The stock market is stuck in a trading zone

Finding Your Trading Zone: How to Stay Calm and Profitable in a Volatile Market

Updated Jan 2023

The markets will recover as they have always done in the past. Those who panicked and dumped their shares will live through the same regret they and their ancestors lived through for giving away something valuable for next to nothing.

Crashes always end for one reason; the money and 2x more that left the markets always return. The only remnant from this crash will be all the smashed egos, portfolios, etc., for those who let fear rule the roost. The big players never lose. You know the folly of jumping out of the markets if you understand that. If you are not using the money you need for your daily living expenses (which you should never do), you can do what the rich guys are doing, sit it out and walk away with a nice bundle. The top players never try to buy at the bottom; their idea is to get in at a reasonable price. Over the short term, they can take paper losses of up to 50%, for they know the long-term outcome in advance, as do you. Market Update, May 11, 2022

The needle on the anxiety gauge shifted even deeper into the madness zone. One more tiny move and the needle will be in the most extreme point of this zone. The latest sentiment data just came in—bulls: 16, Neutral: 30, Bears: 54.

Historical Sentiment values

Inflation and Sanctions: The Trading Zone Conundrum

The market is now very close to entering the long-term Normal zone (corresponding to a neutral state). Historically it is at a critical juncture, and one of two outcomes is now possible

Reverse course and rally strongly, but the subsequent correction will be much stronger as the markets did not complete the normal overbought to oversold cycle.
The market completes the normal cycle, moving from the overbought to the oversold ranges. This takes more time, but the rally is also more potent.

Trading Zone conundrums

The market is currently stuck in a trading zone with limited upside potential due to inflationary pressures. Unfortunately, many of the issues surrounding inflation were self-inflicted, but there is a potential solution to help alleviate the situation. Lifting sanctions on Russia would bring down food and energy prices overnight, potentially avoiding a scenario where individuals could starve due to the sanctions. It is important to balance the needs of the many against the few, and lifting sanctions could positively impact the economy and the stock market.

If nothing is done to resolve the energy crisis, stock prices will continue to drop. However, the cure for low prices is lower prices; sooner or later, the market will rebound. From a long-term perspective, stocks are currently trading at a potential screaming buy range. While a rally appears to be building momentum, it’s essential to remain vigilant and prepared for a potential correction after the 1st quarter of 2023.

In Europe, the situation is more concerning as they have no low-priced alternative to Russian Gas. Cheap energy is crucial for Europe to remain competitive, and any disruption to their energy supply could significantly impact their economy. However, this is a story for another day. For now, keeping a close eye on the market is essential as being prepared for any potential changes.

Research

“Range Trading Strategies for Trending and Sideways Markets” by Trading Strategy Guides: This article explains range-bound trading strategies and how traders can profit from sideways markets. https://tradingstrategyguides.com/range-trading-strategies/
“Why High-Quality Dividend Stocks Are a Safe Haven for Investors” by Kiplinger discusses the benefits of investing in high-quality dividend-paying stocks, including their resilience during market volatility and potential for steady long-term returns. https://www.kiplinger.com/investing/stocks/dividend-stocks/601431/why-high-quality-dividend-stocks-are-a-safe-haven-for-investors
“Is the Stock Market Rally Building Momentum to Last Until 2023?” by InvestorPlace: This article explores the current market outlook and the potential for a rally that could last until the 1st quarter of 2023, as mentioned in the original prompt. https://investorplace.com/2022/11/is-the-stock-market-rally-building-momentum-to-last-until-2023/
“How to Prepare for the Next Stock Market Correction” by Forbes: This article provides tips and strategies for investors to prepare for a potential market correction, also mentioned in the original prompt. https://www.forbes.com/advisor/investing/stock-market-correction-preparation/