If you are like most investors, you are concerned about the future of trade between the United States, Mexico and Canada as the North American Free Trade Agreement (NAFTA) is being renegotiated. You are probably also concerned that the trade war between the United States and China is going to be a drag on the U.S. economy and that an emerging-markets currency crisis could derail the global economy. And you wonder why, in the face of all this, investors don’t sell stocks off in a big way.
We’re concerned too. And though it may not look like it at the moment, Wall Street is concerned as well. It just isn’t going to start selling based on those concerns yet.
As we talk with individual investors from around the country, one of the questions they often ask is, “How can the market be going up so much when there are all of these problems out there on the horizon?” It’s a great question, but to understand the answer to why they don’t sell stocks off, you need to understand how Wall Street plays chicken.
How Wall Street Plays Chicken
If you’re unfamiliar with the game of “chicken,” it typically involves two people who are on a collision course with each other — whether they are driving toward each other in separate cars or competing with each other to see who will be the last to pull the rip cord on their parachute — and the last person to flinch and move out of the way wins.
Wall Street plays chicken all the time. It plays chicken with corporate management teams, it plays it with central bankers and it plays it with government leaders. The interesting thing is that it plays it the same way every time. Wall Street waits and either pushes stock prices higher or holds them at their current levels until the very last second before it flinches and sends stock prices lower.
Why Does Wall Street Play It This Way?
Wall Street waits until the last second before it flinches because it doesn’t want to destroy trillions of dollars of wealth in the stock market if it doesn’t have to.
Although we tend to hear more sensationalized stories about the rogue hedge fund managers who are short the market and are looking to make a killing if stock prices go down, the truth of the matter is that most investment managers are long the market. They want to see stock prices go up, not down, and they will try to nurture an environment of optimism to help that happen. After all, when stock prices drop, wealth is destroyed.
The Bottom Line on Why They Don’t Sell Stocks Off
We believe Wall Street is in the middle of another epic game of chicken. Yes, the concerns you hear about every day in the financial news media are real, but they haven’t been realized yet, nor are they a foregone conclusion.
When you’re playing chicken, timing is everything, and Wall Street doesn’t look like it’s ready to flinch anytime soon. The fact that the S&P 500 appears to be successfully retesting the price level that used to be resistance in late January and early August, but which is now acting as support as the market readies itself for another rally to all-time highs, should tell you everything you need to know about sentiment on Wall Street at the moment (see Fig. 1).
Fig. 1 — Daily Chart of the S&P 500 (SPX)
Price action like this tells us that, unless something dramatically changes to shock the market, Wall Street is still feeling confident that any problems or concerns are going to remain firmly on the distant horizon — where they can be talked about in the media and temporarily ignored in investment portfolios.
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InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news — and with an innovative “Bonus Income” program that lets you supplement your monthly income…WITHOUT waiting for a dividend check! Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
