Per Investopedia, a consolidation is defined as “the movement of an asset’s price within a well-defined pattern or barrier of trading levels. Consolidation is generally regarded as a period of indecision, which ends when the price of the asset breaks beyond the restrictive barriers. Periods of consolidation can be found in charts covering any time interval (i.e. hours, days, etc.), and these periods can last for minutes, days, months or even years.”*
Back in September of 2014, Federal Reserve Chairwoman Janet Yellen announced that the easy money party was over! She was no longer going to engage in money-printing to stimulate the economy and she would be looking to raise interest rates at some point in the near future. The S&P500 lost over 9% in roughly two weeks as a knee-jerk reaction to her statements. At that point, the Chairwoman came out and essentially said, “Hold on! I’ll only raise rates if the economy can sustain an interest rate increase.” The market responded well and shot up immediately, recovering all loss by the first week of October.**
In late November, the stock market hit an all-time high of 2,075, as measured by the S&P500 Index. Since then, the market has been making dramatic moves both up and down. As of May 6, the market had an intraday low of 2,067 – although you may have heard the Nightly News quip, “We’re at all time highs,” during the day the stock market indexes were actually negative.
I believe the market is confused about what type of economic data it wants and the resulting reaction to the data. If the economic data is too good, one could interpret that the Federal Reserve is going to raise rates in an effort to slow down the economy (which is barely growing in the first place and could be market negative). If the economic data is too poor, then one could think “with all the money-printing and stimulus to provoke the economy, this was the inevitable end result.” In my opinion, the markets are in a bit of a pickle.
As a consequence, we now face a long, drawn out consolidation period in the market. Consolidation periods are not bad or good but simply a time in which the market is determining the next move. In the past, after a period of consolidation, once the market breaks one way or the other, it tends to move rapidly.** In the investing community, a general rule of thumb remains that the longer the consolidation period, the harder the move will be once the price ranges break. Consolidation periods, especially when elongated, can be fairly frustrating for the average long-term investor. It seems that the market goes up and then down repeatedly, and no one is making money – except for your financial advisor.
I would encourage you to meet with your financial advisor to develop a plan for navigating the markets when and if this period of consolidation ends. As I stated, the longer the consolidation period, the greater the potential for aggressive movement when the breakout arrives. We have been consolidating in the markets since November of 2014,** so the situation does deserve some attention and appropriate planning.
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