There’s one constant underpinning this market: The Fed. It has literally lost its collective mind (not that I feel sorry for them), like headless chickens running aimlessly around the otherwise impressive façade of the Eccles Building.
My daughter says I write about the Fed too much, but there’s no way around it: The Fed is the market now.
We’ve presented plenty of evidence that this cadre of PhDs is simply making up policy as they go; forever scurrying to keep their Wall Street master smiling.
This experiment, of course, ends badly, but in the near-term we also know that when the Fed is pumping steroids (which is to say slashing rates and printing money at the same time), the markets will go up.
In October, the money printers returned, and I mean big time-which prompted me, the jaded macro bear, to pause my fishing trip out West and scream “Party on! The money printer is back!”
Since then, and right on cue, the markets have been melting up, as my admittedly “exuberant” articles made fairly clear last week – and which we immodestly predicted even earlier in the year.
Why so immodest? Because it’s so simple: We knew the Fed, which is nothing more today than Wall Street’s harlot, would print money as soon as the market needed it.
Since my autumn fishing trip, we’ve watched stocks fly higher than my fly rod, posting new gains week after week after week. That’s precisely why I told you to buy the S&P and ride the most hated bull market we’ve ever seen…
Bad News Got Worse, Markets Got Higher… No Surprise
Remember the Atlanta GDPNOW report we reported upon last week – that credible indicator of GDP growth whose projections had dropped to 1% for Q4/2019?
1% GDP growth against the backdrop of the highest stock market on record is a flashing neon sign. And that sign says: CRAZY.
But the crazy just got crazier folks.
We thought 1% was pretty fricking low – pathetic, in fact. But then last Friday there was yet another update.
The Atlanta Fed has lowered the 1% figure again, from 1.0% to 0.3% on the back of poor manufacturing data and slumping industrial production.
Folks, do the math; I have. It just doesn’t make sense. GDP is tanking and the DOW just crossed 28,000.
A record high market and a tanking GDP. The Fed experiment has mathematically (if not officially) failed our country.
But at least it’s saved the stock market… for now…
Ah, but who needs trivialities like good ol’ American manufacturing, healthy industrial output, or even a GDP growing by single digits when our magical Fed is able to print and pump money, and make Wall Street fat on cheap interest rates?
Heck, who needs a real economy at all?
Again: If this sounds crazy, unbelievable, or unsustainable, well, it’s because you already know that it is.
For now, however, we can twist the wisdom of another great American icon, Forest Gump, and simply observe: “Crazy is as crazy does.”
As unpalatable as it may be, as investors, we have no choice but to play ball, and to swing at fat pitches when they come our way.
My colleague Tom Lott – whom you’ll get to know shortly – has his eye on just the right pitch. Take a look at the chart he shared with me.
Money Flows With (and Follows) the Fed
We like to look at exchange traded funds (ETFs) for clues on money flows – tracking the money flowing in and the money heading for the exits.
Well get this – Equity ETF’s have just taken in almost $21 billion as of mid-November, as more money pours into stocks at levels already 70% higher than the prior month of September, which was before the money printers kicked in.
See the difference a money printer makes? Just turn it on and watch the Pavlovian investor reactions.
In short, where the Fed goes, the money flows.
Since the QE re-commenced on my fly-fishing trip, we’ve enjoyed the best month of 2019 and thus seen further evidence of this continuing melt-up with short interest rates pinned to the floor.
As for how to invest or trade this absurd yet nevertheless obvious melt-up, last week we made two suggestions.
As we said there and elsewhere, this market will melt up, but not without wild swings of volatility, which is why we suggest you follow our recommended approaches (either passive or active) carefully.
Eventually, the fat, easy pitches the Fed is throwing today will morph into dangerous curve balls tomorrow. One therefore needs to swing with open rather than just starry eyes.
And our entire mission is to help you swing with clear eyes.
And as for what we are seeing now, the data is fairly clear, as we strive to see (and to show you) where to be, and where not to be, in this current era of crazy.
Here’s a High-Profit Heat Map
For now, our own heat map confirms a gleeful, risk-on attitude among investors, as returns and flows into Quad 2 Sector ETF’s (shown below) have now turned bullish across seven out of eleven sectors – namely technology, financial, industrial, materials, healthcare, communications and consumer discretionary sectors – and all in that order (strongest to weakest), we might add.
Here’s our code to the Heat Map below, one which we’ll be sharing from time to time. It’s pretty simple, but very accurate:
- Quad 1 (Light Green) – A recovering market…look to buy.
- Quad 2 (Dark Green) – A bull market…get long-buy now.
