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Did The Fed Just Trigger A Market Correction?


I just started reading the Jonathan Swift classic, Gulliver’s Travels’, along with my granddaughter. And considering the pace at which things are being banned nowadays, this might be our last chance.

The book has its controversy, including a constant analysis of its main message. Some say this is a direct rebuttal to Daniel Defoe’s Robinson Crusoe that celebrates the capabilities of man and the importance of the individual.

(When I say “some,” I mean Wikipedia.)

For my granddaughter, it’s just one great adventure that matches her swashbuckling style. She’s a smart, fearless girl. Yesterday, I thought about the book and several illustrations while I watched the NASDAQ Composite come tumbling down.

The Mighty Tied Down

I’m not big into stuff like the NASDAQ has lost all its gains since the start of the year. Unless January l, 2021 was the first day you started investing or trading, it’s an irreverent stat  (it does sound intriguing when it’s on the teleprompter).  If you are a buy-and-hold investor, this dip is par for the course. Going back even one year, the index is still sporting hefty gains.

NASDAQ Gains:

  • 1 year: +41.1%
  • 3-year gain: +68.3%
  • 5-year gain: +170.0%

But the pace of the index has fallen, and it is frustrating. There have been giant chunks snatched out of the hottest names, erasing months of gains in a blink of an eye.

Cathartic Correction?

The folks at Bespoke Research put out a great table yesterday, covering 10% of corrections in the NASDAQ going back to 2009.  There have been so many in that time frame, it underscores how ordinary such moves had become, and how quickly the index bounces back. 

Highlight

It took only 20 days to swoon 10%, the second-fastest after the stumble in October 2011. 

Once hitting a 20% decline, the duration of down days thereafter is usually short-lived. (2018 saw 61 additional days of weakness, as Powell pressured the market with verbal miscues and rate hikes.)

Of the twelve corrections, seven saw a further decline of 2.0% or less.

To see the chart, click here.

Above It All

I believe there have to be extenuating circumstances for the selloff to become more dramatic. However, I believe Jerome Powell has to be the source of a course correction. As I feared, he was too cool yesterday – perhaps the Federal Reserve Chairman is Gulliver. 

He’s been cool as a cucumber, and even the little people scramble for cover and prepare for the worst.  

We are combing through our entire universe of names. A focus on creating a new, fresh buy list, especially in beaten-down Technology names, where nothing has changed except the temperament of the shareholders.

The top twenty winners on the NASDAQ are now seeing an average gain of 91%, down from an average gain of 145% a month ago. 

Technical View

The NASDAQ has plowed through the bottom of the trading range and 50-day moving average closing at a formerly pivotal number that was key resistance and support.

There are two potential support points from here:

  • 11,600 200-day moving average
  • 11,099 major support points

Market Breadth

It’s no surprise market breadth was abysmal, and the big red flag was all of a sudden. There are more new lows than new highs on the NASDAQ. Record ratios of highs to lows have been erased.

Market Breadth

NYSE

NASDAQ

Advancing

697

614

Declining

2,593

3,522

52 Week High

159

200

52 Week Low

154

311

Up Volume

2.09B

1.50B

Down Volume

4.57B

5.98B

 

Cool Breeze

So, Jerome Powell says he doesn’t just focus on the ten-year yield, and he will not get hot under the collar until things get crazier. His exact words: “would be concerned by disorderly market conditions.”  Well, yesterday was seriously disorienting and the stock market can accommodate if Powell needs more to consider.

Portfolio Approach

There is no action in the Hot Model Portfolio – cash at an elevated level of 15%.

Today’s Session

Private Sector Employment Trends

The street was looking for 212,000 jobs in the February employment report instead it got 379,000 paced by the private sector, which generated 465,000 jobs.

Huge +513,000 moves in the service sector:

  • Leisure +355,000
  • Retail +41,000
  • Temporary +52,700

Disappointing, the goods producing number, -48,000:

  • Construction -61,000 (harsh weather had major impact)

To see the chart, click here.

The big beat on the jobs report put an extra bounce into the ten-year yield, pushing it to 1.63% before backing down to 1.61%



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