Why The Federal Reserve “Playing Dumb” Is a Genius Move

 By now, you have probably read a lot of interesting interpretations of yesterday’s Federal Reserve meeting. It seems everyone in the financial world – and even outside of it – has an opinion about it and what it means for stocks. 

Arguably the most popular interpretation is that the Fed is making a policy mistake.

That is, the failures of Silicon Valley Bank and Signature Bank – as well as the near-failures of First Republic (FRC) and Credit Suisse (CS ), and all the volatility in the stock prices of pretty much every regional bank – underscore that we’re in the midst of a big credit crisis. 

Yet, while the Federal Reserve acknowledged that crisis yesterday, it still hiked interest rates. And Board Chair Jerome Powell sounded resolute in the Fed’s fight against inflation during the post-meeting press conference. 

Therefore, many interpreted this move as the Fed being tone-deaf to the credit crisis. And that makes them believe the central bank will hike the U.S. economy right into a recession. 

Those feelings were exacerbated when stocks, commodity prices, and Treasury yields all dropped yesterday. That’s a rare combination that typifies pre-recession behavior in the financial markets. 

But… 

What if this isn’t a policy mistake? What if the Fed knows exactly what it is doing here?

That’s my interpretation. 

I think the Fed is purposefully “playing dumb.” And I think it’s a genius move that will ultimately allow for the creation of a new bull market.

The Federal Reserve Made a Genius Move

Simply consider this: The Federal Reserve hasn’t ever discussed “tightening credit conditions” during this rate-hike cycle. Yet, yesterday, Powell mentioned it about a dozen times in the post-meeting press conference. He kept saying over and over again that because of the bank failures, credit conditions are tightening. 

Clearly, he wanted to emphasize to everyone that bank lending standards are tightening significantly. 

Still, he kept saying that it is too early to say what these tightening credit conditions will do to inflation. 

But anyone who has taken any economics class knows exactly what “tightening credit conditions” do to inflation: they kill it. 

Tighter credit conditions mean it is harder to get access to capital. The harder it is to get access to capital, the less capital consumers and businesses have at their disposal. The less capital they have at their disposal, the less they spend. The less they spend, the lower inflation goes. 

It’s not rocket science. It’s Economics 101. 

You really think the seven voting members of the Federal Reserve don’t know this? You really think that a bunch of folks who are supposed to be the best economic minds in our country don’t know that big bank failures create significantly tighter credit conditions and kill inflation? 

They know it. 

But they can’t say it.

Getting the Best of Both Worlds

By enacting a policy of deliberate ambiguity, the Fed will get the best of both worlds. 

We won’t get re-inflation because markets won’t run away with this idea that the “coast is clear.” Bloomberg’s Commodity Index dropped again yesterday and remains at its lowest level since Russia invaded Ukraine. And real-time inflation data from Truflation, which measures millions of data points and contrasts outdated government metrics, shows that inflation is collapsing toward 4% right now. 

We also won’t get an economic collapse because the banks – or their depositors – won’t be overly fearful that the Fed is staying aggressive with rate hikes. 

Instead, we will get rapid disinflation without a recession – which, perhaps uncoincidentally, is exactly what we’ve had over the past nine months. 

Inflation peaked in June 2022. Since then, it has dropped more than 300 basis points. As it has, the unemployment rate has barely budged, and the economy has continued to expand. 

What other Fed in history has cut inflation by 300 basis points without hurting the labor market? 

Give this Fed credit. It knows what it’s doing. 

It’s done an awesome job so far, and it’s about to finish things up with a masterful final act by executing a policy of deliberate ambiguity until inflation collapses over the next few weeks. Then it’ll pivot fully dovish in May, pause rate hikes, and fully support the economy… and markets. 

Long story short, this is a great buying opportunity.

The Fed’s fight with inflation is nearly over, and it’s figured out a way to finish this fight without knocking out the U.S. economy. Within months, inflation will be dead, the Fed will be on pause, the economy will be recovering, and stocks will be rebounding with vigor.

We believe this is the ninth inning of the bear market. Up next is the first inning of a prolonged, multi-year economic expansion and bull market. 