- Quad 3 (Yellow) – A weakening market…look to sell.
- Quad 4 (Red)- A bear market…get short or get out.
What’s most evident above is that all the Fed steroids we’ve been talking about for weeks, if not years, are having their intended/expected impact: Markets are melting up as the money printing kicks in. Our “Strong Sectors” are making all the money as our “Weak Sectors” lag.
Let’s parse an example, so you can familiarize with the power of this kind of data, by drilling down in the Technology Sector (above, the top Sector ETF in the strongest Quad, Quad 2).
In the last 30 days, the SPDR S&P 500 ETF (NYSEArca: SPY) is up 4.64% and the Technology Select Sector SPDR ETF (NYSEArca: XLK) is ripping – up 7.82% (by 1.7 times as much).
Drilling down a bit more…
Altogether, there are 68 underlying stocks that make up the SPDR XLK ETF. Of those, just over a third (25 to be exact) are positioned for investment in our Quad 2 – our bull market Quad, because they meet certain criteria.
Now, the average return of these Quad 2/Tech stocks only was +12.04% in the last 30 days – that’s 1.5 times as much as the “mothership,” the XLK SPDR itself.
Indeed, only one stock among those 25 is down over the last 30 days, namely Microchip Technology Inc. (NASDAQ: MCHP), and it’s only down by -0.43%
All the rest are up – substantially up.
Fortinet Inc. (NASDAQ: FTNT), with a $17 billion market cap, and QORVO Inc. (NASDAQ: QRVO) with a $12 billion market cap, are each up 33% in just 30 days; Advanced Micro Devices (NASDAQ: AMD) which sports a $43 billion market cap is up 25%; and that good old $104 billion staple, Qualcomm Inc. (NASDAQ: QCOM) is up 17%.
Get this… a February call option on Qualcomm (QCOM US 02/21/20 C85) has soared from $2.50 on October 16 to $10.19 last Friday. That’s up 4.08 times in 30 days, or 408% (+4,895% annualized, if you like to think in annual terms).
Boy, do I remember Qualcomm back in the Dotcom craze. It moved all over the place, like a fly on a raging river.
The fact, of course, that the balance sheets on these tech “leaders” are an embarrassment to common sense or high school arithmetic is immaterial.
I’ve argued this clearly. But if the Fed is printing money, everyone gets greedy, and hence everyone runs to tech… Today they are ripping, but eventually they’ll be my favorite “Big Short.”
Again, I’ve seen this movie before. It ends badly. But not yet, and not now.
Here’s the key to all of this…write it down: Investing in the leading stocks in the leading sectors is the winning investment strategy.
Let us know what you think in the comment box below as we tackle a little reader “Q&A” from the past week.
Here’s What You’ve Been Asking Lately
Recently, R. S. suggested that more blunt facts from articles like this one be shared with like-thinking (i.e. truth-seeking) minds in small groups to spread the news.
Well, anyone who can put a sizable group together should let me know. I’m happy to come on my own dime and swap thoughts. This stuff matters to all of us, and I want to inform as many people as I can.
Until then, just keep spreading the blunt-speak and share our articles to those you feel need them the most.
C.R. Davis had asked my thoughts about Canadian banks. For more on this, see my July report, here.
Reacting to my recent “bull” stance last week, S.K. asked if I saw a time frame for this melt-up while Frank asked about a 28,000 “cap” on the Dow.
As for S.K., all I can honestly say is this will last as long as faith in the Fed lasts, and for that I’m as curious as you are.
But to track it, just watch that yield on the US 10-Year Treasury, for once the Fed loses control over rates, the debt party ends, which means this debt-driven bull dies. I’ve discussed this many times and can’t emphasize enough how important this bond indicator, plotted for you below, is for stock survival. 10-Year Rates are trying to break to the upside.
Frank, in terms of a Dow “cap,” I hear you-28,000 seems technically and fundamentally realistic, but realism in an era of Fed insanity is harder to measure.
The Dow passed 28,000 on Friday. I opened and stayed above it on Monday. Will it hold? Some are arguing for a Dow at 40,000. Crazy? Yes. Totally. But then again, we are in uncharted waters-a true Twilight Zone— and don’t know how long this experiment can hold water.
No one knows.
F.J.C. preguntó si nuestros informes están disponibles en español. Desafortunadamente, todavía no, ¡pero desearía que lo fueran! (Translation: F.J.C. asked if our reports are available in Spanish. Unfortunately, not yet, but I wish they were!)
In the interim, stay sane, stay informed and stay careful out there. It’s crazy…
6 responses to “Here Are the “Buy” Signals in a Market Gone Crazy”
November 18 2019