Well, you had to think a relief rally was due. Congress spending another $1.5 trillion was the impetus to get bulls into action with the NASDAQ pulling itself over the cliff’s edge last week. Like a scene in the movies where the hero is backed into a corner, the NASDAQ fought its way out of a seemingly impossible situation after it closed at the point of no return last Monday.
Had stocks gone any further south, our hero would have fallen, and the bears might have run rampant. With the good guy seemingly back on solid ground, a move down doesn’t appear to be in the script right now.
Like in the movies, the protagonist is in position to discard the antagonist, save the damsel in distress, and ride off happily ever after. Maybe not ever after, but for the intermediate term.
Last week’s swift reversal higher butted the NASDAQ against its 50-day moving average. For whatever reason, these benchmark averages act as support or resistance for prices. On the way down, the 50-day tends to be a floor, and on the way up, a ceiling.
If bulls can carry the day and close the NASDAQ above 13,500ish, then the index is likely to head towards another key benchmark, the 200-day address at 14,720ish. On the other hand, if buyers can’t take prices above the 50-day, then NASDAQ would likely trade between last week’s intraday low of 12,555.35 and the 50-day average.
Whichever line is broken first will likely be the direction the NASDAQ takes next. Right now, we give the 60/40 edge to bulls. There is a lot of talk of both the Russians and Ukrainians wanting to reach a ceasefire and agreement. When Putin and Zelensky announce a face-to-face, it’s likely an agreement has been achieved via backchannel intermediaries. That should be the end the conflict, for now at least.
Another positive is that the NASDAQ broke above its descending trendline. Many times, this is the first step in a direction reversal. If the index gets above the 50-day, index investors might think about Invesco QQQ Trust (QQQ). It should do well if the NASDAQ heads higher.
However, inflation remains, and it isn’t going away anytime soon. Sure, the air Putin pumped into prices with the invasion will come out of the balloon, but inflation was on the march long before his troops crossed the Ukrainian border.
From our perspective, it’s simple, there is too much money in the system. Look at this M1 graph below (M1 is the money in circulation). How are prices not going to rise if the economy is flooded with money? It’s Econ 101, and yet the wizards of smart in the Federal Reserve, Federal Government, and Wall Street can’t figure it out? Don’t kid yourself, they know.
On a side note, money supply and low interest rates are also the main source for the growing wealth gap. Increased money supply creates inflation, more dollars chasing a finite supply of goods and services.
Wealthier people own stocks, metals, real estate, collectibles… whereas up to 60% of the population lives paycheck to paycheck. When the value of assets increases, the people who own assets benefit and those who don’t own assets don’t. More often than not, those who don’t own assets fall behind during inflationary times. It’s why real wages (wage increases – inflation) have stagnated for decades.
No matter where you fall on the wealth spectrum, the M1 chart clearly shows why we are dealing with inflation and why it’s likely to be around for a while. Much like it takes a long time for a python to digest a pig, it’s going to take a long time for prices to digest this pile of cash.
One might ask, well if inflation is going to be hot, shouldn’t that be good for the stock market? You’ve heard it said too much of anything isn’t always a good thing. As we mentioned, 60% of the population lives check to check. Paying more for gas, food, housing… reduces discretionary spending and the consumer accounts for most of our three-legged economy (consumer/corporate/government spending).
The combination of inflation and a stagnant to contracting economy is stagflation, something we lived through in the late 70s and early 80s. It wasn’t good for stock prices.
I’ve rambled on long enough. The takeaway is that stocks would likely head higher if the NASDAQ closes on the better side of its 50-day average. However, problems persist that could limit upside and investors would likely remain exposed to violent swings to the downside. Be careful.
Technology roared last week and would likely be a winner again if, as we outlined above, the NASDAQ vanquishes its 50-day mark. A fund like SPDR S&P Semiconductor ETF (XSD) could perform well if we get the technical break we are hoping for.
Like the NASDAQ, XSD moved past its descending trendline but, unlike the NASDAQ, is already on the good side of its 50-day benchmark, usually a bullish sign. If XSD closes below $200, you might consider cutting your losses.
We are still reluctant to take on new individual ideas at the moment. There is some protection in the diversification of an ETF. Whereas, an individual stock could get pounded if the market goes south again. We’ll give it a week to see if bulls can get beyond the 50-day. If so, we’ll have a defined downside target, which could help us mitigate potential losses.