This is buying time. 

If you agree, find out what stocks you should be buying to prepare for this emerging bull market.

(Luke Lango)

Michael Burry Calls a Stock Market “Bottom” – Is He Right?

If there is one person you, me, and every investor should listen to during a bear market, it is Michael Burry.  You may know him from the movie based on his life, The Big Short, but he is the esteemed hedge fund manager who correctly predicted the subprime mortgage market meltdown in 2008. 

He’s a certified bear market genius. No one knows how to navigate turbulent markets better than him. And he just issued a shocking warning to his 1.4 million Twitter followers about the current bear market – a warning that you may miss out on a monster rally of epic proportions over the next six months if you don’t buy stocks today!

That’s right. The bear market genius, Burry himself, is suddenly sounding bullish. 

So, what exactly did Burry say? How is it bullish for stocks? And is he right?

Let’s take a deeper look.

The Tweet

Yesterday, Michael Burry sent the following tweet. In true Burry fashion, he has since deleted the tweet (for those who don’t know, he deletes all his tweets after about a day). But many stock market observers screenshotted the tweet because it is of paramount importance. A screenshot is posted below. 

In short, Michael Burry is drawing parallels between the recent string of bank failures – Silicon Valley Bank, Signature Bank (SBNY), and now possibly First Republic (FRC) and even Credit Suisse (CS) – to the so-called “1907 Bankers’ Panic.” 

In that bank panic, a multitude of market and economic factors sparked a bank run on Knickerbocker Trust, one of New York City’s largest banks at the time. The country was spooked. Suddenly, everyone started withdrawing their money from banks, and there was a massive credit crunch, also known as a bank run. Faith in America’s banking system was breaking. 

In response, the stock market crashed. The Dow Jones dropped almost 50% in a hurry.

JPMorgan to the Rescue

Then, JPMorgan stepped in and saved the day. He pledged a chunk of his fortune to help shore up the banking system. He also convinced a bunch of other wealthy financiers at the time to do the same. 

Collectively, they saved the U.S. banking system from collapse, restored consumer confidence, and stabilized financial markets. 

Within weeks of JPMorgan pledging his capital, the stock market’s 50% “flash crash” ended, and stocks soared. 

Mr. Burry thinks history is repeating right before our very eyes. 

That is, the Bank Panic of 1907 ended when a stand was made to protect and shore up failing banks. 

This past weekend, a similar stand was made by the U.S. government to protect and shore up failing banks Signature Bank and Silicon Valley Bank. 

Then, just yesterday, another similar stand was made by the Swiss government to protect and shore up Credit Suisse. 

The “stands are being made” all around us, so to speak. 

Burry seems to think that these stands are a prelude to significant market bottoms – and huge stock market rallies . 

After all, after the stock market bottomed in the Bank Panic of 1907 following a stand being made by JPMorgan, the market basically doubled over the next two years. 

Could we be in store for a similar huge rebound rally over the next two years?

Burry’s cryptic tweets seem to suggest he thinks it’s entirely possible.

We believe a major stock market bottom was put in place late last year, and that right now, we are in the first innings of a new bull market breakout. 

Recent developments in the banking sector – alongside the swift and strong response from major governments across the globe – have strengthened our bullish conviction. 

This  feels like when JPMorgan rescued the banks in 1907. It feels like when the government rescued the financial sector in 1998, and when it rescued it again in 2008. This feels like when the government rescued the economy in early 2020 as the COVID-19  pandemic hit. 

When the government starts rescuing things, stocks start soaring.

The government started rescuing things this past weekend. Now, it’s time for stocks to start soaring – which they're doing today. 

(Luke Lango)

One Chart Shows Why Tech Stocks Could Stage an Epic Comeback

 It’s finally time for tech stocks to stage a huge comeback.

We’ve all been waiting for this moment. Ever since tech stocks started crashing in late 2021, we knew that they’d eventually bottom. And we knew that when they did, it’d create the buying opportunity of the century…

Like when tech stocks bottomed after the COVID crash and soared more than 130% in less than two years. 

