Tag: Stock market

Opportunities Abound - Building Out A Portfolio

Posted on by Noah Kiedrowski

The economy is going through a pivotal moment as the Federal Reserve withdrawals stimulus as economic tailwinds may be in jeopardy. The culmination of inflation, supply chain constraints, pandemic backdrop, rising rates, and easy money policies coming to an end has led to some individual stocks losing 30%-80% of their value in a matter of weeks. All the major indices have sold off in a meaningful way and are now in correction territory. Initially, there was a massive sea change in the market out of technology, specifically high beta/richly valued stocks and into value. As a result, the Nasdaq dropped over 15%, Russell 2000 dropped over 20%, S&P 500 dropped over 10%, and the Dow Jones dipped down over 8%.

With many high-quality companies selling at deep discounts, this correction offers an opportunity to build out a portfolio and engage in dollar-cost averaging. It's difficult, if not at all impossible, to time the market and buy at the exact bottom. However, one can initiate a position and add to the position as the stock becomes cheaper when and if the market-wide sell-off deepens. Any portfolio strategy should include a cash portion, and it's times like these where the cash portion should be deployed and put to work.

Earnings Disasters And Indiscriminate Selling

Disappointing earnings have been a linchpin for individual stocks to lose swaths of value while sending entire sectors into a downward spiral. The financials suffered massive selling pressure after JP Morgan (JPM) and Goldman Sachs (GS) reported earnings. Netflix (NFLX) saw its stock tank over 25% after reporting earnings, and this reverberated through the streaming space to sink Disney (DIS) too. Continue reading "Opportunities Abound - Building Out A Portfolio" →

Apparently, Valuations Do Matter

Posted on by Noah Kiedrowski

2021 ended with a bang, with the S&P posting a 27% gain on the year. This appreciation occurred with the markets were facing a trifecta of rising interest rates, an unknown coronavirus variant backdrop, and the Federal Reserve tapering. The major indices reached unprecedented territory breaking through all-time high after all-time in what seemed like a daily occurrence throughout the year until the back third of the year rolled around. The September correction was a harbinger that valuations do matter, albeit October saw a huge reversal to the upside. Then came the November/December bifurcation in the markets, along with extreme bouts of volatility. Despite the back third of the year, the S&P 500 posted a 27% gain, placing the index in rarified air across many valuation metrics.

As interest rates, fed taper, and the pandemic gripped the markets, a sea change occurred. This sea change started to take hold back in November and December of 2021 while really accelerating in the first week of January 2022. As a result, technology names experienced heavy selling, specifically in stocks with high beta and/or rich valuations. This massive rotation came out of technology companies that are unprofitable with proof of concepts and into value-oriented companies that are well-capitalized, profitable, and pay dividends. As 2022 continues onward, this theme will lead the charge in the markets until the uncertainty surrounding the pandemic and the interest rate environment is settled out. Continue reading "Apparently, Valuations Do Matter" →

Gold Gets Hammered But Copper Fails To Seize The Moment

Posted on by Gary Tanashian

The Copper/Gold ratio remains at a key decision point. Gold has been clobbered lately but a key metallic macro indicator remains in a long-term congestion zone. If it’s going to be cyclical ‘inflation ON’ we’d expect Cu/Au to break through and do what it has not done since a major inflation trade blew out in 2006-2008, and for the 30yr Treasury yield to eventually catch on and rise at least to the EMA 100 (blue line).

copper/gold ratio & 30 year treasury yield

Here is the daily futures view of Cu/Au. Going by simple TA (daily trends) it looks poised to break out to the upside, especially in the face of a government at the ready to pump Trillions more funny munny into the economy. The economically cyclical metal would benefit over the more counter-cyclical monetary metal. It’s logical, but still theoretical. Markets do not always do the logical thing, now do they? Continue reading "Gold Gets Hammered But Copper Fails To Seize The Moment" →

Stock Market Risk Not Yet Realized

Posted on by Gary Tanashian

The stock market is at high risk, but…

The ‘but’ is the old saying “markets can remain [seemingly] irrational longer than you can remain solvent” if you fight a trend that is intact at any given point. Since March 2020 that trend has been up.

Structurally Over-bullish

Below is a chart showing the 10-week exponential moving average of the Equity Put/Call ratio (CPCE) that we review periodically in NFTRH for a view of the structural over-bullish situation in stocks. I write structural because it has extended much longer than extremes in the CPCE have done at previous ‘bull killer’ danger points, after which risk was realized in the form of moderate to severe corrections.

The trend began logically enough at a ‘bear killer’ reading in the midst of max pandemic fear. We noted at the time that market participants were not just bearish, not just risk-averse, but absolutely terrified. So the recipe is this: take 1 lump of terrified investors, add a heaping helping of the Fed’s money printing and voila, enjoy the taste of a slingshot rally that is very filling despite its inflationary odor.

Risk? Well, when SPX took out the previous 2020 high last summer we established a target of 4400 (conservative) to 4600 (at an extreme). The market is in the target zone, CPCE has begun to labor up and out of the structurally over-bullish floor and well, it could be a signal of a later stage bull market. But a warning about jumping into a heavily active bearish position is that using the run-up to 2016 as an example, the pressure can build for months, even years before risk is realized. Another caveat to going full frontal bear is that the EMA 10 is starting to hook down again as pressure is being relieved lately. Continue reading "Stock Market Risk Not Yet Realized" →

Stock Market: What Happens When Rates Rise?

Posted on by Noah Kiedrowski

The broader indices have been in a blistering bull market for a year straight, only accelerating from November 2020 into April 2021. The rally has been largely uninterrupted, with minor blips in September and October of 2020 before reaching new all-time highs after new all-time highs by mid-April. The initial rally was narrowly focused on technology and the stay-at-home economy stocks. With the improving vaccine prospects, November saw a sea change with broad market participation with value stocks breaking out with huge moves to the upside. To boot, Washington's massive stimulus is being priced into the markets via fiscal and monetary stimulus. All three major indices (S&P 500, Nasdaq, and Dow Jones) are at all-time highs and continue to break into uncharted territory in what seems like a daily basis.

Stocks are overbought and at extreme valuations, as measured by any historical metric (P/E ratio, Shiller P/E ratio, Buffet Indicator, Put/Call Ratio, and percentage of stocks above their 200-day moving average) or technical metric (Bollinger Bands and Relative Strength Index - RSI). Valuations are stretched across the board, with the major averages at all-time highs and far above pre-pandemic levels. A rise in rates due to inflation could be lurking in the shadows of this frothy market.

If/When Inflation Hits

If the Consumer Price Index (CPI) continues to push higher, The Federal Reserve may be compelled to entertain the idea of raising rates finally. Although interest rate risk disproportionally impacts fixed-income investments such as bonds and annuities, stocks will undoubtedly be impacted as well. This is especially true for highly leveraged companies such as tech and super-charged growth companies. Even the prospect of higher rates hit the Nasdaq in March for a sharp decline, albeit that decline was quickly erased. This is a case in point of how quickly the markets can turn negative with the hint of rising rates which may be exacerbated in an already frothy market. Continue reading "Stock Market: What Happens When Rates Rise?" →