EB Daily Market Report - Thursday, March 17, 2022
Happy St. Patrick's Day!
This DMR will be brief as I'll be traveling much of the day today.
Well, it's the "Day After". The Federal Reserve announced yesterday that it was not only raising interest rates (by a quarter point) for the first time in 3 years, but that it intended to do it 6 MORE TIMES this year. It also said it was looking at 3 more rate hikes in 2023, but none in 2024. First, let me say that the Fed talking about what they're going to do with interest rate policy in 2023 and 2024 is like a meteorologist providing you a weather forecast for 2023 and 2024. It's going to change.
I will say one thing. The Fed picked its poison. They had the options of (1) fiercely fighting inflation, (2) remaining pro growth with an already deteriorating economy helping to lower inflation, or (3) doing something in between. They chose option 1. Granted, the Fed has two mandates and one of them is price stabilization. So I don't really fault them for being so hawkish. However, a recession is now all but a certainty. And few stocks like recessions.
An EarningsBeats.com member reached out and asked me what stocks to buy during a recession. Honestly, I wouldn't buy any. But here's the good news. The stock market has been weak and pricing in bad news. I do think the large cap tech and discretionary names could struggle as many of those did not really get hit hard in 2021 with the rising inflationary pressures. The recession, though, could be a game changer for them and with many other stocks as well. So I'll be watching the likes of Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), Tesla (TSLA), Alphabet (GOOGL), etc. Here's a 1-year chart of the S&P 500 with these 5 key names below it on a relative basis (vs. the S&P 500):
AAPL just moved to a fresh 4-month relative low. This is the largest holding of both the SPY and QQQ, so any further relative weakness is going to weigh quite heavily on our major indices. MSFT has weakened over the past few months, but it's still holding onto key relative support - at least for now. AMZN has been lagging for quite some time. TSLA saw massive outperformance, but it's been underperforming now since November. GOOGL saw a relative surge with its earnings report, but other than that, it too has been weakening for months.
Watch these five, along with the many sustainability ratios that I've been highlighting and discussing throughout 2022. These will help to provide us clues about whether Wednesday's rally sticks longer-term. It's important to realize that it's options-expiration week. There is financial incentive for market makers to help prices move higher this week, so don't be surprised if a short-term bid remains under prices.
History tells us that a hawkish Fed is not good for U.S. equities. Many of our signals have already been suggesting weakness. I remain steadfast in my prediction for lower prices ahead in the very near-term, but I also have a very bullish long-term view of the stock market, believing we remain in a secular bull market that will likely last another decade.
So what should we do? Well, everyone must make their own decision based on their own personal financial situation and financial goals and objectives. I believe "staying the course" makes the most sense for long-term investors. This will likely be another blip on the long-term radar, even if we have another impulsive move lower. From a shorter-term trading perspective, I'm going to focus a lot on my sustainability ratios and on SENTIMENT. If the VIX remains elevated (20s, 30s, or even 40s possibly), then the 5-day moving average of the equity-only put call ratio ($CPCE) can help us find short-term bottoms, along with capitulation days. Resistance can be measured by moving averages and trend/channel lines.
Happy trading!
Tom