Like when tech stocks bottomed after the 2008 financial crisis and rocketed 120% over the next two years. 

Or like when tech stocks bottomed after the dot-com bubble and popped about 100% over the next year. 

We’ve all been waiting for that moment; the bottom – then the surge. 

And we think it has finally arrived.

Tech Stocks Are Regaining Their Mojo

You may have noticed. Tech stocks are starting to get their “mojo” back. The tech-heavy Nasdaq soared 2.5% on Thursday. It’s up 12% so far in 2023, marking one of its best starts to a year ever. It has retaken its 50-day, its 100-day, and its 200-day moving averages. 

Tech stocks clearly have some newfound momentum. 

Can it last? Yes. But more than that, tech stocks are about to catch fire and stage one of their biggest comebacks ever. 

Why? Inflation and rate hikes – or more specifically, the lack of those two things. 

In 2022, tech stocks were dragged down by rising inflation and interest rate hikes. Both headwinds will disappear in 2023. 

Inflation – as measured by the Consumer Price Index – peaked in mid-2022 at 9.1%. It has since dropped all the way to 6% in February. Looking at real-time Truflation data, which measures millions of data points and contrasts outdated government metrics, it looks like inflation is tracking toward 4% in March. 

Inflation is unequivocally crashing. 

Meanwhile, interest rates will likely stop rising soon. 

The financial sector has started to break over the past week because of the Fed’s rapid increase in interest rates. Silicon Valley Bank and Signature Bank failed. Credit Suisse (CS) and  First Republic (FRC) almost failed.

To be sure, those failures didn’t break the back of the U.S. economy. The U.S. government essentially rescued SVB and Signature. The Swiss government rescued Credit Suisse. And major Wall Street banks saved First Republic. 

But the Fed knows that if it keeps pushing the envelope – and stays the course with rate-hike after rate-hike – the breaks will get bigger. And bigger breaks could crush the economy. 

The Fed doesn’t want to crush the economy. And it also knows that inflation is falling rapidly. So, the most likely path forward is a 25-basis-point rate-hike next week, and then a pause. 

Net-net, both inflation and interest rates rose throughout 2022. Now, neither will rise in 2023. 

This inflection point marks the beginning of the massive tech stock comeback.

The Final Word

Historically speaking, whenever the Fed pauses a rate-hike cycle as inflation is falling – exactly the situation we will have in 2023 – tech stocks always outperform:

Either this is the first time in history that the combination of steady interest rates and falling inflation equals tech stock underperformance, or… 

Tech stocks are about to stage an epic comeback.

We’ll go with the latter. 

Tech stocks have regained their mojo, and the party’s just getting started. 

But if you want to maximize your returns in this comeback, you can’t just settle on buying the Invesco QQQ ETF (QQQ) – an ETF that tracks the Nasdaq. 

Back in 2020 – the last time tech stocks staged a huge comeback – more than a dozen rose over 1,000% in a year. 

The Nasdaq may rise 100% over the next two years. But certain individual stocks will rise much, much more than that. 

(Luke Lango)

Government fear-mongering over Silicon Valley Bank — and how to profit

A week ago, traders were pricing in a Fed rate hike of 50 basis points at its March 22 meeting. Now, after all the bank failure fears, I have no idea what the Fed will do.

But whatever the Fed does, I bet it spews more chaos than calm. 

Treasury Secretary Janet Yellen — government finance’s version of Anthony Fauci — loudly proclaimed on Saturday that the feds wouldn’t bail out Silicon Valley Bank. 

On Sunday, however, they announced jointly with the Fed and FDIC that they were bailing out SVB’s depositors — although not the shareholders or creditors — while insisting it wasn’t a bailout at all.

Inconsistency instills fear. 

The media says SVB’s failure was the second-biggest ever and that New York-based Signature Bank’s was the third-biggest. Scary. But they weren’t really No. 2 and No. 3.

Yes, SVB was $200 billion-plus in deposits, and they are No. 2 measured that way. But in relevant economic impact — what really matters — SVB, for example, was only about 4% as big relative to the economy’s size in 2023 versus what Bank of the United States was when it failed in 1931.

