Inflation Rises, Market Exposes Cracks


Simpler Trading Team

Dec 15th 2021  .  2 min read

Directional trades can be dangerous in this inflationary market. Simpler’s traders have watched as the market bounced to new highs, then dipped and then chopped – never committing to a sustained trend.

This  market never seems to want to reveal a solid trend and this uncertainty creates the danger for traders.

As an example, the Nasdaq – seemingly perched toward an upward path to bigger gains – has shown cracks in its seams with heavily weighted technology stocks hinting at signs of increased investor selloff.

Higher inflation has also made a dramatic impact on the market. While the Fed previously referred to escalating inflation as transitory, leaders there have admitted this description was not accurate or reflective of the real influence of inflation on the economy. Limited supplies have consumers paying more for housing, food, gas, and paying well beyond full prices for new vehicles.

Inflation has reached the highest level in more than three decades. Simpler’s traders have observed that historically, as corporate earnings dip in a stagnant economy, stock prices follow. During periods of high inflation, our traders determined, the market tends to retreat to bond purchases as high inflation stunts economic growth.

In this often fickle market that appears more responsive to tweets and memes, history hasn’t repeated itself as much as expected. Still, the moving averages are leaning bullish, and some traders anticipate continued movement upward.

Simpler’s traders acknowledge that anticipating a trend and confirming that the charts are revealing a trend are two very different things. In uncertainty, our traders stay light and nimble. Staying in the market requires patiently executing well-planned trades.

Simpler’s traders structure trade entries and sizes in the rising sectors to reduce risk. Sectors that tend to do well during inflation include energy, food, healthcare, and building materials. In some cases, technology can outperform during this time – cracks in any seams aside.

Identifying setups in an uncertain market using time-tested strategies enables Simpler’s traders to make solid trades while waiting for a more certain trend to reveal itself.