The Week On Wall Street: The Waterfall Decline Continues

Skogafoss waterfall with solitary person

Rixipix/iStock via Getty Images

“You said before you were waiting for a sign. What sign are you waiting for?” – Egon Spengler, Ghostbusters

It is a given that swift monetary tightening will continue over the summer months as the Fed prepares to rein in inflation that is running near a 40-year high. The recent CPI print is another data point that is crucial to expectations of Fed actions. Ultimately if inflation is going to slow commodities have to stop going up. WTI Crude remains at the $110/barrel level. and Nat Gas is just off the highs for the year. Near-term inflation does not seem to be decelerating, and commodities are going to have to come down sustainably for that to occur. The problem is they may start retreating from highs because of a global slow-down.

Rate expectations are rapidly adjusting, with the market now pricing in a 3.5%-4% Fed funds rate at year-end, up from an expected 0.75% rate at the end of last year. While the Fed just started quantitative tightening on June 1 and has only delivered relatively small rate hikes to date, it is clear that expectations of aggressive Fed tightening are taking some wind out of the sails of the stock market and the economy.

We’ve seen some of the most interest-rate-sensitive areas of the economy, such as housing, are slowing as evidenced by mortgage purchase applications falling to a four-year low. Sentiment has also fallen sharply, with consumer, business, and investor sentiment now sitting at ALL-TIME lows. The Fed has a delicate balancing act to cool demand without tipping the economy into a recession, and the stock market is in the process of re-pricing this new backdrop. Given the recent price action, market participants are leaning toward a worst-case scenario.

The probability that the Fed engineers a “soft-landing” has to be based on the resiliency of the consumer, particularly as consumer spending makes up ~70% of the economy. Thus far, consumer spending has held up well in the face of rising prices and increased asset volatility, but how much more can the consumer absorb?

We saw a “Goldilocks” jobs number for May but so far there has been no job growth. There are still fewer people employed today than before the pandemic. May jobs data was a bit stronger than expected in aggregate, though average hourly earnings were a bit softer, and labor participation increased nicely.

Consumer Is In Good Shape

High inflation is leaving its mark on the average consumer but they are in a much better position to try and weather this storm. Consumer balance sheets have rarely been in better shape. Robust job gains, strong wage growth, and a significant amount of accumulated savings since the pandemic began to continue to provide plenty of fire power to support consumption. Consumers also used the pandemic to pay down debt. Household debt servicing ratios are now running at a 40-year low, significantly below the levels seen during the three prior recessions. This suggests that consumers can increase their debt-financing options (i.e., credit cards), if needed, to maintain their spending.

On that note, there is some evidence that savings are being spent down. Consumer debt levels relative to GDP rose sequentially in Q1 after a substantial decline; income growth is running below spending growth, so it’s not a surprise that cash balances are not rising anymore and households are starting to take on debt.

It’s not the same picture we saw before the financial crisis. Housing-related debt is only 30% of the value of housing-related assets; that’s the highest equity share of household real estate exposure in over a generation and shows how strong household assets are relative to liabilities. Even with booming interest in the housing market, mortgage debt is less than half of GDP and is continuing to trend lower. While the average consumer is at a better starting point they are getting hit by a two-pronged attack.

The wealth effect is being eroded, while inflation is eating away at their purchasing power. If that scene lingers, the entire “strong consumer” argument goes by the wayside.

Corporate Scene

Goods-producing companies were big beneficiaries during the pandemic as people spent money on things they could enjoy at home, such as furniture, electronics, and other at-home gadgets. However, as the economy has reopened, people have shifted their spending to more services-related items, such as airline travel and restaurant spending. While this shift was predictable, some “big-box” retailers have reported elevated inventory levels and slowing sales that have raised concerns about the health of the consumer.

All of the real-time activity metrics confirm consumers are spending on services as restaurant bookings, hotel occupancy and TSA screenings are all at or near post-pandemic highs. In fact, with over 80% of consumers planning to take a summer vacation this year, many airlines/cruise lines have raised their forward sales guidance due to the increased demand. This shift will be supportive of economic growth as services spending makes up ~60% of total consumer spending and remains below its pre-pandemic trend.

