Normally when you think of January you think cold temperatures or winter. But as of late, the markets have been heating us up and not in a good way. Maybe we can compare it to when you’re wearing a thick turtleneck that you thought would keep you warm but it ended up being more of a thermal blanket that left you nervous that people would start to notice the beads of sweat gathering on your forehead or upper lip. Those nerves or surging fear is what keeps people from wanting to invest in the market, intimidates investors that should remain invested, and seeing red causes panic to rise and initiate the fight or flight instinct. And all of these feelings of uncertainty are blurring judgment as people act without taking the time to understand why things are happening the way they are.
With that said, I wanted to follow up my rather long diatribe from Wednesday’s Newsletter (01/25) with some digestible nuggets about the lackluster Fed meeting that also took place that same that the newsletter when you. I will also paint a more vivid picture of how oversold we currently are by showing some informative charts that I find to be extremely helpful.
The Fed Meeting Commentary:
- No surprises: he told us he was going to rein in the bond-buying and probably do an interest rate hike in March and Wednesday, he said it again.
- Inflation well above the target 2% and strong labor, thus soon appropriate to raise Fed Funds rate.
- Powell confirmed that he would use the Fed Funds Rate (the cost of funds charged to member banks of the Federal Reserve) as his primary tool.
- The economy is continuing to strengthen. Thus far earnings for Q4 2021 are dramatically better than forecast and forward projections are stronger than initially thought.
- Supply / Demand imbalances related to the pandemic are the cause of inflation. Since the supply chain issues are far from easing, this is expected to continue.
- Will remain sensitive to economic changes and adjust accordingly. Didn't go on to mention a bunch more hikes.
What happened? The market was very strong at the open Wednesday due to Tuesday night earnings from the biggest software company on the planet far greater than expected. The difference that we have seen over the last three days was that there were fewer lows on Tuesday and Wednesday than there were on Monday. This implies that possibly this is the end of the decline and the beginning of a new basing process from which the markets could recover.
This brings me to my final point: where we are on the "downside momentum" spectrum. The Debbie Downers are out in force. Jeremy Grantham calling for an additional 50% downside, Ralph Acampora's call for another 20% down (he is affectionately called Ralph (I Can Make Ya Poorer). On top of this, the UN is mobilizing troops to the Russia / Ukraine border, not to speak of China's cancerous continuous creep into Taiwan and the continuously declining support for the Biden Administration. Corrections can be sharp and deep, as we have experienced since the beginning of this year, but this does not necessarily begin a bear market. The market's current technical status is akin to a giant coiled spring fully compressed and ready for a violent snapback. Remember the adage of the sage of Wall Street, Warren Buffet, "Be fearful when others are greedy and greedy when others are fearful."
I am going to insert a few charts for comparative understanding. For starters, the markets are almost as sold off as they were at the COVID lows of March 2020. Some indicators are showing the most oversold readings on record! When these lows have been registered in the past, the next place the market traveled was upward. Here are five charts that I believe are worth at least considering.
Oversold readings are seen at or near market bottoms. Currently, NAUD is registering the most oversold reading on record.
Similarly, the NAHL also registered the most oversold reading on record.
This chart also registered the most oversold reading on record
On Monday morning, January 24th, this indicator slid to a record low
Readings below -1000 are oversold. At this writing, the NYUD is registering the most oversold reading on record.
These are five charts that provide perspective. What they don't provide is an exact answer. Every time is a little different. What we do know is there is no major calamity (like COVID) in the offing. What Powell is doing is because our economy is good, not because it is bad. I am not about to tell you that the market decline is definitely over, but rather that it is much closer to an end than a beginning. We are paying attention to what we own, why we own it, and what is going on in the world to provide runways for their respective futures.
We are here to answer any questions you may have, address your individual concerns, and make any changes you would like us to make to assist you in achieving your individual goals and objectives. I realize that the information I have provided above is really quite technical in nature, but I am hoping that the pictures make the technical nature understandable. If you would like a greater explanation, please call us and we will answer your questions.
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