That’s despite the fact that SVB was roughly 1,000 times bigger in dollars than New York’s Bank of the United States. 

Nominal GDP (not inflation-adjusted) growth since then accounts for the difference. Relative to contemporary GDP, Signature and SVB were smaller than 1984’s Continental Illinois failure — relative pimples, not huge hemorrhages. 

Britain’s finance minister Jeremy Hunt, boasting that the UK saved the roughly 3% of SVB’s assets parked there, claimed that if they hadn’t stepped in, “strategically important (UK) companies would ‘be wiped out.’”

Such statements instill fear. But name one UK company that would have been wiped out.  You can’t. He can’t, either.  

President Biden said failing bank managements should be fired. Again — scary. But when?

If upper management had been fired last weekend the FDIC would have had nobody to talk to at SVB to enable customers to redeem deposits. Chaos would reign.

Later, Mr. President, on that firing blather.

SVB’s main problem? Its depositor base was way too concentrated in firms and employees from the venture capital realm.

When VCs started urging their portfolio firms last Thursday to pull their SVB deposits before others might, it launched the “run” on SVB from among those firms, employees, families and friends. 

Almost no American bank has nearly so concentrated a depositor base as SVB. First Republic Bank — same size as SVB with a heavy geographic overlap, but with a far more diversified depositor base by industry — fell heavily Friday and early Monday because of all the fear.

But then it stabilized then soared

Banks use deposits to fund long-term loans which fall in value when long-term interest rates rise — as they did from 2023’s rising inflation fears. 

SVB’s marginal balance sheet couldn’t take it as of last week.  Ironically, 10-year rates have just now fallen by 0.5% —actually now down a bit overall in 2023. SVB got caught in between. 

Most banks don’t because of their diverse depositor base. 

Big banks are in far better financial shape than small ones.

But, overall banks are close to the best condition, (measured by total loans relative to assets) in my 50-plus year professional investing career. 

Stocks are up this year as I expected but down since February.

There is lots I don’t know—like where stocks will be in 45 days.

I do know that once you get to bank failures, stocks are hugely higher two years later. 

(Ken Fisher)

 

Silicon Valley Bank Collapse May Actually Be Good for Stocks?

Throughout this week, I’ve been thinking about the collapse of the technology’s world premier banking institution – Silicon Valley Bank. And oddly enough, I‘ve come to the conclusion that it could be a very bullish signal for stocks.

In fact, the bank’s collapse may have marked the crescendo of the bear market. 

It really all boils down to one thing: SVB’s collapse was a “Goldilocks” crisis that will likely spark a Fed pivot without collapsing the economy. 

This is a serious-enough situation to illustrate that cracks are forming in the financial markets because of the Fed’s rate hikes. If the Fed keeps playing aggressive offense with the rate hikes, what happened at SVB can and will happen at lots of other banks. It may end up being an enormous financial contagion.  

But alone, SVB’s collapse is also not serious enough to cause a still-pretty-healthy U.S. economy to fall into a recession. 

SVB had total assets of $211 billion, almost all of which were centered around the startup tech world. Compare that to Bank of America’s (BAC) $3 trillion in assets across all sectors, and you’ll start to see why the SVB collapse was a wake-up call – not an economy-crusher. 

What happens next?

We think the Fed will heed this warning. It should slow its roll with rate hikes and likely pause this rate-hike campaign in either March or May. If that happens, the U.S. financial system will be resecured. The economy will re-stabilize. And stocks will likely burst into a new bull market. 

Indeed, this is exactly what happened in 1998.

Silicon Valley Bank Collapse: A Warning, Not a Death Sentence

A lot of folks are likening the Silicon Valley Bank collapse to Lehman’s failure in 2008. But in truth, it is much more like Long-Term Capital Management’s failure in 1998. 

Lehman Brothers had over $600 billion in assets when it failed. Its collapse wasn’t a wake-up call. It was an economy-crusher. 

But like SVB, LTCM only had between $100 billion to $200 billion in assets when it collapsed in 1998. That was a wake-up call. 

And the Fed listened. 