All of that bodes well in the very near term. So it goes back to the earlier discussions of how long inflation lasts at these levels. That will determine how long can the consumer cope with higher prices. Investors will remain hyper-sensitive to inflationary data points moving forward, as its trajectory results in a wide range of potential outcomes over the coming months. That makes any near/intermediate-term market forecast that has any conviction behind it nearly impossible.

A soft landing is very important to the market. Why? Because following the three other periods that the Fed has engineered a soft landing (1965, 1984, and 1994), the S&P 500 was up ~15% on an annualized basis over the next three years and was positive each time.

When a recession is involved all bets are off, as losses could mount up quickly. Yes, despite the weakness lately a full-blown recession isn’t priced into this market. There are many moving parts to this “story” and one of the biggest is the part Energy costs play in the inflation scene. If the U.S economy stays somewhat resilient, and the Chinese economy rebounds after all of the COVID roadblocks it is hard to imagine crude oil collapsing to the point where inflation slows dramatically or disappears overnight. There are other factors at work that will keep prices elevated.

Energy

The European Union’s embargo against Russian oil, initially proposed in early May, was confirmed recently at a political level. The regulations still need to be finalized by the European Commission, and the implementation timetable extends to the end of 2022. What we know already is that pipeline deliveries will not be restricted, at least in the initial stage. The embargo will apply to seaborne (tanker) deliveries. By way of background, approximately 4 million barrels per day of pre-war Russian exports were sold to EU countries, of which 75% were seaborne.

A question that remains up for discussion is whether the EU will eventually impose what’s known as secondary sanctions against non-European companies that are still shipping or purchasing Russian oil. Secondary sanctions would aim to prevent Russia from relying on China, India, Turkey, or other countries as proverbial “relief valves” for oil exports. Ordinarily, the oil market’s inherent fungibility means that Russia can sell without limit to jurisdictions without sanctions of their own, but secondary sanctions would impede that.

While an end to this miserable war in Ukraine will cause a knee-jerk reaction to the energy and equity markets, does anyone believe the world will open its arms up and embrace “Anything Russian”? So it seems doubtful that an end to the war will get Russian oil back into the mix. It is incumbent for the U.S. to step up production to help with the shortfall.

Of course, the other scenario is a global recession that kills demand and the price of Oil will also be killed along with equity markets.

That scenario is also known as being between a “Rock and a Hard Place”.

Food For Thought

Speaking of someone who is between a rock and hard place The White House has announced that president Biden will be taking a trip to Saudi Arabia to talk about issues, like “oil production”. One has to wonder if they will remember that they were called a “pariah” by Mr. Biden in 2020. It’s interesting that drilling for oil in the U.S is not acceptable in a world that is obsessed with global climate change, BUT perfectly acceptable if the drilling takes place in Saudi Arabia or elsewhere in the world.

While the approach to solving HIGH energy costs requires a trip to the Saudis, the “jihad” against the oil industry that began in January 2021 continues.

Exxon, start investing. Start paying your taxes.

That was one of the recent salvos fired by the administration at the oil industry.

Exxon (XOM) decided to reply to the accusations by citing what I like to see FACT instead of spin.

We (Exxon) increased production in the Permian Basin by 70%, or 190,000 barrels per day, between 2019 and 2021. We expect to increase production from the Permian by another 25% this year. We’re spending 50% more in capital expenditures in the Permian in 2022 vs 2021 and are increasing refining capacity to process U.S. light crude by about 250,000 barrels per day – which is the equivalent of adding a new medium sized refinery.

We reported losses of more than $20 billion in 2020, and we borrowed more than $30 billion in 2019 and 2020 to support our investments in production around the world. In 2021, total taxes on the company’s income statement were $40.6 billion, an increase of $17.8 billion from 2020.

That doesn’t include local and state taxes.

The anti-business climate will continue to have negative ramifications for the economy and the stock market.

Now it appears there is yet more anti-capitalist rhetoric that could change the energy scene for investors. When I hear the administration chastise the oil industry and announce that above-normal profits for the “refiners” are unacceptable it’s time to realize there is NO chance of a policy change despite the ongoing “crisis”. This commentary resurfaces the nonsensical windfall profit tax proposal, that if enacted will KILL drilling and refining in the U.S.

The administration deems it necessary to rely on “others” to fix the energy crisis. The end game could easily be a deep global recession that will be the deciding factor bringing energy costs down.

