The inflation news raged like a tsunami across financial media. Markets were impacted by this. Stock indexes appeared to have recovered since May 20, but they are now back to the same levels. A breakdown looks to be looming, but a double bottom outcome would be wildly bullish going into summer.
While we are not forecasting either of those two outcomes, we are emphasizing that both scenarios would be strong. More importantly, there is not just any one outcome at any time, despite what you may derive from reading the headlines. Keep an eye out for what narrative is being sold, that is our top recommendation.
In one of the best articles we have ever written, 7 Secrets of Successful Investing, we recommended being careful with narratives. Not only that, we also noted that identifying turning points in markets is probably the most challenging thing for any analyst and investor. Interestingly, narratives prevent investors and analysts from finding such turning points.
Here, we provide our 'successful investing secret #7.' Identifying turning points in markets is the toughest challenge:
"A turning point in the markets often occurs mostly unexpectedly. That’s because turning points come after a long bullish or bearish period. The mind of the investor gets used to a specific market direction (up or down). That’s when it gets tough for the brain to ‘see’ the trend change.
"Markets can change fast. It is a fool’s game to try to hit the exact top. Being smart about exits is what you need to avoid mental stress but still be relaxed about securing profits (not selling too early). It sounds easy, but it really isn’t."
That said, we are seeing some decisive setups in markets. While the breakdown risk in markets is real, so is the double bottom scenario.
Below we display charts of Treasuries, Transportation, the Dow Jones index, as well as the Nasdaq. Imagine on all of these charts that we get lower lows. Also, imagine what the charts would look like if we were to get a few green candles which push all of these charts back to early May levels.
Our point is this: narratives will make you see the former scenario (breakdown). However, turning point analysis suggests that a turning point is also a possibility, starting next week. It will not be a fun week, we expect, as both bulls and bears will be slaughtered, mark our words.
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