People have always looked for the next best thing. It doesn’t matter if you’re talking about investing or if you are talking about anything else in life; we are always looking for the next best thing. With the stock market going ever higher and the threat of rising interest rates, people are really starting to question where the next best thing will be.
Let’s first look at the ever-rising stock market, and specifically the fear around the dropping of that market. I had the pleasure of teaching in multiple countries, and almost every state in the United States over the last 12 months, and one thing has been a constant: In almost every class I teach, the question I am inevitably asked is “How much longer do you think we can continue to go up”?
I’m sure that as you’re reading this at home, you’re asking yourself much the same thing, and I will give you the same answer I give everyone: There is no limit to how high this market can go; there is no ceiling on our potential growth in the stock market. Does this mean that we will continue to go up forever? Absolutely not. Rather, it simply means that there is no known institutional supply above us.
Markets move on the foundations of demand and supply, and the only time we anticipate prices falling is when there are no more willing buyers at a given price point, and there are willing sellers that will absorb all of the potential buyers. Since we have absolutely no way of knowing where the unfilled institutional sell orders above us are located, we have to rely on unfilled buy orders below us as our gauge. I have written in the past about the need for investors to have a stop loss or “line in the sand” as a point where they are willing to take no more losses. As it currently stands, the monthly demand right around 2000 in the S&P serves as a good basis for a line in the sand, as it is the only monthly demand to be seen on our charts. So as an answer to peoples’ questions about the stock market, it remains wise to be a bullish investor so long as we stay above a strong monthly level of demand.
And that brings us to the second point, specifically regarding bonds: As is typical in an environment of rising rates, we will expect to see bond prices fall if indeed rates do rise. As it stands now, there is very low yield in most corporate, municipal, and federal bonds, and almost all of them are priced at a premium. As rates rise and the demand for these bonds goes down, they will come down to be priced at a discount level and allow investors the time to get in. A prudent investor would be wise to keep an eye on both the equity and bond markets simultaneously and attempt to re-allocate their portfolio to a more income driven strategy if they see the demand in the S&P break combined with an opportunity to pick up more yield at a discounted bond price.
A good security to continue to watch that stock investors will be familiar with is the ETF of the 20 year bond markets- TLT. By watching the movement of the TLT (which has been falling for months) and looking for quality demand as an opportunity to enter long bond positions, investors have an opportunity. The yield paid by these bonds may continue to rise as these prices fall, and if timed with a break in demand of the S&P, it can be a good opportunity for a smart investor.
Chuck Fulkerson is the Director of Student Development at Online Trading Academy, a leader in investing and trading education for any market or asset class. Fulkerson helps education individuals across the globe in what it means to be a successful investor and trader. He currently trades options as a swing and position trader; futures and currencies as a day trader; and equities as an investor to round out a truly diversified trading portfolio.