Global Markets

The STOXX 600 closed at 52-week lows this week similar to those of the S&P 500, having collapsed over the past week in a global response to US inflation. Things aren’t looking any better in the UK where a negative Q2 GDP print looks likely amidst a huge cost-of-living shock that has the Bank of England almost explicitly engineering a recession and housing market collapse amidst a potential trade war a week after the unpopular Prime Minister survived a party no-confidence vote.

In short: in Europe, virtually everything is down and at 52-week lows.

It’s a different story in China. The Chinese market as measured by the CSI 300 (ASHR) posted its 3rd consecutive week of gains. The China 25 Index ETF (FXI) broke its 5-week winning streak by posting a modest loss for the week.

The Week On Wall Street

Entering a week where the Fed was set to proclaim their next move on interest rates and investors were buckling up for a quadruple witching on Friday. They knew both events would keep uncertainty elevated many had no idea how volatility was about to ramp higher. Markets were already weak, with the S&P having posted losses in nine of the last 10 weeks. The stage was set.

The S&P opened, then remained in “official” BEAR market territory (-20% from the highs) until the closing bell. The fact that the S&P 500 closed down 20% doesn’t tell us anything that we don’t already know based on the market action over the last several months, but merely makes the S&P 500’s BEAR market ‘official’.

It wasn’t a pretty picture for risk assets of any kind as global markets were down over 2+%. Treasuries sold off hard, and crypto prices crashed. Concerns over inflation and its impact on economic growth have become heightened over the last several days, and unlike prior periods in recent history where growth has come into question, with inflation pressures as strong as they are, there is little optimism that the Fed can help to cushion the blow.

The S&P fell 3.8% closing at 3749, which was significant because the index breached the May Lows. Monday was the fourth straight loss of 1% or more, something the market hasn’t done since Christmas Eve of 2018. This was also the third straight loss of 2% or more, a streak that hasn’t been tested since August of 2015. That was the last time the market experienced a “growth” scare. As it turned out that scare was more of a conjured-up scenario, while today’s issues are indeed REAL.

Only five stocks in the entire S&P 500 were green on the day and not a single NYSE operating company hit a new 52-week high (the second day in a row with zero new highs). Not only was it a 90% downside day, but it also was one of the most extreme ones we will ever see. 98.3% of stocks declined, on 98.6% of the volume, and 99.9% of the points traded. The S&P 500 has now fallen 10% in just four sessions, as we have gone from neutral readings to downside extremes in a hurry.

Not much changed on Tuesday. Another day, another fresh new intraday low as the selling continued. Wednesday saw interest rates rise along with stocks. The 7-day 9% waterfall decline ended with a knee-jerk bounce as the Fed’s interest rate decision is out of the way. The S&P rose 1.4% and all of the other major indices posted gains.

The post-Fed bounce was short-lived as the S&P 500 fell 3+%, more than erasing all of Wednesday’s gains. The 8-day decline reached 11%. It has been a one-step forward and two steps backward market for some time now, and the Wednesday/Thursday price action was another illustration of that pattern.

While the S&P went out on a positive note to end the week, it wasn’t enough to erase the weekly loss which tallied 4%. It was the worst week for the index since March 2020. That made it 10 out of the last 11 weeks where the index has posted a loss. In that time frame, the S&P is down 18+%.

The Fed

The Federal Reserve had foreshadowed 50 basis point hikes in June and July, But recent inflation data forced the issue and the FOMC hiked the Fed funds rate band by 75 basis points to 1.50%-1.75%. It is the biggest boost since November 1994. The statement was rather short.

The Fed anticipates that “ongoing increases in the funds rate will be appropriate, but without giving any indication of the size. The war in Ukraine was seen creating additional pressures on prices while weighing on the global economy. The Fed said it will be “prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

The statement added it will continue to reduce its balance sheet as previously described. The vote was 10-1 with the one dissent coming from Mester, who analysts consider one of the more hawkish. She preferred a 50 bp increase. In my view slowing tightening (let alone pausing) is not tenable with inflation this high. A 3.5%-4% Fed Funds rate is a realistic outcome if anything like the current inflation path continues, and eventually, markets will start to calm as the economy moves back towards equilibrium. One thing is certain: the current path for interest rates is extreme. Over the last 9 months, 2-year note yields are up 3.15%. That is the most extreme change in two-year yields from 1994’s bond market carnage, which was 2.79 percentage points over 9 months.

