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Stocks go up and down, stay focused

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  • Stocks go up and then they go DOWN.

  • Investors are NOT buying what JJ is selling.

  • Oil pushes higher…. Why are you surprised?

  • Shelter in the storm – Earnings Growth vs. Multiple Expansion.

  • Try the Spaghetti Arrabiatta.

OH, I need an Excedrin! It was a brutal day…or was it?  I mean stocks rallied hard on Wednesday and then they sold off on Thursday…. Up 935 pts on Wednesday and then down 1060 pts on Thursday….so in reality we sold off 70 pts!!!  What’s the panic?  Well – not so fast.

I guess investors/traders and algo’s were not so impressed with what JJ had to say….I guess when they got a chance to dissect his statement and his comments – the answer was “Not so fast, buddy”……This is not the bed of roses that you suggest it is…..and that 75 bps ‘non rate hike’ that you told us about along with the ‘I don’t see a recession story’ isn’t what we think is true.  You had us on day 1, but then we pulled it apart and listened again to your speech and your comments and decided that we think you and your whole committee has lost control of the narrative and of interest rates.  And it was an ugly day…. right from the start…. a small pullback would have been expected after the red-hot rally on Wednesday…but yesterday’s action was anything BUT a small pullback and the sense now is that there is more downside to go…. How far?  Who knows – I guess it depends on what the FED does and says next….?

Stocks came under pressure the moment the opening bell rang…..and continued to melt down as the clock ticked……by the end of the day-  the Dow gave back 1,063 pts or 3.1%, the S&P choked – giving up 153 pts or 3.5%, the Nasdaq got absolutely creamed – losing 650 pts or 5%, the Russell gave back 80 pts or 4% while the Transports gave up 450 pts or 2.9%.   Now to be clear – while it was an ugly day yesterday – the broader market and the Dow remain in ‘correction territory’ down more than 10% of their highs but less than 20%.  The Nasdaq and Russell are both well into Bear Market territory down 24% off their highs with a bit more to go. 

And we know – that individual hi-growth sexy names are down even more…. Cathie Woods’s ARKK Disruptive Tech ETF – is off 50% this year and is off 65% from its all-time high back in July 2021.  Names in that ETF include TDOC -88%, ROKU -80%, ZM -75% COIN -70%, TWLO -72% and how can we forget HOOD – 90%.... The winner in that fund – TSLA only down 31% from it’s high on Nov 4th.

From a broader perspective –  Of the 11 S&P sectors – Communications and Consumer Discretionary are tied for first place down 21% each ytd, followed by Tech down 18%, Real Estate down 12%, Financials down 10%, Industrials down 9%, Healthcare down 7.5%, Basic Materials down 5.5%, Consumer Staples is off less than 1%, Utilities are up less than 1% and Energy is the clear winner up 45%. 

Most individual sub-sectors are also down so while it feels like there is no place to hide – that is not exactly true.  There are pockets of strength – Energy, Staples, Coal, Fertilizer, Big Tech, Utilities and Aerospace/Defense names…..you know them….they are they the Big, Boring and Beautiful names….XOM, CVX, HAL, OXY, BTU, MOS, LMT, NOC, RTX, GD, JNJ, KO, WMT, PG, IBM, SO, DUK, AEP - Do you see the pattern?  These are not the ‘Cathie Woods’ names…. these are tried and true US Americana names. …. I have highlighted them, and I will remind you - Look for earnings growth and NOT multiple expansion…. because in a rising rate environment – multiple expansion will be hard to come by……. especially for some of those ‘sexy’ names.  Capisce?

It is what I have been saying for months now – Value overgrowth and speaking of – the value trade SPYV is -4.7% while the SPYG is -20%.  Don’t forget – you also get paid to own value in the form of decent divvys – that can automatically be re-invested in what is known as DRIP programs…. (Dividend Reinvestment Plans) which helps to build your position in names you like.  

10 yr. treasury prices dove sending yields all the way up to 3.1% at one point – only to close yielding 3.03% and that finally made some sense – considering that the FED is about to embark on a historical rate increase cycle.  The idea that bond analysts were trying to explain it away by saying that the bond market has gotten ahead of itself and the idea that the FED is not ‘actively considering’ 75 bps has to make you laugh.  Yesterday I thought that we wouldn’t be having the 75-bps rate increase conversation until next week – but I guess I was wrong – we are having it just hour after JJ told us to put it to bed.

Now – This morning – US futures are down…. which should be no surprise at all…. Dow futures down 45, S&P’s down 10, Nasdaq down 50 and the Russell is flat. We are due to get the monthly NFP (non-farm payroll) report today…and while the expectation is for an increase of 380k jobs and for unemployment to go to 3.5% - I am not making investment decision based on this report  - now could we see a BIG upset (in either direction) – sure…is it really gonna make a difference right now?  No.

The focus will remain on speculation about what happens ‘if’……What happens if they raise by 75 bps – (which is what FED funds futures are NOW pricing in – see how fast that happened?).  This after JJ told us that they were ‘not actively considering’ it?  What happens if they make an ‘intra-meeting’ move?  Which is not unheard of at all…? think of the message that would send…. I mean – remember what I said on Tuesday – it’s about the combination of rate policy that includes not only the rate but now the pace of those increases.

Expect lots of chatter today as analysts and strategists dissect everything that has happened in the last 3 days…..In the end – it is now even clearer that investors think that the FED has lost control of the narrative, that they think rates will rise faster than JJ said, that inflation is not expected to subside anytime soon and that we should brace for a hard landing (recession).  Next up – expect all of the FED members to start to ‘make the rounds’ on TV and at industry conferences…. Expect them to continue to tell us ‘They got this’.     

European markets are all lower……Monetary policy remains the key focus…. global bond yields are all up as investors react to rate hikes and expected rate hikes.  Bank of Finland – Olli Rehn – demanding that the ECB move faster on rates suggesting that the recent turbulence is all about the ‘pervasive uncertainty’ around global monetary policy.  Markets across the region are down more than 1.25%. 

And Oil is up again……Adding $2.45 to $110.65……Remember when they tried to force oil lower with the SPR release…. saying that they ‘got this’ – oil did trade as low as $94 in early April……because they were adding supply – and that would solve the issue…. How’s that working?  We have very strong demand, and we still have a supply issue that isn’t going away anytime soon….so brace yourself for higher prices.

The S&P closed the day at 4146 – down 153 pts…...leaving 2 century marks in the dust – 4300 and 4200!  The April low is 4,062…..that will be the next level to watch…..A breach of that level will set the algo’s on fire and ignite a new round of sell orders…..buyers will NOT stand in the way – why would they…..and that doesn’t mean everyone is giving up – not at all, it just means that the market is working and pricing in risk….so wherever it takes us – is where it takes us…You have to decide where you are on this ride.  Time horizon and risk profile.

Yesterday I said that the Wednesday rally ‘was a bit overdone’  I think as we move thru the month and see that the eco data is not in retreat and that inflation is not in retreat – the conversation once again turns to the pace of rate increases…I am in the camp that the 75 bps conversation is NOT over by any stretch…..unless of course the economy goes into reverse….(which it just might – no matter that Jay tells us that we are strong enough to withstand multiple hikes…).  

The immediate level to watch is 4062 on the S&P – a breach there could see the S&P make its way to the 3800 level….and if you think there is value now – just wait til then! 
Remember it is about sentiment…. In the end – create a plan and stick to it. Emotions are not an investment strategy.

Spaghetti arrabiatta 

Arrabiatta - is the Italian word for angry.......created in Rome - this sauce is simple to make and gets it anger from the red chili pepper.... You can serve this with any type of pasta you want - but spaghetti or linguine is best. 

This dish should cost you:  $25 for a family of 4.  And it takes only about 30 mins to make.
You will need:  olive oil, onion, garlic, red wine, sugar, crushed red pepper (or chili peppers if you want hot, hot, hot), lemon juice, oregano, s&p, crushed tomatoes, tomato paste and chopped parsley....

Bring a pot of salted water to a rolling boil.

In a large pot (or deep sauté pan) on med-hi - heat up olive oil and garlic.... sauté a bit - but do not burn - 3 mins or so.... now add sliced onion and sauté until soft - like 5 mins more.  Next - add 1/2 cup of red wine, 1/2 tblspn of sugar, fresh squeezed lemon juice (about 1 tblspn) , oregano, bit of tomato paste and a 28 oz can of kitchen ready crushed tomatoes (not in puree - just crushed tomatoes), crushed red pepper (or crushed chili pepper if you prefer) - bring to a boil and then reduce to simmer and cook for 15/20 mins.

Add 1/2 lb of spaghetti to boiling water and cook for 8 mins or until aldente - strain - reserving a mugful of the pasta water.  Return pasta to pot and add back about 1/4 cup of the pasta water to re-moisten.  Stir....Now add pasta directly into the sauté pan with the sauce - toss well - add a handful or two of grated parmegiana cheese and serve immediately in warmed bowls.  Enjoy with a nice bottle of Brunello di Montalcino.  Always have extra cheese on the table for your guests.

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