Stocks Need an Apple Today, but Fear Flat Yield Curve

It’s well known that inflation is running red hot and that the Fed has finally begun taking away the stimulus punch bowl, bowing to months of outrage by politicians and financial professionals. Stocks love free money that our Government and Federal Reserve Bank supplied like confetti during a never ending New Year celebration over hte past 22 months. However, after a stunning 120% gain in the benchmark SP 500 Index in less than 2 years and 39 year highs for inflation, investors are somehow surprised by a lack of further Fiscal handouts and the new trend toward monetary tightening by the Fed that has sent the Tech heavy Nasdaq (QQQ) down 18%. Many rapidly growing tech stock darlings are down 50%. Our advice to raise cash and shift away from technology holdings in portfolios was based in part upon the widely expected flattening of the yield curve during a shift to higher interest rates to fight inflation. Debt heavy, profit poor tech companies are hurt most by higher borrowing costs. The Yield curve, measuring the spread between longer term bond yields and shorter term maturities is often viewed by the popular 10 Year Treasury yield minus the 2 Year. An increasingly upward sloping yield curve, where short term rates remain lower vs long term rates, supports higher trending stocks on the back of cheap borrowing costs. The converse is unfortunately just as valid, where more rapidly rising short term rates cause stocks to fall. When true Quantitative Easing (QE) first began in 2008, there were several periods that ensued when the Fed reversed course and pressured short term rates higher with a rapid flattening of the yield curve. When this occurred in 2010, 2011 and 2012, the stock market, led by tech, corrected 13 to 18% each time (see chart).

In the current January stock market correction, during a period of yield curve flattening, the QQQ’s have fallen 18% at their lows from record highs last November. Stocks are anticipatory mechanisms valuing stock on future expectations, not recent growth metrics. While the unanimous expectation of the first official rate hike of this cycle should begin in March, money managers have already priced in at least 4 rate hikes and possibly 7 over the next year. This indicates the broad stock market is in a germinal phase of bottoming this quarter. Should the current January lows be taken out, then there could be one last leg lower to wash out weak hands and establish a stronger trading range bottom later in the first quarter (Q1).

The vast majority of indicators we follow signal oversold Buy levels this week based upon a typical 10% stock market correction. Hedge Funds and automated algorithmic models can irrationally trigger a short term panic down to the next zone in the 3,900’s basis the S&P 500 Index, but for now it appears that our Seasonal low projected for the final week of January (now) has provided a zone to begin converting investable cash back into equities. One interesting clue to track is the action of market leaders Apple and Microsoft. These are the two most valuable companies on the planet with a combined value of about $5 Trillion today. These stocks by themselves propped up a weak technology sector and the market in general despite clear signs of underlying broad market deterioration for the past several months. Both of these behemoths reported earnings this week and like many other tech stocks, the numbers were amazingly strong, beating consensus expectations while providing excellent forward guidance. Double digit revenue and earnings growth across most segments of their operations is astounding for companies of their size, but it’s also Bullish during a period of slowing economic growth rates in China and globally. These restrained consumption patterns abroad should become tailwinds later this year. The short term clues, as outlined in the chart below, indicate levels to watch to support a breakout from the bottom for the market as well as price supports that must hold to keep the market from falling another octave lower. These stocks should hold their post news overnight price jumps if the markt is finally in a mood to reward good news. Afterall, if Apple and Microsoft can’t respond to stellar Bullish news in a positive manner, what hope is there for the rest of the stock market universe? This is only day 1 since Apple reported, but so far so good. If Apple can hold its gains and Microsoft can clear 308, then we should have a green light signal for a short term breakout over the next couple of weeks for the broader markets. No record highs are expected in February/March at this juncture and should the support levels outlined break down, then we are likely starting one more panic wave down as hedge funds run algorithmic “stop limit orders ” near recent market price lows.

The path ahead for stocks is always full of recondite clues, but our ExecSpec sentiment oscillators (below) also concur that a short to medium term low is in here or very close in time.

In our previous reports this month we highlighted the 10% correction level and 200 day moving average (dma) as likely magnets to attract lower stock prices. We also observed that these levels would become quite popular and that weak hands would need to be cleared out by a brief plunge below these levels before a panic low could be achieved. In the chart below we can see the final 2% plunge below this support was climax low at 4213 (March SP). While these short term metrics and supports can become trigger points for another run lower into the 3900’s basis the SP 500 Index, we are in a zone here (4200’s – 4300s) where some cash can be invested back into stock sectors such as financials, chips and travel. One additional metric to watch is that the S&P 500 must hold the 4260’s. This is a volatile market, thus watching hedge funds and Algo models attempting to trigger a panic is still required, but a short term low is being carved out to provide a higher trading range into mid-February. On a short term basis, any rally above SP 4460 on January 31st could project a quick run to a short term top around February 3rd in the mid 4500’s with more trading range action through much of February, but possible new lows <4,000 SP  in late Feb’ to mid March should we retest the 4200’s.

 

 

 

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