Sold Small & Mid Cap Indexes 221119

Friday I sold the remainder of my Small and Mid Cap Indexes.  Markets have done extremely well over the past month, as investor sentiment is rising on hopes the Fed will pivot on raising interest rates and that China will ease its Zero Covid policy.

Euphoric investors believe that the declining economic data will cause the Fed to ease.  I believe the declining economic data is…evidence of a declining economy.  That’s the Fed’s explicit intent.  I was optimistic that the Fed could engineer a “soft landing” as long as their terminal interest rate was below 4%.  But that’s no longer the case.  Their words and actions are now supportive of an extremely restrictive rate in excess of 5%.  So until the unemployment rate gets high enough to squelch wage inflation, I think the Fed will likely remain obstructive.  (Side note- the UK is officially in a recession, yet monetary & fiscal policy is TIGHTENING not easing.)

As to the relaxing of Zero Covid policies and a reopening of the Chinese economy, much of that hope is based on a smiling and maskless President Xi at the recent G20 meeting.  And yet, while Chinese stocks are rebounding, I can’t help but wonder why Oil is dropping if the world’s second largest economy is on the brink of an expansive reopening.

As the attached chart indicates, the magnitude of Market volatility isn’t rising (suggesting investors haven’t yet capitulated during selloffs) but the lower threshold of volatility is increasing.  All the while, during this run up, the S&P 500 still managed to fail this week at its 200 day moving average.  That’s the third 200dma failure this year, the others were in August and April.  Each of those failures precipitated a 17%+ selloff that resulted in a lower low.    

In April and August I was confident that a sustained rebound could occur because the economy was strong and the Fed’s terminal rates were projected at 3.25% and 3.75%, respectively.  Today the outlook is much less bright, economic conditions are deteriorating and the terminal rate is escalating to 5.25%. 

So is an economic collapse imminent?  NO!  The Establishment casino dealers are simply reshuffling the economic deck of cards and a new hand will soon be dealt.  Opportunities abound.  [ Yes the casino reference is a subliminal message…where will you be on April Fool’s Day 2023? ]

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Taking advantage of the Election rally 221108

Today I took advantage of the Election rally to sell half of my Small & Mid Cap indexes.  There might be a Santa Clause rally but as I previously mentioned, I’m concerned about the Fed’s overreach with a terminal target rate of above 5%.  While my favorite form of government is Stalemate, I don’t think that will trump a heavy handed Federal Reserve. 

So for now, I’ll park my money in a nice safe cash equivalent money market fund and wait to see if this Market goes up, down or sideways.  Speaking of which, last month’s scary chart showing correlation with the 2008 Financial Crisis is continuing to play out.  We just need an “event” to precipitate the crash. 

I’m not very creative, so this isn’t much of a black swan, since it already occurred in 2011 & 2013 when the USA’s credit worthiness was downgraded…but imagine a world if you will, where in the Spring of 2023 the Federal debt exceeds $31.4T and the Congressional Republicans refuse to raise the debt ceiling.

My apologies to the podcast audience…I’m extremely busy and have an unrelenting travel schedule.  New content will be posted soon, along with a much overdo video from the final phase of the 2022 Post-Pandemic road trip.

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Fed keeps raising the bar on restrictive rates 221103

Yesterday at the FOMC press conference Fed Chairman Jay Powell said, “The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive.”

Of course the real question to investors is, how high can rates go before something in the global economy breaks?

The Fed’s plan is to orchestrate a soft landing by creating just enough unemployment to curtail wage inflation.  They’ll likely keep tightening until that goal is reached or until they unintentionally throw the economy into a deep recession. 

For pragmatic patient investors the outcome will be the same- the opportunity to buy quality profitable companies at a discounted stock price.

My recommendation is to not get caught up in the speculation of where rates are headed.  The Fed doesn’t know.  They can’t predict the future any more accurately than anyone else.  They’re simply reacting to economic realities.  Note the below chart which illustrates how frequent and variable their “target” changes.

So for now, just patiently mark time.  Wait for opportunities to present themselves.

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Are we entering a Range Bound Stock Market? 221029

Yesterday I used the continuing Market rebound to sell more stocks.  Given the escalating situation in Ukraine, I think raising a majority cash position is prudent.  My holdings have been narrowed down to Small/Mid Cap Indexes, Energy, and a few dogs & cats.

So am I preparing for more downside?  The September lower double dip definitely raised the probably of an extended Market crash; however, I believe a long term range bound Market is even more probable.

Today’s energy induced inflation can be comparable to the economic situation of the 1970s Arab Oil Embargo.  But I also see a stronger parallel to the immediate post-WWII years of 1946-1950.  Then as now, government debt was extreme; interest rates were rising from a bottom of near zero; inflation was escalating due to wage inflation & pent up consumer demand; unemployment was low; and there were excruciating supply chain disruptions (wartime production was being converted back to making consumer products). 

During those years, the stock market traded in a tight range of about 20%, with high volatility switchbacks between the upper and lower boundaries.  It never “crashed” but instead vacillated around its long term moving average. Nor did it rocket to a new record high, instead it stagnated, remaining about 15% below its previous high.

Range bound markets are poor performers for buy & hold strategies, but they can be very profitable for active swing trading.  Of course, the $64,000 question is always, “what are the boundaries?”

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Sold Aerospace & Defense stocks 221025

The Market continues to recover.  The S&P 500 is trying to get above significant resistance at the convergence of several key levels- 50dma, 100dma, & June horizontal midpoint.  The Market’s moving up as move companies report positive earnings, corporate profits remain stable.

I’m using today’s bounce to further my move to cash.  I’ve sold all my Aerospace & Defense related stocks.  While they could go higher with unrelenting geopolitical concerns, I don’t like the way they’re behaving during this week’s earnings releases.

The ITA Aerospace & Defense ETF is hesitating near the resistance level where it failed last month.  I’m concerned the sector might be stalling because in the wake of importance earning announcements, today the sector is underperforming the other Indexes.  It’s done extremely well in the past month, and with the abrupt daily Market switchbacks, I’d like to hold onto any gains.

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