In short, the current tightening is knocking on the doors of the fastest tightening since the Volcker shock in the early 1980s.

The 2% end-of-year inflation target was finally scrapped as Chair Powell now sees an end-of-year rate at around 5%. I was in the “you have to be kidding me camp” regarding the 2% forecast now I’ve moved to the “show me” camp on the revised 5% forecast.

The FOMC is expecting growth of nearly 3% in the second half to get to their 1.7% annual advance estimate per their recent Summary of Economic Projections. That is going to be almost impossible with a slowing consumer, especially considering the shock of price hikes in categories where demand is highly inelastic including electricity, gasoline, and rent.

If the Fed is to be accused of anything it’s the fact they decided to “toe the party line”, downplaying the severity of the situation from transitory inflation to GDP growth.

The Economy

The last several weeks of economic news have been disappointing in terms of economic momentum and activity relative to expectations. The chart below shows the monthly net number of indicators showing positive momentum in their year/year readings going back to 2000.

Economy

Bespoke Economy Index (www.bespokepremium.com)

The current level of -10 is hardly a historical extreme, but it’s not positive either. Not only that, but for the last year, the net number of indicators exhibiting positive momentum has been positive just three times. The rate of growth has been downshifted.

U.S. leading index dropped 0.4% to 118.3 in May following April’s 0.4% decline to 118.8. This is the first back-to-back set of declines since April and March 2020. Of the 10 components that make up the index, 4 made negative contributions, led by stock prices, consumer expectations, and building permits. Also, 5 of the components made positive contributions, led by the interest rate spread.

Plenty of analysts/economists continue to debate IF/WHEN a recession will enter the scene. There are all sorts of data that go into economic forecasts, but sometimes a simple chart can tell the story quite well.

Sentiment

Consumer sentiment (www.bespokepremium.com)

Based on that ugly picture, we could already be in a recession. Q1 was negative and everyone wrote off that report as an outlier. We’ve seen the Q2 GDP forecast come down from 3% to 2% and now the Atlanta GDPNow model has Q2 coming in at ZERO. I’ve warned that GDP was too high since Q4 2021, when I stated there were NO pro-growth policies in place, I was attacked by the BIASED “agenda followers”. Nothing has changed. Economists have either been caught off guard by the speed of the demise OR they simply have their head in the sand and buying into the “rhetoric” out of D.C., and that rhetoric continues to be pervasive now.

Investors need to be mindful of the data, avoid the “noise”, lose their BIAS and leave the GDP discussion to others.

Inflation

The main culprit for record low sentiment is Inflation. This week’s PPI report included a 1.6% PPI rise that left a rise in the y/y gauge to a 47-year high of 16.7% from prior 47-year highs of 15.7% and 15.4%. Today’s y/y rise marks the largest gain dating back to an 18.3% increase in December of 1974 with the first OPEC oil embargo. The record gain was a 19.6% y/y climb in November of 1974.

Consumer

U.S. retail sales declined by 0.9% in May with ex-auto sales rising 0.5%. These follow respective gains of 0.7% and 0.4% in April. Sales excluding autos, gas, and building materials edged up 0.1% versus the prior 0.9% jump in April and 0.9% gain in March.

Despite the decline at the headline level, breadth in May’s report was narrowly positive with seven sectors showing month-over-month growth and six were declining. The biggest winner for the month, unfortunately, was Gas Stations, which increased close to 4%. The only other sector that saw growth of more than 1% was Food and Beverage Stores. The fact that these two sectors experienced such strong growth at the expense of most other sectors illustrates the inflationary pressures of higher gas and food prices crowding out spending in other areas of the economy.

On the downside, Autos saw the largest decline in May with a drop of 3.5%, followed by Electronics & Appliances at -1.3%. Not only are these sectors down m/m, but they are also two of only three sectors where y/y sales are down. The Online sector was also a notable laggard in May as sales fell nearly 1% and are now lagging the pace of overall headline Retail Sales on a y/y basis.

Small Business

NFIB Small Business Index was unchanged in April, remaining at 93.2 and the fourth consecutive month below the 48-year average of 98. Small business owners expecting better business conditions over the next six months decreased one point to a net negative 50%, the lowest level recorded in the 48-year-old survey.

