LD
Magnificent 7, is now the Super 6, and on the way to the Fantastic 5, then there were 4
We’ve had a sideways price action for the S&P 500 for months, and the first few weeks of April we slid into a mini-correction. More specifically, according to Gabriella Santos, JPM Asset Management CIO, on CNBC TV, “We had 279 days without a 2% pullback, these last 3 weeks had to happen”. This resonated with me, I was calling for a 5% to 7% correction in March, as well, thinking that at that point there would be a macroeconomic piece of data that would “shake the tree” somewhat. March came and went and still no sell-off, I came to accept the sideways action as a form of correction.
Higher inflation wasn’t a problem until it was
Market commentators regarded the strong inflation numbers of January and February as just seasonal. March inflationary numbers made it 3 months, and 3 times is a trend, so market participants sold stocks in the first half of April.
This week started strong, with Monday and Tuesday showing gains and Wednesday remaining flat. Yet, this Thursday, April 25, we had another swoon with the news that Q1 GDP was unexpectedly low at 1.6%. This in turn started murmurings of the dreaded “stagflation” and that there would be no rate cuts this year. The market sold off hard, and then something strange and wonderful happened, we started to rally.
Even though we ended down that day in my opinion, the unspoken consensus was that if Friday’s PCE numbers were in line, we should rally again. We did continue to rally, but why? That GDP number was the first release and is notoriously subject to change. Upon closer examination of the GDP components, consumer spending remained strong, and business investment in intellectual property and equipment was strong as well. Imports were a drag on GDP. Our dollar is high compared to most currencies, making our products less competitive, and inventories were lower.
The key takeaway here is that if businesses were investing and the consumer was strong, the low topline number was less important and likely to be revised later, so the market rallied. Earnings were the real savior with almost 50% of the earnings reported, 4 out 5 companies beating expectations. The S&P 500 responded with a 2.7% jump for the week, the best showing since November. The Nasdaq also had the best week since November, rallying +4.2%. All good.
What now? Why expect a sell-off next week, and why buy it?
This week will arguably be the most consequential in the last 4 weeks. We all should know by now that the market hates the unknown. The big unknown here is what Jay Powell and the Fed Presidents decide during the FOMC Meeting. It is this week on the last day of April and the Fed announcement starts the first day of May, with Powell speaking at 2 pm. We already had a more hawkish Powell saying “There is no hurry to cut rates”.
What more can he say? He can say no cuts until 2025, or he can reiterate watchful waiting. What I think traders most fear is putting rate hikes back on the table. I give a very low probability of that happening, just the nagging fear of the return of the “Jackson Hole” Powell super hawkish rhetoric. I’m referring to August 2022, when the market was rallying on the mistaken notion that the Fed was ready to cut rates. Powell then said they are working for 2% inflation 2 means 2, and that he is willing to put the economy into recession to get there. He even said that there could be pain. Now I don’t expect any of this, I am just saying that the fear of the unknown could engender a bearish mood going into Wednesday at 2 PM.
Technically, it will be hard to go higher because the S&P 500 is about to meet overhead resistance at 5150. Here is the 3-month chart from Yahoo.com for the actual S&P 500 index.
Yahoo Finance
The overhead resistance starts at about 5120 but gets stronger at around 5150. So further gains might be capped, especially as it’s the first time market participants have approached this level since the selloff. Remember that the chart is about price, there are a lot of people who bought at the top and would happily sell out if the prices approached what they paid for it.
Remember that the S&P 500 ETF (SPY) and other similar ETFs follow the S&P 500, so there are actual forces exerted on the entire market. When enough people buy or sell the SPY, it moves all the stock. If there is overhead resistance – meaning a lot of sellers’ overhead, and general fear of what Powell might say, I think the indexes could give up much of last week’s gains.
Why buy, why not cash out and stay out?
Right about now you are probably saying in your head “Sell in May and go away” that old Wall Street saw. I think this sell-off is a buying opportunity because the earnings reports are coming in better than good. Some report great results but sold off, like Meta Platforms (META) but I think that they will regain most of what was lost. More about that later.
