Market volatility continues… what our technical expert, John Jagerson, believes is behind it… what he thinks is coming… two buy-and-hold sectors today
This morning’s “What the Bleep is Going On?” news story is the just-released inflation data, showing that inflation has jumped to a 13-year high.
More on that in a moment.
First, this week, in a segment we’re calling “What the Bleep is Going On?”, we’ve been turning to our analysts to help make sense of today’s crazy market conditions.
On Monday, our CEO, Brian Hunt, walked us through a laundry list of examples of market insanity, tying much of it back to the government and its decision to print trillions of dollars to pour into the economy.
Though this is creating certain risks, Brian believes it’s also setting the stage for a massive boom in select, high-quality stocks.
Yesterday, we turned to Eric Fry and Luke Lango, both of whom stressed the point that valuations matter. Today, investors can succumb to their FOMO (fear of missing out), and join the herd by piling into overvalued “hot” stocks…or they can maintain a focus on intrinsic value and growth, and generate strong returns without taking on excessive risk.
In today’s Digest, we’re turning to John Jagerson of Strategic Trader. For newer Digest readers, Strategic Trader is InvestorPlace’s premier trading service. It combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.
The great thing about checking in with John is that he has his pulse on how Wall Street traders are feeling. This is highly-valuable information. After all, traders direct the flow of billions of dollars of investment capital. So, their decisions move markets…and that affects the portfolios of little guys like you and me.
Knowing how these traders are viewing the markets, which impacts what they’re buying and selling, is a bit like having a crystal ball into what’s headed our way.
Today, let’s delve into John’s perspective on What the Bleep is Going On? and see what that crystal ball is showing.
***A top-down look at market craziness with John Jagerson
Let’s begin by looking at the inflation data that came out this morning. I reached out to John earlier to get his thoughts.
Jeff: John, the inflation data came in higher than many anticipated this morning. Did it catch you off guard? And more importantly, should investors be worried?
John: Core month over month inflation came in at .9% or almost 3% on an annualized basis, which is higher than expected.
It’s important to note that expectations already had accounted for the “base rate” problem of comparing inflation to last year when prices were falling, so we can’t just completely wave this away as an anomaly.
However, it is not significant enough to change our view that although inflation will trigger volatility in the market, it does not pose a long-term threat yet.
Jeff: But what about some of the larger inflation increases in consumer goods?
John: We believe the most surprising factors in today’s report like used car prices (+10%), and lodging (+8%) are temporary issues driven by supply constraints which should be resolved later this year. So, we expect the annualized number to come down over the next few months.
Most importantly, we feel that this view aligns with the Fed’s expectations so there is a low risk that the Fed will try to tighten the money supply which would be a big problem for the market.
***In the meantime, stocks aren’t taking the news well
As I write, Wednesday morning, the Dow is down 1% and the Nasdaq is off 2%. The weakness in the Nasdaq is a continuation of the slide we’ve seen all week for the tech index.
Here’s how John explained it to his subscribers in an update yesterday:
Traders in the bond market are pricing in an expected five-year inflation rate that is as high as it’s been since 2008.
On the one hand, that is a concern because inflation and higher interest rates tend to go together, which is a worry for growth.
However, to put it in perspective, the expected five-year rate is between 2.5% and 3%, which is within the Fed’s target and around the long-term historical average.
So, we aren’t worried about the issue yet, but it will still contribute to volatility, which is what we are seeing.
As we noted in last week’s update, this period of volatility is likely to last another three to five weeks, so what we are seeing is within normal ranges.
Ultimately, if we can be patient, this should create some nice entry opportunities in stocks that hit support in May.
***With the inflation news and stock slide out of the way, let’s turn to the general state of the markets
I grabbed John yesterday to interview him for the What the Bleep segment. Let’s jump right in.
Jeff: John, lots of Main Street investors are looking at the state of the world and the investment markets today and thinking “what in the bleep is going on?” How would you answer that from a macro perspective?
John: We think investors are torn between how much growth has been organic and likely to last a long time, or how much is due to government and central bank stimulus. The risk is that if more growth depends on stimulus, then inflation will start to kick in from all the easy money and government spending.
Jeff: So, are you looking at inflation concerns as the primary cause of this weird market?
John: In part, yes. The problem here is that one of the most critical sectors, technology, is extremely sensitive to inflation. Because technology products are deflationary, any unexpected inflation has a compounded effect on this sector.
Along with Construction, Autos, and Finance, the tech sector has been driving much of the growth in the market, so worries about rising prices will create a lot more volatility in tech that will ripple out to the rest of the market.
The bottom line is that because investors can’t quite tell how much of each factor is driving the market, we wind up swinging from extremely optimistic back to neutral.
Jeff: Are you truly worried about inflation right now?
John: While we accept that inflation is a risk, we don’t believe it will spoil the rally yet. Unfortunately, I think investors will have to deal with a choppy bullish trend for now.
Jeff: How do you see all this unfolding and ending? Are there any major inflection points ahead that investors should keep on their radar?
John: We think the end of the market trend is too far out in the future – based on the information we have available right now – to make a reliable forecast. However, one catalyst that could spoil the rally is rising interest rates. Rates could go up because inflation is rising, or the Fed could move rates higher to avoid rising inflation.
The Treasury bond yield curve is a good proxy for inflation expectations that we can monitor for an early signal. Currently, investors are pricing in the same levels of interest rates and inflation we enjoyed during the pre-COVID pandemic.
If the long end of the yield curve started to creep beyond 3-4%, growth would have to be much faster to sustain market prices. We don’t expect a change like that to happen before the end of the year at the soonest.
Jeff: This week we’ve been featuring specific market stories of craziness. Are there any such anecdotes that jump out to you? And if so, to what extent do such stories impact your market approach?
John: The market is hot, and there are signs that investors are chasing dangerous bubbles. However, to a great extent, we haven’t been too worried about issues like GameStop’s spike or cryptocurrencies like Ripple or Dogecoin’s stratospheric rise this year.
If the “hot money” is preoccupied with those fringe markets or fad stocks, it keeps them out of more important markets like housing and traditional stock sectors.
As long as those investors are busy chasing the next Tesla-like short squeeze, we expect that to help keep volatility under control.
Jeff: So, big-picture, what should investors do about all this craziness?
John: First, we recommend that investors not try to time a collapse in the market – even if it looks inflated. Bull trends tend to last for a long time, and it isn’t easy to find the likely end. For now, if retail sales growth remains positive, we see dips in the stock market as good entry points.
However, we think traders should tread lightly in the tech sector. For reasons we have discussed, tech stocks are extremely sensitive to rising inflation expectations, which will probably keep volatility high in that group.
The bright side to this is that in the short-term, option premiums in the tech sector are high, which is good for short puts and covered calls. If your strategy remains flexible and focused on the short-term, option sellers in the tech sector could do really well through the summer.
Jeff: Sounds like you’re bullish despite the need for caution in tech?
John: We currently still have a bullish bias because we think enough economic growth has been sufficiently organic to keep pushing prices higher.
Jeff: Last question – if you have to buy-and-hold a sector today, what would it be?
John: Based on prior cycles, we believe industrial stocks and large retail/services companies look best for buy and hold strategies.
Jeff: Thanks, John.
If you’d like to get access to all of John’s market insights and technical analysis through Strategic Trader, click here.
We’ll see you tomorrow, as What the Bleep is Going On? continues.
Have a good evening,
Jeff Remsburg
