Here comes the second round of selling...
Remember that “dead cat bounce” scenario that I painted for you on Wednesday? You can review it here.
It’s getting ready to play out beginning today, Friday. And it may lead us right into next week’s inflation data, a situation that will certainly cause more volatility.
You need to be ready, and I’m going to help.
Right before I went to bed last night I checked out the futures markets. Everything was going exactly as I thought it would be.
After a relatively strong day, the markets were mixed with the Nasdaq futures trading just a little lower for the night.
My eye curled up and I returned to my book, but I knew what the futures were telling me… This Friday and Monday are going to be another raucous stretch for the market.
The clues presented themselves earlier in the day on Thursday. The first, light volume on the Nasdaq 100 ETF (QQQ).
We saw incredibly heavy volume on the QQQ shares for the last five days as investors were selling the large cap technology sector heavily. It was the first sign that something was going wrong in the market.
Then, on Wednesday, we saw half of an attempt to rally the markets as investors jumped back into their favorite group of stocks, the magnificent seven, at the open.
All seven started the day higher only to see the closing bell reveal one of the stocks, NVIDIA (NVDA), posting gains for the full day’s trading.
Yesterday, the market revved higher after the unemployment claims data showed that fewer people had applied for unemployment benefits for the week, a sign that the jobs market didn’t decay any further over the last seven days.
This market doesn’t know which way is up and that’s not good for the next few days of trading.
There’s something bigger going on.
Think about this for a minute
Three weeks ago, investors were celebrating bad news…
Investors were rooting for the market to slow down for one reason, they want that Fed rate cut more than anything.
It would be like my teenage self driving my car into a wall because I hoped my parents would replace it with a better car.
Investors are hoping that the market will drive into a wall so that the Fed will give them rate cuts in September and November.
But there’s a catch (there always is).
Investors now want to see two cuts in September. They want the Fed to drop rates 50 basis points – or half a percent – to make up for not dropping interest rates last week.
Believe me, they don’t want that.
Let’s keep this our little secret, because what I’m about to say will help you prepare for what could be the next bear market.
IF the Fed embarks on a double cut to interest rates in September then you need to prepare for a market that drops another 20-30% over the next six months.
The rest of the market will celebrate this, but if you listen to me you’ll notice a small group of investors that are preparing for the real storm.
They’ll look like the people we see on the TV putting sandbags around their house as the hurricane swirls off the coast. Those are the investors, like me, that know a double cut will be a warning sign.
Any aggressive action by the Fed will tell you that things are worse than suspected with the economy.
I remember the first time I saw Ben Bernanke drop rates 50 basis points. Investors spent a week or so buying stocks as they celebrated the Fed’s action.
The day after the rate cut, I updated my research clients with a summary of the market that included the following…
“Ben Bernanke did nothing but put a band-aid on a bullet wound. The economy is in worse shape than our models were forecasting only a few weeks ago. The Fed’s dramatic actions changes our outlook for the next 6-12 months. As a result, an immediate change to our portfolio holdings is required.”
Months later, the market found itself deep in the throws of a bear market.
So, investors were celebrating bad economic news for the last three months as the hoped it would result in the Fed dropping interest rates.
Now they’re celebrating good news as a sign that the economy hasn’t gone to hell in a hand bucket.
Don’t invest in a confused market is an “Investing 101” rule.
Investors are confused, and their actions are coming down to “hope”.
There’s an old saying in this business, I learned it in 1994 from my mentor Andy at Prudential Securities.
“Hope is not a hedge”
Investors are hoping on the Fed to be their hedge in four weeks.
They’re hoping that the Fed will drop rates considerably.
But remember, if the Fed does drop rates considerably, it means that they see something behind the curtain that you and I don’t.
Hope may not be a hedge, but the following is a simple plan or approach to hedging your portfolio from risk.
Next week, we’ll see the Consumer Price Index and Producer Price Index data hit the headlines.
This is going to be the big market mover when it comes to the Fed. Have this plan together before those reports are available as they are likely to ignite another volatility move for stocks.
