Stock market rally: Should traders be aggressive?
The first 5 months of 2022 have proved disastrous for most markets. The technology sector and cryptocurrency saw a mass selloff. The only sectors that continued to thrive were oil and wheat, though this is directly attributed to volatility caused by the ongoing conflict in Eastern Europe.
And yet there’s hope for traders; the stock market has been rallying for the past week. The is one, according to experts, has a decent chance of lasting.
Today, we look at the markets and find out whether traders should be aggressive or cautious going forward.
The current stock market rally started shakily with the Nasdaq setting a 52-week low on May 24. Fortunately, the major indexes rebounded strongly for the rest of the week, delivering strong gains to close to a high on May 27.
The Dow Jones Industrial Average rose 6.2% during last week’s trading. Similarly, the S&P 500 leaped 6.6% while the Nasdaq composite jumped 6.8%. Even the relatively small Russell 2000 index saw gains of 6.55%.
The US Federal Reserve reported 10-year Treasury yield fell four basis points to 2.74%. The oil price continues to climb; WTI is trading at $118.6 while Brent Crude is pushing beyond $123 a barrel on May 30.
What is driving the rally?
The gains during the final week of May are being driven by the expectation that the Federal Reserve will not be more aggressive in its plan to lift interest rates. The US central bank is attempting to curb record-high inflation by raising rates. Unfortunately, by raising short-term rates the Fed is diminishing economic demand and consumer confidence in the market.
Earlier in 2022, the Fed announced a potential 3 major rate hikes for the year. A ray of hope was cast on May 25 as the Fed revealed that it might not implement any more rate hikes than the ones it currently has planned. It was heavily implied that rate hikes could slow down soon as the economy begins to slow.
Market rallies like this one we’re experiencing have been short-lived in 2022; the March rally saw the S&P 500 rise beyond the 4600 level. The index then dropped, and each subsequent rally saw the popular index drop even lower.
All your trading questions answered
Fred Razak, the chief trading strategist at CMTrading, shares his views on the market:
The current stock market rally – will long will it last?
Razak said: “So many times, when we are in bear markets there is something called a short squeeze, which means that at a certain point people who short the markets will need to cover their shorts, thereby creating a buying frenzy in the market. That’s not a rally per se.
“It’s just, you know, one of these types of sharp vertical moves that happen at such a velocity and so quickly. They’re great trading opportunities. They’re part of what separates the Bulls and the Bears. Ultimately, they ended up fizzling out, but I guess time will give us more intel as to whether or not this was just a correctional move or this was just a short squeeze.
“I’m more inclined to think that it’s a short squeeze as the current economic environment is getting much more difficult both in the United States and internationally. So that’s just a matter of, you know, going into the summer with a little bit of a bang.
Markets have cycles – what are the trends for the coming months?
Razak said: We’re hitting the last week of May, traditionally speaking when you’re trading the financial markets and specific stocks you sell in May.
“June, July, and August are known as months for financial trading. Generally speaking, they are lighter sessions you know relative to what we experience earlier in the year
“There may be some selling pressure once we come back in September or October. That’s also traditionally some tough months to hit the market.”
Any specific stocks you’ve had your eye on?
Razak said: “Catching my eye is Dell computers. Dell is at the lower end of computer manufacturing in the United States. It’s a well-known manufacturer but doesn’t get the whistle and the trinkets that Apple does. They were very big in the 1990s. In the 2000s, they were a very big contender but since then they’ve kind of fallen from grace. They have been in business but not as big as they used to be. Recently they beat their earnings which you know, a lot of people are adding a lot of value to. Maybe it’s just because people are less inclined to buy Apple products and looking for cheaper alternatives because financially, they are a little bit more strapped for cash.
“Another stock, believe it or not, that I’m looking at is Zoom. I’m checking to see where their stock is trading up because I believe they’re the market leaders right now ironically, as we’re exiting from this coronavirus environment. Going into the environmental Zoom was the one that initially went from $100 to $400. I think it even hit $500 and since then it’s been back to under $100 per share. So, I’m looking to Zoom to give us a little bit of directions to where the markets are going. I think if that’s even though it’s bellwether and it’s not one of the largest stocks to follow, it’s giving us some insight as to which way the markets are going.”
Advice for traders?
Razak said: “As always, trade responsibly. That’s my advice for traders. Look for opportunities that will present themselves as we head into the Northern hemisphere summer trading. There are still lots of things happening in the world both economically and geographically and politically that are adding some pressure on the market right now.”
Trade stock CFDs
One of the most advantageous methods of benefiting from stock price movements is to trade CFDs online. CFDs or Contracts for Difference are financial derivatives that allow investors to speculate on the price fluctuations of an underlying financial asset (I.e., Zoom, Dell, etc.) without buying it beforehand.
Moreover, CFD traders can profit both when prices are rising as well as when they are falling. This is because CFD trading allows traders to open a buy or sell position, which means they can buy when prices are moving up or sell when the prices are dropping to generate profits.
Also, CFDs are traded on margin, which means that traders only need a small amount of capital to open a position on the market and enjoy increased returns at the cost of higher risk exposure.
Please note that trading CFDs is considered a high-risk investment, which can result in the loss of your invested capital. Always get in touch with your account manager to discuss profit targets and how you can minimize your exposure to downside risk.