The year has started out with plenty of volatility in the stock market.
Futures are generally a good indicator of what the market is doing that day.
But when you’re in a more volatile period, they’re not.
It’s not only futures.
In the early part of the day on Monday, [January 24, 2022,] trading was different. It didn’t indicate how the day would finish.
We are in a volatile churn right now. In the time it takes to look down at your watch, you may have a different market by the time you lift your head up.
So, with all that said … what next?
Stock Volatility: How Short-Covering Rallies Create Buying Pressure
We are oversold at the moment, and I think we’ll likely see a short-term bounce.
When people aggressively sell and short, they create buying pressure.
We’ve discussed this in Green Zone Fortunes.
When a lot of people short stocks, they borrow the shares first.
Then, when they close out that trade, they have to buy back the shares that they sold back to repay the person they borrowed them from.
In a short-covering rally, shorts are quick to reverse, which creates a lot of buying pressure.
All the people who were selling have to buy.
When you’re in correction mode, like we are right now, we have rip-your-face-off rallies. That’s how it is if you’re short. It’s sudden, it’s violent, it’s quick and it does come as a relief, of course.
Volatility in the Stock Market — More to Come?
I think we’re likely to see a strong finish to this month. (There are only a few days left, so we’ll find out soon enough.)
But I think looking a little bit longer-term — over the next couple of weeks or months — I don’t know that this is really over yet.
We’ve had such a long run in the market of minimal volatility and maximum price gains. That doesn’t last forever.
You have to have those market pauses, occasional corrections and occasional bear markets.
Without risk, there is no return in the market. If this were easy and predictable, returns would be zero. We would not have jobs.
At the end of the day, stocks are expensive right now, by any historical metric you want to use.
Stocks are expensive, and the Fed drains liquidity out of the market. And I don’t think that’s priced in yet. I think it takes a bit more time.
Click here for further analysis of the stock market’s recent swings.
Where to Find Us
Coming up this week, Matt will have more on The Bull & The Bear podcast, so stay tuned.
Don’t forget to check out our Ask Adam Anything video series, where chief investment strategist Adam O’Dell answers your questions.
You can also catch Matt every week on his Marijuana Market Update. If you are into cannabis investing, you don’t want to miss Matt’s weekly insights.
Remember, you can email my team and me at feedback@moneyandmarkets.com — or leave a comment on YouTube. We love to hear from you! We may even feature your question or comment in a future edition of Investing With Charles.
To safe profits,
Charles Sizemore
Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.