LTCM failed on September 22, 1998. A week later, the Fed cut interest rates. What was a slowing economy in 1998 turned into a booming economy in 1999. And what was a falling stock market in 1998 became an explosive stock market in 1999. Check out the chart below. 

History appears to be repeating here – at least, the bond market thinks so. 

The 2-year Treasury yield famously tracks the Fed Funds rate. It also famously doesn’t have much volatility. 

But the 2-year has collapsed by a dramatic 75 basis points over the past five days. That represents one of the most violent and drastic drops in the 2-year Treasury yield ever.

The historical precedent here is a Fed pivot.

Drastic Moves in the 2-Year Indicate a Soon-To-Be Dovish Fed

That is, since 1985, dramatic downward moves in the 2-year yield have always spurred dovish Fed action. 

Specifically, whenever the 2-year yield drops more than 50 basis points over a five-day stretch, the Fed has historically cut rates within weeks. 

Remember: The bond market is the biggest, most powerful market in the world. Today, it is giving us a huge signal that a Fed pivot is here. 

Why is a Fed pivot so bullish? 

Well, a Fed pivot from rate-hike cycles – otherwise known as a “Fed pause” – systematically sparks stock market rallies. 

The Final Word

Every single time the Fed has paused its rate-hike cycle in the past 40 years, stocks rallied over the next few months with returns often running north of 20%. 

In other words… 

Fed pauses systematically spark stock market rallies. And these pauses always follow 2-year yield plunges. The 2-year is plummeting right now because of financial contagion fears, which are high because of the Silicon Valley Bank collapse. 

Following that logic, SVB’s failure should lead to a big stock market rally, by creating sufficient financial contagion fears that push the Fed into ending its rate-hike campaign. 

Of course, if SVB were the second coming of Lehman Brothers, things would be different.

But we think that’s unlikely. Instead, it’s the second-coming of LTCM. After LTCM failed and the Fed played the part of “white knight” to save the day, the stock market soared into one of its most explosive eras ever. 

We think history is about to repeat. 

If so, it is time to buy the dip. 

(Luke Lango)

3 Reasons Why the Stock Market Is About to Skyrocket

Spoiler alert: While the markets are wavering thanks to a hawkish Fed, we’re still preparing for a massive bull market run… and I’ll tell you why.

Last week, stocks tested and bounced off of some critical technical levels. And we believe that was the start of a big short-term burst higher for stocks in March and April. Plus, we view this bounce as proof that the rally we’ve had off of the October 2022 lows is, in fact, the start of a new bull market. 

There are three elements to this bull thesis – fundamentals, technicals, and positioning. 

Let’s start with fundamentals.

A lot of people are worried about inflation, rate hikes, a slowing economy, and the 10-year Treasury yield climbing to 4%. But in reality, these trends are shifting course in a favorable direction. Though the decline is a choppy one, inflation is coming down. 

Demand and supply are normalizing to pre-pandemic levels. And with a slowing – but not dying – consumer and rate hikes from the Fed, this disinflation will likely continue into 2024 and ‘25. 

The Federal Reserve is a bit of a wild card here. However, it’s aware that inflation is falling and is likely to move forward with rate hikes at a slow and steady pace. Plus, the labor market is not weakening in a way that’s indicative of a collapse, so we’re confident that the Fed will be able to pull off a soft landing. 

It’s true that the equity risk premium (ERP) – the spread between the S&P 500’s forward earnings yield and the 10-year Treasury yield – is the lowest it’s been in several years. But given the stable string of recent earnings, today’s ERP is historically normal, and we’re confident that stocks are fairly valued. Earnings and P/E multiples suggest that stocks have room to rally over the next nine months.

Now to technicals:

Stocks held the 200-day moving average last week. They held the uptrend line from October 2022’s rally. And they bounced off the resistance line that acted as the ceiling for stocks during the 2022 bear market. Whenever stocks turn resistance to support, it means a trend reversal is underway. And they just turned a year-long resistance level into support – that is supremely bullish.

Every time stocks were in a bear market, then bounced above and stayed above the 200-day moving average for more than 20 to 30 days, the market went higher. And that’s exactly what we have today. 

