I know how you feel.
Most investors woke up this morning to a regular Monday morning, then things changed.
You hear it on the news or see it on the TV, the Markets are down 5% before the bell even rang on Wall Street.
What is going on???
What do I do now?
Let’s take the next five minutes to answer both questions and the bigger question that most investors are asking, “what should I do today?”
If you follow us, you know exactly what’s going on. This is the culmination of three events or situations that have been brewing for some time.
Investors have been falling over themselves to get into the market ahead of earnings season. The reason for that is simple, Fear of Missing Out.
For more than a year, investors have been watching stocks, especially the Magnificent Seven, rally into the earnings season only to shoot higher. Revenue and earnings growth hit 13% growth on a year-over-year basis last quarter, one of the best quarters in years.
But that changed this quarter.
Investor’s expectations finally stretched the reasonable boundaries resulting in a lot of disappointment for the earnings season.
It’s not that the earnings have been bad, its that investors expected much better.
As of Friday, 75% of the S&P 500 companies have provided their earnings results. They're not bad, but there's an underlying problem/
So, what’s the real problem with earnings?
While companies have been beating their earnings results they haven’t been raising their outlooks for the next quarter.
Of those same companies, 39 have issued negative earnings outlooks while only 35 have revised their outlooks higher.
That’s the problem, that’s what has been disappointing for investors. Why hold stocks that are already highly valued if the companies aren’t giving you reason to believe that the values are going to stretch even higher?
The answer is you don’t, so the market is in the process of taking profits on those high-flying technology companies, which affects sentiment towards the rest of the market.
Last Wednesday, Jerome Powell and the Fed concluded their interest rate policy meeting with the decision to hold rates steady until September.
The move was expected by the market, but there was a catch.
During his press conference, the Fed Chairman stuck to the view that inflation is still a threat to the economy and that the Fed was going to be cautious in lowering rates. That wasn’t what investors wanted to hear.
Instead, investors were looking for a sign that an interest rate cut in September was all but a lock.
Proof of that comes as the rally that we saw in the small cap and real estate sectors in the weeks ahead of the interest rate decision.
Those two sectors are highly sensitive to interest rates, which is why traders were quick to buy them ahead of the Fed’s meeting. The thought was simple, Jerome Powell will confirm that rates are coming down and these stocks will take off even more.
That didn’t happen.
Instead, the Fed chief merely confirmed that the Fed would address lowering interest rates when they were confident that inflation had been fully contained.
Again, investors have been disappointed in the lack of commitment to a September rate cut, giving them more reason to be weary of stocks.
It couldn’t have been timed any more poorly.
The two days following the Fed’s meeting saw two reading on the economy come in worse than expected.
First, Manufacturing ISM came in lower than expected. That index tracks the expansion and contraction of the economy from a manufacturing perspective. Here's the report from the Institute for Supply Management
Last month’s activity came in much lower than expected, revealing a large contraction in the economy. This one data point puts investors on edge as it starts to feel like the economy is heading closer to a recession.
Those fears were compounded on Friday with a weaker than expected jobs report.
Investors have been heralding a slowdown in the jobs market as it served as a sign that the Fed would lower rates, but now things feel like they’ve gone too far.
Put simply, investors have gone from believing that the Fed has done an amazing job of architecting a “soft landing” to believing that the economy is heading towards a hard landing recession.
The simple answer is “nothing”.
The Nasdaq 100 is down more than 4%, the S&P down 3% and the most important stock in the market, NVIDIA (NVDA) is trading below its critical price support of $100.
Most amateur investors are hitting the “sell” button as quickly as their computers are refreshing to dump their positions, but the fact of the matter is that we’re likely to see some aggressive short-term traders come in to start buying stocks today.
The CBOE Volatility Index – best known as the market’s “Fear Gauge” is registering its highest readings since the Covid-19 Pandemic hit the headlines in early 2020. This tells us that the market is trading on fear this morning. The experienced investor knows that this is a good thing.
You’ve undoubtedly heard the term “Dead Cat Bounce”? The market is ripe to see exactly that over the next few days.
Here’s how it should play out.
The Nasdaq 100 breached its 200-day moving average this morning. That is one of the most critical trendlines on any market watcher’s screen. Here’s the chart of it.
The last time that the Nasdaq 100 crossed below this trendline was in January 2022. The break of this trendline happened over a four-day period that saw the Nasdaq 100 drop 10% of its value. It was also the move that put the stock market into a long-term bear market, resulting in another 25% drop over the following 100 days.
That’s the worst-case scenario here, and you must remember that the Fed was raising interest rates at that time, not preparing to lower them. That’s the biggest difference today.
Today, we should expect that short-term byers will come in to buy stocks on that technical support. This will set up an opportunity to sell or hedge your portfolio for what is likely to come next, another drop below the Nasdaq 100’s 200-day moving average.
From there, expect to see another 8% more lower for the large cap technology index as we’re not likely to see investors display the resiliency and the “buy the dip” attitude that have been on display towards these companies, and the rest of the market, over the last year.
Investors looking to protect their portfolios from that 8-10% decline in the Nasdaq 100 may want to consider the Proshares Ultrashort QQQ ETF. This inverse ETF appreciated in value by about 2% for every 1% drop in the Nasdaq 100. It’s an easy “hedge” for times like these.
Read more about this approach right here.
In addition to hedging a portfolio, the best practice that any investor can do in time like this is to construct a list of stock to add to a portfolio along with specific target prices to buy them.
I'll be back tomorrow with a short list of technology stocks to buy target "buy prices".
