Trade With the Trend: Making Money While the Money’s Good

Shah Gilani|November 16, 2023

Remember the 1968 Blood, Sweat & Tears song “Spinning Wheel”?

What goes up must come down
Spinning wheel got to go ’round
Talkin’ ’bout your troubles
It’s a cryin’ sin
Ride a painted pony
Let the spinning wheel spin

It’s a great song… and the lyrics were prophetic, aptly describing the times we’re in now.

Inflation’s gone up and come down.

Stock and bond prices – which had been going up and up while inflation was dead dormant – came down hard as the Fed battled inflation.

And now… the latest CPI report has come in cooler than expected. No one is cryin’ about troubled bonds and stocks, as investors are making money spinning the market’s big wheel.

Here’s the thing… It’s all good until it isn’t.

Inflation hasn’t been defeated. Even though it has cooled… prices are still rising. And the rocket ride higher that stocks and bonds are enjoying just might be a short-covering, head-faking, rip-your-face off rally.

It’s all fine and good either way… as long as you know how the spinning wheel spins – and when and where to place your bets.

Let’s take a look at what got us to this point and what it means for investors…

A Fed-Sized Problem

In January 2021, CPI was hovering around 1.3%… and the markets were off to a scorching start to the year. As inflation figures rose, the Fed tried to allay fears by calling the rise transitory.

The markets believed it.

But by the end of the year, the Fed had given up all the transitory talk… and the markets started going crazy.

In 2022, the S&P 500 fell 24% from January to June. It then tried to rally… only to make a lower low in November.

What investors didn’t get at the time was that the June 2022 9.1% CPI figure was the peak. It’s been trending lower since (except for a slight uptick in August 2023).

Stocks tried to rally as inflation cooled… but the markets mostly just violently yo-yoed up and down.

That is… until the 50-day moving average of the S&P 500 crossed above the benchmark’s 200-day moving average at the beginning of February 2023.

That “golden cross” was investors’ ticket to ride.

That’s when I started calling the stock market action the possible first leg up in a new bull market. And at the end of May, I declared on Fox Business News that we were, in fact, in a new bull market.

I saw the golden cross as a buying opportunity that could have legs if CPI stayed in a downtrend.

Yes, the Fed continued to spook markets with its “higher for longer” interest rate talk. But the dip was only a fleeting correction, barely a 10% drop from late July’s 52-week high.

The game is tough sometimes, especially when stocks are drifting lower and rates are elevated.

But inflation and CPI are why rates are elevated… and why stocks have been volatile.

Last week, I told you to watch support and resistance levels on the S&P 500.

And sure enough… we broke above resistance last Friday while waiting for CPI.

This week’s lower-than-expected CPI print – which wasn’t much lower, by the way – was proof that the CPI is trending downward. That means bond prices can rally and bring rates down, which makes stocks look more attractive.

Inflation down… stocks up.

But that’s behind us.

What’s in front of us is whether inflation will continue to fall, whether we’ve seen peak interest rates and whether stocks can rally into year-end.

The answers to those questions are all unknown. So for the time being… trade with the trend. In the case of stocks and bonds, as of now, that’s up.

But be careful, and use stop losses.

What goes up must come down… as I’ll explain in future essays.