Will it be a case of ‘3 strikes, you’re out and back down we go?

Or is something far more interesting happening?

Last year we saw US fund managers starting to sell into the rally too early, only to watch the market climb, even on the back of negative economic data and events.

At the same time, capital inflows to the US were surging. This leads me to the view that the actual phenomenon was one you will not read about in textbooks.

The US stock market was climbing on the back of fear. Not greed. Around the world, people were concerned about the ongoing waves of Covid, supply chain disruption and rampant inflation.

In response, overseas investors saw the USA as not just a safe haven in terms of currency or bonds, but also in the form of stocks.

The cherry on the cake was stocks were having one of their most spectacular rallies in history. So why not a safe haven where you could get great returns too.

After the initial war protection/hedging behaviour as was expected in the major global markets, energy, gold, the US dollar and equities were sold off.

The powerful mix of the perennial buy the dippers and this new process of overseas investors safe-haven buying US stocks has completely overwhelmed any late selling based on the global economic disturbances of the war.

If the US stock market begins to stall out in the next 24 hours, as well it could on the introduction of new potentially stern sanctions on China, then it may also be the case that the buy the dip panic buyers have exhausted themselves. Which could be expected around the four-to-five day mark of such a significant rally.

Should the US market power through any sanctions on China and into next week, then what we are actually witnessing is a “Safe-Haven Bull Market” in the US that could continue for several weeks or months.

My feeling is to be highly cautious as the potential for this rally can immediately falter and implode should sanctions on China be added.

If we are still strong into Monday, Tuesday next week I may well be throwing the towel in the ring for the moment.

We said at the new highs at the start of the year, that this would not be the first time we have seen a major top for the year in the first week of trading.

So far, that bearish view has been spot on. Let’s see how these next two to three crucial days of trading go. They could determine the direction of the market for several months to come.

Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities