There is absolutely no correlation between the number one movie at the box office Top Gun and the stock market. Neither has a direct impact on the other. However, both share the same theme song at the moment, Danger Zone by Kenny Loggins.
There really isn’t too much to say about the state of stocks. It’s like looking out the window, seeing rain and saying it is raining outside. Looking out of our stock market window, it’s raining sell tickets, the indexes are crashing, and the S&P 500 officially entered bear market territory.
Yes, the forecast is without nuance. It is what it is, bad.
Last week, we hoped the NASDAQ would sell off, hit support at its descending trendline and reverse higher. It would have been the first sign that the wave of selling that’s lasted throughout 2022 might take a breather. But, no.
Instead, investors were treated to a pair of gap down days and neither was on blowout volume. Gaps at the opening tend to be confirmation signals for the current direction. Unfortunately, down at this point.
The reason for the panic selling is because last week’s inflation report was much hotter than expected. Wall Street expects the Federal Reserve will have to be more aggressive in raising interest rates to cut off the head of the inflation snake as it bites all of our wallets.
The problem is that increasing interest rates into a slowing economy is the exact opposite of what Jerome Powell and the Central Bank should be doing. Have you ever gone to the circus and watched the folks walking on the high wire? Most carry a long balancing stick, and all have a safety net below in case they fall.
Unfortunately, the Federal Reserve is walking a tightrope without a balancing stick and there is no safety net. Under normal circumstances, they would be lowering rates in the face of a slowing economy and the federal government would up its spending. But with inflation roaring, raising rates and spending more money would be Weimar Republicesque.
We hope and pray that we are wrong, but it’s likely going to get worse before it gets better, buckle up.
In the meantime, we are back to our operating model of selling into rallies. Stocks could recover some ground in the immediate future and the NASDAQ’s relative strength rating is close to an overbought reading. Remember that bear market rallies tend to be aggressive with sizable gains, don’t get too excited until there is confirmation of a new uptrend.
Every sector we monitor was underwater last week. The only thing that was close to breakeven was energy, oil and gas. If stocks continue to slide, it will eventually pull everything down with it. Be careful.
There is no way we’d consider any individual stocks under the current conditions. We do recommend compiling a list of market leaders to buy at discounted prices once the market knife stops falling, whenever that is.