Key findings include:

  • Forty-seven percent of owners reported job openings that could not be filled, unchanged from March.
  • The net percent of owners raising average selling prices decreased two points to a net 70% (seasonally adjusted), two points below last month’s highest reading.
  • The net percent of owners who expect real sales to be higher increased six points from March to a net negative 12%

Inflation continues to be a problem for small businesses with 32% of small business owners reporting it’s their single most important problem in operating their business, the highest reading since the fourth quarter of 1980.

Manufacturing

The Empire State index bounced to -1.2 followed by a May plunge to -11.6 from a 4-month high of 24.6 in April. We now have negative headline readings in four of the last six months, and they are the only negative figures since June of 2020.

The Philly Fed drop to a 2-year low of -3.3 in June marked the first negative reading since May of 2020, following a May drop to 2.6 from 17.6 in April and a 4-month high of 27.4 in March. The ISM-adjusted Philly Fed also plunged to 52.6, which was also the lowest reading since May of 2020.

The 0.2% U.S. industrial production rise in May after a tiny net upward revision left a report that tracked estimates, with component swings that also largely tracked assumptions.

Housing

NAHB housing market index slid 2 ticks in June to 67 after dropping 8 points to 69 in May. It is a 5th straight monthly drop. It was at 81 last June and at an all-time peak of 90 in November 2020. The single-family sales index dipped 1 tick to 77 in June after slumping 8 points to 78 last month. The NAHB noted the housing market faces challenges from both the demand and supply sides amid rising construction and materials costs and increasing mortgage rates.

The U.S. housing starts report sharply undershot estimates with a significant weakness for starts, permits, and starts under construction, though completions bounced sharply in May. Starts plunged 14.4% to a 1.54 million clip in May. Building permits fell 7.0% to a 1.69 million rate. Starts under construction rose just 0.4% to 1.66 million to leave the smallest gain since September of 2020.

Housing completions surged 9.1% to a still-lean 1.46 million rate. Completions are still tracking below the path implied by permits and starts likely due to material shortages. Soaring mortgage rates are impacting starts and permits, alongside the big hit to new and existing home sales.

Earnings

Inflation is wreaking havoc on consumers and many participants are moving out of the stock market suggesting an economic slowdown is here or coming. If so, earnings estimates for next year are too high. We’ve seen reports and commentary recently suggesting that the recent pullback in stocks was making the price-earnings multiple on the S&P 500 very attractive. I’ve suggested that it is perfectly normal for PE ratios to come down because the growth phase has ended. BUT that doesn’t necessarily make them “attractive”.

EPS estimates are likely too high and I wouldn’t attempt to use those earnings forecasts to predict the forward PE ratio on the S&P 500. Rather than trying to pinpoint a range, I think we would be much better off trying to decide if earnings will be higher or lower next year than they are this year. So while many pundits put a lot of emphasis on such metrics, the real question is what kind of PE multiple investors will place on those earnings.

When investors are worried about earnings they tend to place a low multiple on earnings; and, when investors are ebullient they place a high multiple on them. So the investment trick becomes how to anticipate what investors are willing to pay for “forward” earnings. It’s a given that we need to start ratcheting down earnings expectations and what investors are going to pay for them.

Finally, using a PE ratio as a “timing ” tool has never worked.

The Daily Chart of the S&P 500 (SPY)

The waterfall decline has picked up momentum. Similar to my OLD maxim of Strength begets Strength, it is now Weakness begets more Weakness.

S&P 500

S&P 500 (www.FreeStockcharts.com)

We often see analysts have a hard time picking a market TOP, the same is true for trying to pick a BOTTOM. It’s a guessing game and one that investors need not play. It’s also a good idea to avoid pundits that like to toss around forecasts that go out for months. We can’t predict next week yet they will tell us what the S&P will be at year-end. This is a process and at some point, there will be enough evidence to put the pieces of the puzzle together and come up with a decision.

The waterfall decline paused on Friday. Now it is a matter of whether a rally can take shape and move the index back to resistance. Unfortunately, the slope of the trend lines is suggesting this market weakness may not be over. Resistance will be formidable and for the time being, should cap any rally attempt.

Investment Backdrop

At the start of trading this week, this was the average stock’s drawdown by index:

S&P 500: -28.4%

Russell 3,000: -42.4%

Nasdaq Composite: -50.5%”

Massive Dispersion in Sector Performance

We’ve talked about this since February. Not much has worked and the situation got worse as the year unfolded. It’s been “Energy” and not much else. As inflation surges, economic growth slows, the Fed hikes rates, and supply chain concerns continue to plague the economy. It has been almost impossible to find anywhere to hide.

