Logic is the enemy

Isaac Newton law of inertia

Logic is the Enemy Right Now –An Isaac Newton Principle

This week feels particularly difficult to give anyone else “advice” when I am equally wondering how far this market rally can go.  Let’s start with some basic facts.  The Fed isn’t pivoting anytime soon.  Inflation likely peaked and will mathematically trend down as long as month to month increases stop rising at 0.5%+ (0.2% reported in July).  At one point we did this math for folks, 0.5% month to month each month gets you 6% annualized plus once you anniversary year-over-year.  0.2% month to month gets you to the 3’s if repeated, again pure math.  Earnings aren’t great, companies are implementing hiring freezes or job cuts and the consumer is shifting its spending between discretionary categories.  Stocks do not care!  Period.

Remember Newton?       

“An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.”     

Obviously, this was meant to describe inanimate objects and their motion.  However, it equally applies to stocks and human behavior and psychology.  Meme stocks are the ultimate example where each day we see 5-25 stocks with small market caps and floats trade hundreds of millions of shares up 100-500% until, until, until, an unbalanced force “acts”.  That force is PAIN.  Pain is losing money in the markets.  If a stock you are meme trading keeps going up, you happily keep selling and collect “free money”.  However, someone else buys (or short covers) at those higher levels at which point when they lose, the pain sets in and either builds (causing a fear of loss and selling occurs) or reverses (and the holder makes money and stays confident).  It is that moment in time, if you could predict, where money is no longer being made, losses start to build up and the unbalanced force changes direction.