How Does Stagflation Affect Stock Market Trading?
In this article:
- Stagflation concerns continue to grow
- Retail traders look to bear market strategy
- High-value stocks lose ground
Concerns about the possibility of stagflation and a recession are constant headlines repeated throughout the news cycle.
Stagflation may be closer than traders believe and the buildup to recession – if it hits – may continue for months or years.
Pressure on the stock market fueled by this incessant worry over what might happen has traders turning more cautious.
What are the plans to wade through this uncertain possibility?
(Check out the free video, above, for insight into trading this changing market.)
How does stagflation affect traders?
The stock market is under a great deal of pressure, and one of the economic factors of concern is the possibility of stagflation.
Stagflation is caused when economic growth slows, inflation rises, and there are fewer available jobs. This happens over a period of time as these factors collide until stagflation is realized.
Part of the danger of stagflation is that attempts to resolve one factor may cause more problems with another factor. For example, government attempts, i.e. through the Federal Reserve (Fed), to raise interest rates and lower inflation may lead to higher unemployment as businesses struggle with debt.
Stagflation also ripples beyond the immediate definitions and causes more problems. This can be seen with rising oil prices that lead to higher gas and diesel costs which lead to supply side cost increases which lead to consumers paying more for groceries and fuel to get to work.
Lurking behind stagflation is the possibility of a recession – a time when the overall economy shrinks and adds fuel to the fire of stagflation. A recession happens when the gross domestic product (GDP) declines in back-to-back economic quarters.
The first quarter of this year recorded a negative GDP and current estimates for the second quarter show GDP at less than 1%. Even if GDP doesn’t go negative this quarter, the economy has slowed and adds to problems of stagflation.
These economic problems haven’t been seen at these levels in four decades. Fears are growing that the U.S. economy, and possibly the world, could be headed for economic and financial crises similar to the 1970s and 1980s. These were not prosperous times for the average consumer or traders.
Add in other concerns such as supply chain issues, political divisiveness, foreign wars, and regaining losses from the Covid-19 pandemic, and worry can grow into fear. To lessen the fear and work through stagflation and the threat of recession, traders need to have a plan in place and be ready to adapt to certain changes ahead.
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Planning for a nimble, bear market strategy
Trading within a stock market environment facing stagflation and recession forces traders to develop a bear market strategy.
This market has created market volatility many traders have not seen before. This environment can be shocking, but it is important not to overreact to all the negative influences.
While a bear market – once it “technically” begins – can last for years, market data shows the average correction lasts a few months to 1 ½ years. The market first has to meet the 20% loss threshold, and then traders can expect another 10% or more loss. There are no set parameters of a bear market as each one is different in the duration and overall market loss.
Traders need a bear market strategy in place before the losses mount.
That’s where Raghee Horner, Managing Director of Futures Trading, offered insight into following a path of least resistance.
Raghee is focusing on waiting for signs from stocks, sectors, and indexes, and watching for a shift in the current range.
She is looking at the trend downward before the current range, or sideways chop, and considering which direction the market is most likely to move after breaking beyond the range. While waiting on stocks, sectors, and indexes, the likely move is expected to match the previous trend – downward.
News, economic concerns, and pressures across the market are expected to keep the market stuck in this choppy range before more bearish action. Specific tickers to watch include AAPL and TSLA which have been trending down.
In this market that is twisting back and forth in chop before settling into a sustained direction, Simpler’s traders are focusing on a narrow range and exercising a nimble bear market strategy.
Potential play with slingshot squeeze
Traders are looking for high-probability opportunities and in the market today these seem to be fading as quickly as they are revealed.
These fast-moving setups require extra attention and tracking what is happening in real-time.
With the wild volume of choppy price action under resistance, using shorter time frames can help gauge price direction at the time of a breakout.
As an example, one of the targets among Simpler’s traders is a slingshot squeeze appearing in the SPDR S&P 500 ETF Trust (SPY). A slingshot squeeze typically follows a pullback just as the downward momentum pauses and the ticker shifts back to a higher move.
Following SPY charts on shorter time frames – 195 minute or four hour – a low-compression squeeze with bullish momentum dropped into support, consolidated, and began slicing higher through resistance at the average true range (ATR).
The potential play in this example is to work the squeeze higher – even in the overall downtrend – and watch for a further breaking through higher ATR targets and consolidating a squeeze on longer time frames.
Considering market conditions, this squeeze could fade as quickly as it starts to form. The key is to know what to look for on the charts and follow the move to target potential setups.
High-value stocks losing ground
The overall market maintained its sideways range today following a positive close yesterday.
The midweek session saw the Dow close at 32,910.90 points to fall .81% (dropping 269.24 points on the day). The Nasdaq dropped to 12,075.92 points for a .82% dip while the S&P 500 posted the lowest numbers at 1.15% lower to 4,112.77 points.
While oil hit $120 per barrel, industrial and technology leaders faltered under the shadow of second quarter estimates pegging GDP at less than 1%. This follows a trend of high-profile stocks faltering in a bearish market.
On the radar within the Simpler Trading world is Apple (AAPL) which posted a .55% drop today and matched the lower numbers across the major indexes. Apple is a leader in the technology space and a high-value stock within the Dow, Nasdaq, and S&P 500.
Simpler’s traders have held that the fall of Apple could signal a shift in market momentum. Here’s action in Apple – Closed down today at: $148.71. Apple grew from a pandemic low of $57.21 in March 2020, but is still down from $182.01 since Jan. 1.
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Staying nimble as market twists through summer heat
The market appears to be on the cusp of a significant shift, although the march to that shift could take more time than traders would like.
Each day the market reveals stocks, sectors, and twists in the indexes hinting at change ahead. Until a sustained direction appears, the goal is to stay nimble and adapt trading strategies to allow for opportunities as they appear.
The temperature outside is heating up for the summer, and the market is heating up with unpredictability.