Besides Energy, the only other sector up on a YTD basis was Utilities. (The sub-sector of Commodities (BCI) is also positive in ’22). On the downside, the worst-performing sector has been Consumer Discretionary which was down a whopping 26.3%. Along with Consumer Discretionary, both Communication Services and Technology were also down over 20% YTD.

One word, BEARISH. There are NO positives that can be gleaned from the short, intermediate, or long-term trends. I’ll let others forecast a bottom, I have my own way of trying to ascertain when stocks might turn. For now, the consensus forecasts are focusing on the 3200-3500 range. The PRIMARY trend is down and every investor that does not have a multi-year time horizon should be focused on preserving capital. Those with multi-year time horizons fall into a different category and dollar-cost averaging as the market drop has proven to be a wonderful strategy for decades. However, I realize not every investor has that luxury.

With an extreme oversold condition at hand, I do expect to see a “bounce” in the indices, and perhaps the new “trade” will be money taken from the Energy sector and moved into beaten-down technology stocks.

Thank you for reading this analysis. If you enjoyed this article so far, this next section provides a quick taste of what members of my marketplace service receive in DAILY updates. If you find these weekly articles useful, you may want to join a community of SAVVY Investors that have discovered “how the market works”.

The 2022 Playbook is now “Lean and Mean”

Yes, that is correct, opportunities are condensed in Energy and Commodities. I’ve dropped Healthcare this week as that sector has now dipped into BEAR market territory as well. However, I still like select Pharma companies that pay above-average dividends. The message to clients and members of my service has been the same. Stay with what is working.

My “canary message” was a warning regarding the Financials, Transports, Semiconductors, and Small Caps. I used them as a “tell” for what direction the economy was headed to help forge a near-term strategy. They sent their messages for the economy and since that day the S&P is off 18%. There will be times when they appear to be revived, but, until there is a decided swing in the technical picture where rallies take out resistance levels, they continue to warn about the near-term outlook.

There is no need to get into details on the sector activity this week. All eleven sectors added to their year-to-date losses. Energy (XLE) wasn’t immune to the selloff dropping 17% this week. I will continue to look for support areas to HOLD in select energy names as this dip looks more like an opportunity to reload, rather than get out.

Green Energy

It is THE topic, it is THE theme that drives many people these days. To some, it is a form of religion where fossil fuels are the devil and no one, but NO ONE should be associated with anything to do with oil including investing. There are pension funds and select money managers that have gone the green route and dissed the more conventional energy stocks. They have been destroyed. It is not only the fact that their choice in green investments has gone down so much, but they have also missed one of the best investment stories that I have witnessed in my career.

Given the runup in energy prices, you would think that alternative energy stocks would be ripping higher as consumers of energy look for alternatives, but that hasn’t been the case. The solar industry got a boost when the Biden administration announced plans for a new federal program to support solar panel manufacturing via the removal of import tariffs. The Invesco Solar Energy ETF (TAN) rallied quickly and traded above its 200-Day moving average for the first time since December. Unfortunately, TAN was unable to stay above its downward sloping 200-DMA reinforcing its downtrend. The LT chart remains in a BEAR market setup.

It was a similar picture for the broader clean energy space as the iShares Global Clean Energy ETF (ICLN) was unable to even trade above its 200-DMA on an intraday basis. When a stock or index repeatedly tries and fails to trade back above a downward sloping key moving average, it represents classic bear market behavior, and until those trends can reverse themselves, investors are usually better served on the sidelines.

There was a time when these stocks wildly outperformed the S&P 500 in a low-interest rate backdrop, but with rates expected to rise, the headwind of the debt that these companies compile offsets the positive tailwind of higher traditional energy prices.

In contrast, traditional energy companies are cash flow machines.

Energy

After posting a 60% return in the first 5+ months this year the Energy ETF (XLE) suffered its work week in quite a while giving back 17% of those gains. It is the ONE sector that remains in a Longer-term Bullish setting. Once the dust settles at support levels, stocks with 8-10% dividend yields will once again be presented as bargains.

