Waiting For The All Clear

It's only a matter of time...

Jul 06, 2022

Okay, I’m back at it. I’m excited to be sitting at my computer writing about something I enjoy. I appreciate you for reading.

Gratitude

Life is good. If you are on your phone or at your computer reading this, there is your sign that you’ve made it in life. I often think about the many people in the world who don’t get this opportunity. I am grateful for the opportunities given to me. And as we move through life, we face many challenges and difficult times. It is through these challenges and our response to these challenges that we grow.

My life is no different.

Recently I have faced some difficult times. It is through these tough times that I have learned to grow and be better. Gratitude is a powerful, healing force. Be grateful for what you have and where you are. Do more of that.

Markets

Okay, now let’s talk about current markets. At the time of this writing, the markets are down 32% and 20%, depending on which index you’re looking at (Nasdaq or S&P 500, respectively). Chances are they will go lower. Not in a straight line but most likely lower. Inflation is the highest its been in 40 years and the FED is actively raising rates…and talking of raising more to bring down inflation.

So how am I viewing these markets?

I know the easy answer is “BUY THE DIP!” but it may not be that simple this time. Bear markets are very different. Dips are to be bought in BULL markets and we are no longer in a bull market. Selling into strength is the strategy for BEAR markets to exit positions and sit in cash. In fact, this is the reason for the strength in the US dollar lately. We are at a 20 year high in the dollar because smart money knows that is a safe haven…for now.

Note: I am talking about broad markets here when referencing the bear market. There ARE bull markets happening as we speak, but I’ll save those for another article. (PS – that’s where my money is).

In looking at the daily chart of the Nasdaq below, you can actually see we are in this bear market. A true bear market grinds lower and lower over time with rallies in between each leg down. You can see we broke well below the 200-day moving average (yellow line) and the moving average is now sloping to the downside. No bueno.

My thesis is that we test the pre-Covid levels marked in red on the chart. After all, that’s when we really went into overdrive on the free money. In fact, I would not be surprised if we overshoot the pre-Covid levels.

How long will this continue?

Nobody knows but I have some thoughts on the matter…

Some Thoughts On The Matter…

You can see how the markets accelerated higher with LOTS of money printing and near zero interest rates. So what happens when there is no more printing and rates are rising? Well, that’s what’s happening now. DOWN. You can actually see this on the chart…as if it’s talking to you.

Or maybe just me since I’m weird like that.

Stocks are being repriced based on the higher cost of capital and lower earnings estimates. In other words, margins are shrinking.

Investors are moving to cash. Even though cash (US dollar) is depreciating by over 8% annually (inflation), it’s safer than the 32% drop in the Nasdaq! Markets are pricing in a recession…and maybe more.

The All Clear

At some point, however, when we get the ‘all clear’, money will be coming back into the market…just not where its been for the past 15 years. It is my belief we will see a rotation from growth to value (it’s kinda already happening)…from overvalued to undervalued.

Commodities, energy, and precious metals are on that list for me.

Again, this is my opinion but as you’ll see in future newsletters, I’ll be supporting this with data. I don’t want to bore you all at once! Lol

Bottom?

So, when will the bottom be in? To put it simply, when there are more buyers than sellers! And we aren’t there yet. I do not predict price or pick bottoms. I don’t know. The ‘bottom’ may look a little different this time. I suspect many tech companies won’t survive.

But I do know there are some catalysts on the horizon.

Catalyst #1: It rhymes with ‘sminflation data’. Yeah, I just made that up. June inflation numbers come out July 13th at 8:30 a.m. EST. That’s one piece of VERY important data.
- Lower CPI data could cause the FED to raise the flag of victory and ease on rate hikes saying, “See, we do know what we are doing!” (even though they’ve admitted they don’t really) (not that we needed them to admit that since we all already know that).
- On the other hand, if CPI comes in higher, the FED will likely stay the course of aggressive rate hikes.
Catalyst #2: The next FED meeting is July 26-27. If the FED gives the slightest whiff of pausing rate hikes, or talks about TALKING about pausing…GAME ON. We rip! It’s all data dependent.

Word of caution, however. Both of these catalysts could very easily surprise and markets will respond accordingly. I’m not predicting CPI readings. I have NO idea. I am merely responding to data as it rolls out.

Summary

Long story short:
We are in a bear market
Inflation is super duper high (kinda fun to say)…waiting on new CPI numbers
Waiting to see what FED does this month
FED is waiting for inflation data to further fight inflation or claim “victory”.

When this tightening cycle slows or even reverses, and it will…markets will rip! The question is…WHEN?

So back to the question above on how I am viewing these markets. …as an opportunity we have never seen.

We just need to weather the current storm.

The Tobin Report

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