500 tick, the highest reading in more than a month. An abnormally high signal means the market may need to take a breather or consolidate.

Bottom Line

Though stocks are in a raging bull market, 5 data points suggest that it may not be the best time to aggressively chase stocks. Instead, investors should take on a stance of strategic inactivity and wait for a “fat pitch.”


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