Earnings this week are going to be nearly as big as last week, and the good news will continue. This will lift stocks, also and this is the most important, Powell doesn’t need to be super hawkish the 10-year bond and 5-year note are climbing and are presumed to tighten credit. He doesn’t need to be “Jackson Hole” Powell, he has to walk a fine line here. He doesn’t want to upset the bond market.
What Mr. Powell wants more than anything is to slay inflation while keeping the economy growing. If he pulls off having a growing economy and low inflation, he will take his place as one of the greatest Fed Heads in US financial history. It would be easy to kill inflation by killing the economy, but then he would miss his dual mandate of low inflation and full employment. No, he is going to thread the needle, perhaps reiterate the same language as last week. This won’t roil the market because we heard it all already. Also, he could play down the inflation numbers because we’ve come down a lot, and it could take time for inflation to get back to 2%. This isn’t a problem unless inflation expectation rises significantly.
Most of the price rise is in services, which means the consumer is strong. However, productivity is strong, meaning higher salaries can be met without raising costs too much. Take General Motors (GM) for example, when the UAW strike was concluded, the narrative was that UAW got the better of GM. Instead of labor costs hurting profits, GM had a great earnings report last week.
That happened because GM found ways to be more efficient and lower costs elsewhere, selling more truck helped. I’m digressing, but Powell has access to all the numbers and last week’s rhetoric as hawkish as it didn’t take rate cuts for 2024 off the table. He will say “that they will follow the data and be patient, and there’s no hurry to cut rates”.
I think there will be a very nice relief rally starting Wednesday and Thursday. Friday, we have March employment, so I am going to go out on a limb and say that it will be strong, I think the low GDP will make having strong employment welcome. So traders should buy the dip and investors, as well as traders, should take a look at some big tech and tech adjacent stocks.
I mentioned META, I am not sure it is ready to trade yet, but I started adding META to my investment account. I think Mark Zuckerberg is one of the savviest operators out there, and he’s a founder who has managed META through many difficult situations. META is also one of the few corporations making use of generative AI for their operations. Everyone was disappointed with spending on the Metaverse, I think Zuckerberg at this point will figure it out. He still has many levers to pull to wring more advertising dollars out of Instagram, and reels.
Let’s not forget that TikTok will be out of the US in about a year. A lot of the influencers and users will move to Instagram. Another stock that is tech adjacent that I haven’t invested in but looking at intently is Netflix (NFLX). It sold off because they announced that at some point they are going to move away from publishing subscriber growth. It’s only logical because their new growth driver is going to be ad-supported content. With my thought that selling pressure is going to start up mid-next week, I might add NFLX equity if it falls far enough.
I would also look at Alphabet (GOOGL) which had an excellent earnings report. If that name sells off somewhat, I think that I will look to add the equity to my investment account. Amazon (AMZN) reports its earnings on Tuesday after the market closes, it might sell off on Wednesday, and I would be inclined to take some equity for my investment account.
Why am I focused on Big Cap tech? I believe they have sold off enough to make it worth gathering some shares opportunistically. Last week in my previous column –Nvidia Down 10%, Time To Buy Tech I bought some Nvidia (NVDA) equity, and I am still looking to add if it sells off again, I also got long Call options using the NVDA 2X ETF (NVDL). It’s a lower share price, so I can add more call options without heightening my risk so much. I don’t need a big justification for wanting to add equity in META, NFLX, GOOGL, AMZN, and NVDA. These are great names, and I am adding them to my investment portfolio very incrementally. There’s no rush in investing, do so gradually and dollar cost average. I believe that the market wants to go higher, so I’m taking this opportunity to pick up some of the greatest stocks in the US.
What about my trading?
Monday morning should still have buyers coming in, I will lighten up positions to generate cash and wait until Wednesday just before 2 pm to decide what to buy. I will take a half position before and half after. There could be knee-jerk selling after Powell speaks, even if he repeats what he said before. If the market takes Powell’s messaging positively, I might just hold the half position, preserve the cash and see what happens on Friday with the April employment readout.