And we can’t forget about the Triple Barrel buy signal we saw in January, with the Breakaway Momentum, Whaley Breadth Thrust, and the Triple 70 Breadth Thrust indicators. All three are ultra-rare and ultra-bullish – and all three flashed on the same day for the first time ever. 

Onto positioning:

From a positioning perspective, stocks are back to where they were at their October lows. That’s when the 10-year yield popped above 4%, when the futures market began pricing out rate cuts, and when inflation expectations were pretty hot. And that makes us bullish because the positioning of expectations are at levels that leave a lot of room for dovish surprises.

There’s a good chance that the data we receive in March and April surprises to the bullish side. And considering these expectations have swung to peak-bearishness while stocks are holding well-above their October lows, we think it’s yet another sign that we’ve arrived at a new bull market.

Rookie traders earning as much as $541,000 in Sydney

 SYDNEY – Graduate traders are earning salaries of as much as US$400,000 (S$541,000) straight out of school.

But this is not New York, London or Hong Kong. It is Sydney, where firms including Citadel Securities, IMC Trading and Optiver have established bases and hired rapidly, and plan to employ even more. Elite recruits with maths and science backgrounds can command up to that amount, people familiar with the matter said.

Sydney has become an unlikely Asia-Pacific hub for tech-driven trading companies, a part of finance that is bucking the global trend of layoffs and pay cuts. Observers say the city has attracted the high-paying roles, thanks to a university system that churns out candidates who adapt well to the business, favourable tax policies and a long history in the trading industry.

“Trading firms offer extraordinary grad salaries,” said Mr James Meade, head of employability at University of New South Wales (UNSW) Sydney, one of the country’s top universities. 

Over at Wall Street, bleak expectations for bank executive bonuses are proving true as a slump in dealmaking ends the industry’s war for talent and firms regain the upper hand in setting pay. Companies including Goldman Sachs and Citigroup are cutting staff. Technology giants such as Amazon.com and Microsoft are also eliminating thousands of jobs.

Only a fraction of graduates in Sydney start on US$400,000 salaries, and some of the market-makers do not pay that much. Wall Street banks, meanwhile, offer base wages of around US$100,000 to US$120,000 for an analyst, according to data from Wall Street Oasis.

Optiver pays as much as A$250,000 (S$223,000) plus bonus to a fresh quant researcher, according to jobs website Prosple. Most graduate programmes at trading firms in the city give salaries of more than A$200,000, said UNSW’s Mr Meade.

At Optiver, perks include gym memberships, massages and in-house chefs cooking free food. IMC added an in-house kitchen and a barista team in 2023.

The hiring spree is focused more on becoming a hub for regional markets than building capability for Australia itself, with the timezone proximity allowing traders to cover Japan, South Korea and other large Asian markets.

The market-making industry is booming globally, and companies are recruiting outside Australia too. It is possible to get similar salaries in some other markets, but what is different is that some of the firms have made Sydney their Asia-Pacific hubs, home to most of their regional employees.

IMC, which employs more than 1,300 people, has been in Sydney since 2002 and now counts the city as its Asia-Pacific headquarters. Around 90 per cent of its more than 300 employees in the region are based there. It is planning to add about 60 graduates in 2023 in trading and technology across Asia-Pacific, according to Mr Matthew Benney, acting managing director for Asia-Pacific.

While Citadel is boosting hiring in Sydney, Hong Kong remains its hub for Asia-Pacific. The American market-maker, founded by billionaire Ken Griffin, may increase headcount in Australia by 50 per cent to 100 per cent over the next two years, according to Mr Matt Culek, its chief operating officer. The company has more than 60 people in Sydney.

Optiver has most of its roughly 500 Asia-Pacific employees in the city. It has been hiring its biggest numbers of graduates and interns in the past few years, according to Mr Tristan Thompson, head of trading for Asia-Pacific. Still, growth in the region is fastest outside Australia, he said.

