Like a lot of investors, I’m loving the way battered positions have started rebounding from the depths. But is this a bullish return to normal or just another head fake?
We’ll find out. In the meantime, we trade the market we have . . . and unless the mood itself collapses, the signals point up.
After all, the bears are running low on walls of worry to raise in our way. While there are plenty of negative factors weighing on the market, all of them put together haven’t been able to do more than slow stocks down.
Yesterday made a great test of this. Jay Powell from the Fed touched a raw nerve with his hawkish stance, warning investors that interest rates might climb ahead of schedule.
And investors who had been conditioned to dread any hint of higher interest rates instinctively recoiled . . . but today you can’t even tell.
All the major indices held technical support. They’re back on the rise today.
We’re still taking the Fed seriously. Bond yields are climbing to give Powell more room to tighten.
It’s just that after a year of flinching from bond yields, investors have learned to take it in stride. The prospect of something going apocalyptically wrong as the zero-rate era ended no longer has the same power to scare us.
Think of any horror movie. We go in without much sense of where the surprises are or which characters will survive. But by the time it’s over, repeat viewings just won’t be as shocking.
Wall Street always learns to cope with every shock. That’s happened to the Fed. While there might be short-term “tightening tantrums” like yesterday ahead, I suspect they’ll decrease in frequency and impact.
We know interest rates are climbing. And everyone knows they haven’t choked the market yet. People who said bond yields climbing past 1.5% . . . or 1.7% . . . or 2.0% . . . would be apocalyptic look a little unsophisticated now.
I’m not blaming them. We didn’t know how the movie would end. But now that we do, it’s time to trade the world we live in, because it isn’t ending any time soon.
This is part of what “technical support” means. It’s a way to express in statistical terms just how low the market mood can get, given the factors in play at the moment.
It’s an effective floor. Bad news can change the mood and break the floor, but unless truly unexpected bad news emerges, the floor is more likely to hold than crack.
The S&P 500 lost support in mid-January, around the time it became clear that higher interest rates were inevitable. War erupting in Europe and the following oil shock kept it down after that.
When a support level collapses, it closes up again above us like ice, becoming a ceiling that’s more difficult to rise through. We call it resistance.
Resistance cracked on Friday and turned into support. Yesterday tested that fragile new floor, but it held.
Today confirms that we have a technical floor beneath our feet and nothing but blue sky to chase above us until the market is back in record territory.
As of today, that’s true of the NASDAQ as well. Those stocks lived out the horror movie of rising interest rates first hand. For a year, people got into the habit of telling themselves that valuations on this side of the market were unsustainable in anything less forgiving than a zero-rate world.
And that’s true in some cases. Stocks that surfed the Fed’s free COVID money have gotten ahead of themselves and won’t deserve to test their own records until their fundamentals catch up.
But on the whole, there are once again bargains in Silicon Valley, provided you have the right perspective.
If you’re looking for instant gratification, you might not be able to squeeze more than 10-20% from the swings. While that’s enough for most practical traders. it’s not really going to pay off for a buy-and-hold strategy any time soon.
The direction is clear. But when the initial rush of relief fades, the rally will slow from its current surge into something more like the gentle “drift” that prevailed after the 2008 crash.
In that kind of world, it’s critical to own stocks that have what it takes to outperform. Back then, inflation wasn’t a factor. Now it is.
A gentle drift doesn’t cut it any more. That’s why I’m looking beyond traditional technology stocks to areas of the market that can rally in the coming year and beyond.
I have to say energy stocks still look cheap relative to their near-term earnings potential. People haven’t figured out just how battered this sector got in the pandemic.
Now here we are, in a world where $110 oil doesn’t even make the market flinch. Oil shock is baked into the market mood now. We know how this horror movie plays out.
And there are opportunities here. Keep your eyes open.