International Scene

From a technical perspective, China continues to be a turnaround story. I’ve already noted how their stock market has outperformed the rest of the globe recently. There is a good reason why that is the case. Stock markets do not care about absolutes, they care about change. It’s all about whether a market sees a positive or a negative change in the MACRO scene. In the case of the U.S, the change is decidedly negative. The MACRO scene has been upended by Inflation and the possibility of a recession.

It’s just the opposite in China, sure they have their “political” viewpoints that have caused angst in their markets, but their change is seen as positive. At some point, this seemingly endless series of lockdowns end. Inflation is not rampant and there is no threat their economy will tip into recession now.

For sure the U.S is also loaded with “political” viewpoints, that have spawned a bevy of “risks” here. There is no need to go into details on all of them now, they have all been documented using facts. When we have an economy firing on all cylinders suddenly on the brink of recession, it’s apparent those political views are at the very least exacerbating the problems. It is for all of those reasons that I conclude that China is worth the risk and it seems prudent to get on board what could be a huge turnaround story.

Cryptocurrency

The emergence of crypto markets has been one of the most rapid wealth creation events in human history. From mid-June 2017 through the start of November 2021, the total market cap of the crypto universe rose by 2761%, or $2.845 Trillion. Wealth destruction is proving almost as rapid on the downside. Over the past week, the total crypto market cap fell over 30% or by $350 Billion and is now back below $1 trillion for the first time since January 30th of 2021.

BTC

Bitcoin (www.bespokepremium.com)

That decline added to the weakness that was in place since March. This space is overloaded with leverage and margin calls are likely leading to forced selling.

Crypto is neither a store of value nor a hedge against inflation. It is a trading vehicle and not much else. Novice investors who saw nothing but upside will now get a lesson in how markets work. The long-term consequences for capital flows to the space of wealth destruction on the scale we’re witnessing may take a long time to play out but they will play out over the coming years.

Final Thoughts

What sign are investors waiting for to signal the bottom? I keep hearing the same commentary over and over where analysts are wondering IF we have seen that “capitulation” day.

Granted, we haven’t yet seen the typical extreme readings in the 10-Day A/D line or the 40+ reading in the VIX that has come to be typical of conditions near market lows. But while they wait for a bell to be rung, the signals have been conflicting. There have been a number of 80% and 90% upside volume days. The month of May was just the 11th month since 1997 that saw more than 5 trading days with upside volume on the NYSE greater than 80%. To date, it has meant nothing and it demonstrates how difficult this market is to navigate.

I’ve addressed this point before so let me repeat. If you are waiting for an all-clear signal, most of the time you don’t get it until it’s too late. Uncertainty always makes its presence felt, especially at the biggest turning points. After all, the term “wall of worry” didn’t become a market maxim for no reason. All we can do is get a detailed lay of the land and make the most informed decisions possible.

Many analysts are using prior rate cycles as their guide to forecast a level where stocks might find equilibrium. Those views are referring to the “typical” Fed hiking cycle to lay out their strategy. The problem is this isn’t your ordinary rate hiking cycle. This one is different and it is EXACTLY what I warned about last year. When you add unnecessary stimulus to a strong and growing economy, you increase the potential for inflation and that brings the FED into the picture WELL BEFORE it was anticipated. They are here to fight inflation. They are not here to cool off an overheated economy. This economy is weakening, and this is anything but a “typical” rate hiking cycle.

Perhaps the economist and analysts that are banking on this rate cycle to trace the same path as the prior cycle will be correct and they can then proclaim victory when the stock market finds a bottom and stabilizes. The problem is the stock market NEVER provides the ultimate answers about TOPS or BOTTOMS. The price action is leading my strategy and it’s telling a story. I wish I KNEW how far the indices can fall but I don’t, and no one else does either. Oh but rest assured some pundits are predicting anything from S&P 2700 to new all-time highs by year-end. Newsflash; they are GUESSING and I’m being kind with that characterization.

In April I sent a message to clients and members of my Savvy Investor Service.

With FEW exceptions this stock market is uninvestable. Since then the S&P is down 15+%.”

The areas that I believed were investable are up on average 8-9%. That is classified as outperformance. I continue to take this market situation one move at a time. If you continue to struggle with your “plan”, my marketplace service is here to help. The BEARS remain in control and if anyone doubts that assessment please go back and look at the chart of the S&P 500 posted earlier.

Postscript

Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.

In different circumstances, I can determine each client’s situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.

THANKS to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to Everyone!

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