Time to revisit my 5 -year strategy in light of all that’s happened in the last month or so. I’m going to start that revision with what’s changed, and what’s going to happen, and then 10 bullet points on changes to my strategy.
I just added Move #4 to this Special Report today, November 1. I’ve added it to the full report that you can find in the Special Reports section of the site. Move #4: Change your Bear Market rally selling strategy now that the rally has moved to a new stage with industrial stocks leading the way and technology shares lagging. To me, it looks like leadership has shifted in this rally in the last week or so of October.
Today I posted my one-hundred-ninety-eighth YouTube video: Trend of the Week Buybacks Fuel This Rally. This week’s Trend of the Week: Buybacks Fuel This Rally. We’re just coming out of an informal “blackout” season where about 90% of companies don’t announce any buybacks as they get closer to earning season. For most companies, that blackout ends in November. This year, stock buybacks are running at a record rate. In the first 10 months of the year, there were about $1 trillion worth of buybacks, up about 8% year-to-year. We’re going into November with buyback wind in our sales at a time when companies are sitting on a lot of cash. Plus this is the time to do a buyback if a company wants to get ahead of the 1% tax hike on buybacks starting in January. As long as we don’t run into a big extraneous event, (like a flare-up in US-China tensions), I think buybacks will keep the rally going until the end of the year.
Today, Monday, October 31, it’s Morgan Stanley strategist Michael Wilson, who until recently was a Bear, joining the “the Fed is about to pause or end its interest rate increases” camp. Indicators including the inversion of the yield curve between 10-year and three-month Treasuries “all support a Fed pivot sooner rather than later,” Wilson wrote to clients today. “Therefore, this week’s Fed meeting is critical for the rally to continue, pause or even end completely.”
The Fed is widely expected to raise its short-term benchmark interest rate by 75 basis points–to a range of 3.75% to 4.00%–at its Wednesday meeting. The CEM FedWatch Tool, which uses prices in the Fed Funds Futures market to calculate the odds of a Fed move, put the odds of a 75 basis point increase at 86% today, up from 82.2% on Friday. The remaining sentiment is betting on a 50 basis point increase. No one is expecting just a 25 basis point increase.
Bad earnings news from Alphabet (GOOG), Amazon (AMZN), Microsoft (MSFT), and (really bad news) Meta Platforms (META) this week, and yet, and yet stocks, even technology stocks are up strongly, very strongly, today. The Standard & Poor’s 500 finished the day ahead 2.46%. The Dow Jones Industrial Average was higher by 2.51%. The small-cap Russell 2000 gained 2.20%. And the technology=heavy NASDAQ Composite and the NASDAQ 100 added 32.87% and 3.17%, respectively. In the short run it can be extremely difficult to net out the forces pushes stocks higher and lower. Right now we have higher interest rates from the Federal Reserve, continued signs of a slowing economy, and slower earnings growth pushing stocks lower. Pushing stocks higher are hopes that the Fed will end its most aggressive interest rate increases soon, the speculative possibility that the U.S. economy might dodge a recession, and a flood of money in the hands of money managers who think they might be able to end the year on an up note because stocks have been punished enough in the short run.
At the moment, based on the market’s rally before tech earnings and the strong bounce today shaking off really negative earnings news from some of the market’s biggest stocks, I’d say that money talks. And that this rally looks set to continue, maybe even until the end of the year, simply because money managers are going to throw money at “bargain” stocks.
What now? I’ve been working to play defense in this Bear Market before there was even a Bear Market. Back in December, I added a drug stock, Bristol Myers Squibb (BMY) to my Jubak Picks Portfolio because it looked like Big Pharma was getting dollars from investors and traders looking for safe havens.
In February I added oil and natural gas, ahead of the Russian invasion of Ukraine. And since then I’ve added ETFs that track agricultural commodities. An ETF based on the U.S. dollar. And inverse ETFs that are designed to go up when prices in emerging markets or the small-cap sector of the U.S.market do down. And, of course, I’ve been selling: early on consumer stocks that looked vulnerable to inflation and recession and more recently technology stocks with exposure to China and the U.S./China trade war. But WHAT NOW? Here’s where I see investors and the market to be right now.
After the close today, October 18, Netflix (NFLX) reported fiscal third-quarter earnings that beat Wall Street projections and added far more subscribers than analysts had expected. After falling 1.73% in the regular session, the stock added 14.02% in after-hours trading.
My one-hundredth-ninety-second YouTube video “A Bounce to a Rally” went up today. To turn a bounce into a bear market rally, we need two things- but before we get to that, let’s look a bit closer at this latest bounce we’re seeing in the markets. The S&P was up on Monday by 2.59%, the Dow climbed 2.66%, and the Nasdaq rose 2.27%. On Tuesday the S&P 500 gained 3.06%, the Dow 2.80%, and the NASDAQ 3.34%. Bonds are down again and 10 Year Treasuries, which had risen to nearly 4% last week, were down to 3.5% Tuesday. How do we turn this bounce of a couple of days, into a longer-term Bear Market rally that could go as far as the end of the year? Well, we need two things. Number one: we need good news – that is bad news – for the jobs number coming out on Friday. In August, unemployment moved up to about a 3.7% rate from 3.5% in July and if that trend continues, I think Wall Street will fall back on its favorite theory that the Fed will stop raising rates and therefore Buy stocks and bonds! The second thing we need is good inflation numbers, or at the very least, a continuation of a downward trend of headline inflation, leading investors to believe the Fed has inflation under control and will therefore stop raising rates. I think that belief is wrong, but that logic may lead us into a bear market rally until 2023.
One of the oddest things about yesterday’s reaction to news from the Federal Reserve of a 75 basis point increase in interest rates was that the market initially rallied. Yesterday, September 21, from 3801 at 10:25 a.m.New York time, the Standard & Poor’s 500 moved up to 3895 at 2:40 p.m. right after the Fed released its news. And, then, markets began a retreat with the S&P 500 closing down 1.71% on the day. It’s almost like the markets constructed one story–relatively positive–in the immediate aftermath of the news. And, then, upon further consideration, built a different much less positive story to the close of the day. Make that “exactly” instead of “almost like.”
I think investors and, more especially traders, should be looking for another Bear market rally to begin after the Federal Reserve’s September 21 meeting. How confident am I on this call? Nothing is ever guaranteed in the financial markets, of course, but I’d give this scenario better than 75% odds of being correct. Here’s the setup behind this call and why I’m so confident.
As the market action today, September 2, illustrates there’s still a lot of money out there that believes (or hopes) that the Federal Reserve won’t raise interest rates as aggressively as it has recently telegraphed; that the September rate increase is likely to be 50 and not 75 basis points, and that the Fed will be back in interest rate cutting mode by the second half of 2023. That belief, bolstered weakly in my opinion, by this morning’s August jobs number was enough to send the Standard & Poor’s 500 up 13% in early traded. The market had second thoughts this afternoon and the S&P finished down 1.07%. But stocks would like to rally from here. And I think the likely short-term move, after a couple of weeks of choppy trading, is likely to be up after the Fed’s September 21 interest rate decision. Why?
The Standard & Poor’s 500 fell 1.29% at the close today, August 19. The NASDAQ Composite dropped 2.01%. The small-cap Russell 2000 lost 2.17. The drop in the S&P was the biggest daily decline since June and it took that index to its first weekly loss in five years. The CBOE S&P 500 Volatility Index (VIX) rose 5.32% to move back above 20. It’s tempting to say, Hey, it’s a Friday in August and everyone is at the beach. But I think there’s more going on here than just typical selling before a weekend.