Sydney traces its roots in the computer-driven trading business back to the 1990s, when Australia’s stock exchange had one of the biggest options markets in Asia-Pacific, which helped entice firms to the city. Tax breaks on offshore trading revenues, which are in the process of being phased out, also contributed.

Sydney is also a major forex trading hub, and Macquarie Group, which is based in the city, has a longstanding trading business that helped its profits hit a record in 2022.

The market-making companies have benefited from a flow of maths, science and engineering graduates from the top universities, such as the University of Sydney, UNSW Sydney and the University of Melbourne. Traders say graduates hired from Australian schools excel at handling the kind of issues they face in the job.

Additionally, the city’s sunny weather, beautiful beaches and strong quality of life meant experienced traders were also happy to move there.

At Optiver, even the boss went surfing before work.

“My schedule was to get up quite early, be in the water around 6am,” said Mr Paul Hilgers, who was its global chief executive, now an investor and consultant. “Go home and grab a coffee, get on my scooter and ride over to the office. I still miss it.”

While Sydney is booming in market-making, it still lags behind other parts of Asia as a financial hub. It ranked 13th in the latest Global Financial Centres Index. Singapore and Hong Kong were third and fourth respectively. But Citadel’s Mr Culek says the city is on the rise. “Sydney is being viewed globally as a fantastic place to live and grow and build a career,” he said. BLOOMBERG

Rare Stock Indicators Show the Market Is About to Skyrocket

 

Back in January, the stock market did something it has never done before. And now, two months later, it could mean that stocks are ready to explode higher in a fashion they only do about once every 10 years. On the second Thursday of the year – Jan. 12 – the stock market fired off an unprecedented “Triple Barrel” buy signal.  That is, on that day, three major, ultra-rare, and ultra-predictive stock market breadth thrust signals were all triggered – the Breakaway Momentum, Whaley Breadth Thrust, and Triple 70 Thrust indicators. The Breakaway Momentum  indicator is triggered when the number of 10-day advancing stocks in the market exceeds the number of 10-day declining stocks by about 2-to-1. This is very rare and tends to only happen when bear markets are ending and bull markets are starting.   The Whaley Breadth Thrust indicator is triggered when the number of five-day advancing stocks in the market exceeds the number of five-day declining stocks by about 3-to-1. This, too, is very rare and tends to only happen when bear markets are ending and bull markets are starting.  And the Triple 70 Thrust  indicator is triggered when the percentage of rising stocks in the market exceeds 70% for three consecutive days. Likewise, this is also very rare. And it tends to only happen when bear markets are ending and new bull markets are starting.  All three ultra-rare, ultra-predictive “bear market ending” technical indicators flashed on the same day in the middle of January. Triple-Barrel Stock Indicators Preempt Mega Rallies That’s the first time ever that all three have flashed on the same day.  In the past, we’ve only had “Double Barrel” buy signals – instances where two signals were triggered on the same day. That has happened just seven times since World War II.  In all seven instances, the stock market was higher three, six, nine, and 12 months later.  But there’s a catch: The stock market always fell first before it soared into a new bull market.  That’s because, in order to trigger multiple ultra-powerful breadth thrust signals, you need a lot of buying power. When you have a lot of buying power, you tend to push stocks into near-term overbought territory. And when stocks jump into near-term overbought territory, they tend to pull back a little.  In each of the seven times since WWII that the stock market triggered a “Double Barrel” buy signal, stocks suffered a pullback of at least 2% over the subsequent two months. On average, those pullbacks were about 6%.  Every time, stocks bottomed after the short-term pullback, then rallied over the next month… the next 4 months… and the next 10 months.  In other words, history says you don’t want to buy stocks immediately after a Double or Triple Barrel buy signal is triggered. It’s best to buy two months after the signal is triggered – once stocks have had time to cool down and right before a big face-melting rally starts.  And that’s exactly where we are today.

