I want to buy stocks right now.
You want to buy stocks right now.
Some people are buying them right now, and they're the suckers.
Take the next five minutes to read the details behind the "Sucker's Rally" that's lifting stocks from their Monday lows. It's going to save you the aggravation that millions of investors are getting ready to feel and set you up with a plan to buy at prices that are likely to be 5-10% lower than what we saw on Monday.
The proverbial dust is still clearing from the last week of selling as a sense of “buy the dip” trading has taken over on Tuesday.
Stocks like NVIDIA (NVDA), and Meta (META) from the Magnificent Seven are bouncing back from Monday’s routing, but for the most part, the rally is a little “thin” in its breadth. Investors are picking and choosing their targeted buys instead of blanketing the stock market with blind buying.
Just look at the Magnificent Seven’s performance from Tuesday.
There’s a name for this. They call that, a “Cluster____”.
NVIDIA posted a performance that was worthy of the beginning of a rally, but that stock has its own problems that you can read about here.
Meta shares posted a nice performance on Tuesday, but that stock has traded in an incredibly wide trading range for the last six months and can’t get out of its own way. That doesn’t help the market turn the last week of selling into a long-term bottom.
Apple, we know the story there. It’s not good for any stock when investors see that Warren Buffet has been dumping the stock like it’s a bad habit. That hasn’t helped the optic that this is a market bottom.
Let’s not even get started on the others and get to the point.
IF this week were THE real buying opportunity, the real “bottom” every single one of these stocks would have rallied in unison on Tuesday. It’s what we call a “high correlation move”. This happens when the market moves as a group, not like a herd of cats.
A high correlation move higher is a move that reflects investor confidence. These moves follow through as the investors that didn’t buy the “bottom” gain confidence and then follow the leaders into the market.
We’re not seeing these moves because the market has very little confidence at this moment.
For that reason, you will see the markets move lower than their Monday lows, and perhaps another 5-10% lower before we see the real bottom in stocks.
How can I say that with confidence?
Did you notice how we went from "Soft Landing" to "Crash and Burn" on the outlook for the economy in less than a week?
Here’s the truth about the economy.
First, the data suggests that the economy is now slowing faster than had been expected by investors. That’s bad.
Last week's jobs report, bad.
Last week's ISM Manufacturing report, bad.
We’re seeing job layoffs increase. Just last night Dell became the latest technology company to cut their workforce. The company laid off thousands of marketing and sales employees as they focus on the AI side of business.
Last week Intel announced that 15,000 jobs were being cut as the semiconductor company is forced to reorganize.
Microsoft, Amazon, Tesla and other technology leaders are following suit. This has turned to a trend, not a data point and that’s got investors thinking that the worst is yet to come with the economy.
Bottom line here is that the Fed did an amazing job of slowing the economy.
But now, things have accelerated while the Fed wants to make sure that inflation is truly dead by waiting another six weeks.
The uncertainty surrounding the market now has investors wondering if there are any investments that they want to hold.
I find it funny that investors and analysts are pointing the finger of blame at Jerome Powell and the Fed for causing the market’s selloff. I guess every story needs a villain, and the Fed is now Public Enemy Number One.
Jeremy Seigel, a very smart man with a much better education than mine, made me think of a Calvin Coolidge quote on Monday.
The quote “Education will not; the world is full of educated derelicts”. It comes from his famous quote about the Power of Persistence”.
Seigel pounded the table on CNBC Monday morning telling Jerome Powell that the Fed needed to correct their mistake in not dropping rates last week by holding an emergency meeting immediately to drop interest rates by 50 basis points.
With all due respect to the Professor, that’s wrong. He's using his measure of health by whether the market is going up or down, not what's going on with the economy.
As Austan Goolsbee, President of the Chicago Federal Reserve Bank, pointed out, the equity market’s stability is not part of the Fed’s two-part mandate. They are not there to make sure that stock prices don’t fall or crash.
The Fed has taken the drastic measure of intra-meeting cuts twice in the last decade.
Once (two cuts) in March 2020 following the initial outbreak of the Covid-19 Pandemic and then once (two cuts) in response to the financial meltdown and its threat to the liquidity of the market during the housing meltdown of 2008.
You must go much further back in time to find other examples of the Fed dropping rates at emergency meetings like Long-Term Capital Management in 1998.
My point is that the Fed is set to announce their next interest rate policy on September 18, don’t expect it until then.
There is a potential exception to that in the case that the recent “Yen Carry Trade” were to accelerate and cause even more carnage, but in that case, rate cuts could make matters worse.
If you follow me you know this is the most reliable and critical piece of the market’s puzzle.
Here are a few quick stats.
These may be just data points to you, but the story of where the market is headed lies within them.
Here’s the most important chart…
This is a chart of the Percent of the Nasdaq 100 companies trading above their 50-day moving average.
The chart has an almost perfect record of signaling when a real market bottom has hit, not a “Suckers Bottom”.
The circles in the chart represent when the percent of Nasdaq 100 companies above their 50-day moving average hits readings below 20%.
These are the extreme readings that represent the point in time that investors have sold their stock so excessively that the market has nowhere to go but up.
These are the moments in time when the sellers run out of things to sell. I call them “selling vacuums”. Those selling vacuums make it easy for a very small amount of buying to shift the focus back on sellers.
The next selling vacuum is not far away as another 5-10% decline in the Nasdaq 100 should result in a bullish signal.
Until then, the market’s rally remains suspect.
Here is Exactly How I See this Play Out
This is literally the market’s roadmap by the numbers for the next few weeks.
Here’s the chart of what that looks like….
A quick note:
We will get the latest report on inflation in just over a week as the Producer Price Index and Consumer Price Index data for July is released on August 13 and 14 next week.
These reports will be absolutely critical for the market’s rally potential. The slightest hint of inflation remaining “sticky” will turn the Fed’s job into a nightmare as we will begin to hear economists talk about “Stagflation”.
We’ll cover that for you next week.