The Final Word The stock market initially rallied after the Triple Barrel buy signal was triggered in mid-January. Then, it suffered a ~6% pullback in February. It bottomed in early March and is now rebounding from that selloff. This is buying time. This is typically when stocks bottom after a Double or Triple Barrel buy signal – about two months later and following a ~6% pullback. History says that from here, stocks will rally anywhere from ~10% to ~40% into January 2024.  Of course, if the stock market soars that much in 2023, certain individual stocks will rally much more than that.  For example, the S&P 500 is up only 5% so far in 2023. Yet, already this year, 125 different stocks have doubled. About 30 stocks have already tripled. Around 13 have already quadrupled. And a half dozen have already risen more than 5X.  (adapted from Luke Lango)

These Signals Point to a Major Stock-Market Recovery

Many investors have built up sizable cash positions owing to fears about inflation, rising interest rates, and recession. However, for those investors who are on the sidelines, we think that it is time to jump back in with both feet.

1. French and German stock markets are near record highs. Without question, Russia’s war in Ukraine has caused turmoil in European economies due to diminished deliveries of Russian natural gas and oil. However, Europe transitioned away from Russian energy faster than expected. To date, the German DAX Index has rallied 29% off its low and is within 5% of its record high. France’s CAC 40 Index is up 23% from its low and is trading within 1% of its record high. Even the United Kingdom, where four-decade-high inflation has triggered labor unrest, is seeing higher stock prices. The London FTSE 100 Index hit an record high on Feb. 16.

2. The stock market has already discounted a small profits shortfall. Golden Eagle’s research shows that there tends to be a correlation between the magnitude of profits decline and index decline in bear markets. During 2008, the S&P 500 Index declined 39% while S&P profits dropped 40%. Last year, the S&P dropped 19% despite corporate profits increasing an estimated 6% last year. Therefore, we think that the 23% peak-to-trough decline by the S&P 500 Index from January through September has adequately discounted a possible profits shortfall in 2023.

3. The U.S. Federal Reserve has more room to raise interest rates. Despite periodic interruptions, the economy has steadily grown over the past half-century with long Treasury bonds yielding 7% on average over the past 50 years. Currently, long bonds are yielding 3.8% and 90-day T-bills 4.7%, so there is still room for the Fed to move rates higher before reaching a level that could throw the economy into reverse. Further, the consumer price index has receded from its peak of 9.1% in June to 6.4% in January. History tells us that the economy can grow with interest rates at current levels, and even at somewhat higher levels. 

4. U.S. market averages are quietly advancing. The stock market surprised many investors with a strong start in January. The Dow index briefly moved into bull market territory on Jan. 13, marking a gain of 20% off its bottom. The NASDAQ Composite was up 11% and the S&P 500 Index gained 6%. Both indexes rallied further in early February.

Current economic forecasts predict recession in the first half of this year followed by a strengthening of the world economy in late 2023 or early 2024. The S&P 500 index is one of 10 leading indicators tracked monthly by the Conference Board. History shows that the S&P index typically leads the turn in the economy (up or down) by 3 to 11 months, which dovetails nicely with our case that a bull market has begun.

5. New highs now exceed new lows. Golden Eagle collects daily data on 52-week new highs and lows to stay abreast of stock market trends. On Jan. 12, 2022, the daily list of new lows started to dramatically outnumber new highs, which continued until year end. This indicator ran parallel to the market decline throughout last year. Thus far in 2023, the number of 52-week new highs has exceeded the number of new lows every day. Rarely if ever does the market go down when new highs are exceeding new lows.

6. This indicator signaled a new bull market. A bullish signal occurs when the S&P 500 50-day moving average crosses over the 200-day moving average. A bearish signal is indicated by a reverse movement of these two averages. The bearish signal referred to as the “death cross” took place in December 2021, before the start of the bear market on Jan. 3, 2022. Earlier this month, the 50-day crossed over into the 200-day, forming a “golden cross” which augurs for a higher stock market in the months ahead. 

7. The January stock effect looks promising. The performance of the S&P 500 index in January often presages how the stock market will perform for the year. Since 1960, the direction of stock movements in January has correlated with the direction of the stock market for the entire year 70% of the time. The S&P 500 Index advanced 6% in January, implying that a good year for the stock market is likely in 2023.

Never before have we seen so many signals coalesce for a major stock market recovery. A major market recovery is likely underway.

(article from Barrons published on 24 Feb 2023)