Contextualizing how oversold we are … Wall Street wants more clarity from the Fed tomorrow … Louis Navellier on how to navigate through this

 

Last week, the Nasdaq fell more than 1% – every single day.

According to Bespoke, the Nasdaq is now more oversold than it was in March 2020.

Bespoke also pointed out that the Nasdaq is more than three standard deviations below its 50-day moving average – and that was before today’s losses, coming in at more than 2%.

Bottom-line, this market is heavily oversold.

In fact, such conditions have occurred on only 73 days in the entire history of the Nasdaq Index. And again, that was before today’s further declines.

For more context on this, let’s turn to legendary investor, Louis Navellier. From yesterday’s update:

According to the folks at Bespoke, (a week in which the Nasdaq fell by 1%+ every day) has happened 20 times before since 1970, with the most recent occurrence in December 2018. On average, the NASDAQ tends to bounce back after a four-day bout of 1% or more declines.

Bespoke pointed out that in the following week, month and next three months, the NASDAQ has risen an average 1.78%, 4.28% and 9.62%, respectively.

Right now, I know it’s not looking too bright for this week, with the NASDAQ already down more than 2% (Monday) morning. But what we need to understand is that the NASDAQ is grossly oversold – and it’s overdue for a bounce.

Hopefully, that bounce will begin tomorrow if the Fed clarifies its policy plans.

***What’s driving this market rout is uncertainty

Wall Street abhors not knowing what’s coming.

And in this case, Wall Street doesn’t know what the Fed will do – specifically, how quickly it will finish up its bond-buying program, and how soon (and how aggressively) it will raise short-term interest rates.

We know that higher rates are coming, but estimates are all over the place, even from the Fed members.

Take the St. Louis Fed President, James Bullard. A few weeks ago, Bullard was eyeing two rate hikes this year. That went out the window just a few days later.

From Bullard, earlier this month:

I actually now think we should maybe go to four hikes in 2022.

Then there’s Minneapolis Fed President Neel Kashkari. He’s long held the belief that the Fed shouldn’t hike rates – at all – until 2024.

No more. He’s now expecting two rates hikes this year.

With this degree of uncertainty swirling around, it has Wall Street stabbing in the dark. And that means all eyes are on the outcome of tomorrow’s Federal Reserve meeting.

***What will the Fed announce tomorrow?

The Federal Reserve wraps up its January policy meeting tomorrow afternoon.

Investors are not expecting any changes from this meeting, but they will be scrutinizing all releases and commentary for clues about the just-mentioned uncertainties.

For more color, let’s go back to Louis:

To break the back of inflation, the Fed has to engineer a “soft landing,” which is easier said than done.

Furthermore, the Fed’s toolbox is compromised due to the fact that if they raise key interest rates too much, then the interest burden on the almost $30 trillion in federal government debt will be unmanageable.

So the net result is that inflation hedges, like residential real estate and our fundamentally superior growth stocks are expected to remain an oasis for investors.

We will get some clarification on the Fed’s intentions on Wednesday due to the Federal Open Market Committee (FOMC) statement.

I expect the Fed to stay it is staying the course and continuing to reduce its quantitative easing before it gets ready to begin raising key short-term interest rates.

In my opinion, the Fed is maintaining its “Goldilocks” environment of low interest rates amidst strong economic growth.

The stock market is essentially a manic crowd that is not smart, since it likes to “react” versus think. Now that we are in the midst of another strong earnings announcement season, it is finally time for the stock market to get “smart” and for new market leaders to emerge.

***Looking directly at the fear

It is very easy to get caught up in the collective fear of the moment. Especially if you’re watching the financial news.

One famous investor receiving substantial air-time is Jeremy Grantham, co-founder of GMO. He’s calling for a historic correction.

From Bloomberg:

Jeremy Grantham, the famed investor who for decades has been calling market bubbles, said the historic collapse in stocks he predicted a year ago is underway and even intervention by the Federal Reserve can’t prevent an eventual plunge of almost 50%.

In a note posted Thursday, Grantham, the co-founder of Boston asset manager GMO, describes U.S. stocks as being in a “super bubble,” only the fourth of the past century. And just as they did in the crash of 1929, the dot-com bust of 2000 and the financial crisis of 2008, he’s certain this bubble will burst, sending indexes back to statistical norms and possibly further.

I bring Grantham up because Louis spoke directly to Grantham’s perspective in his podcast update.

From Louis:

(Grantham) is a perma-bear. He’s predicting that there’s now a super-bubble bursting and it’s going to take down four asset classes – housing, stocks, bonds, and commodities.

Jeremy has always been super-negative. I personally don’t want to pick on people that are manically depressed. But clearly, he has a lingering depression problem. The media loves to pick him up because fear sells.

After dismissing Grantham’s uber-bearishness, Louis pivots, focusing on navigating through this painful period:

The conundrum that we’re all in now is “is there a silver lining, a critical path that’s going to emerge?”

When the stock market corrects 5%, we can be resilient. When it corrects 10% or more, nothing works. Unfortunately, they throw the baby out with the bathwater.

But right now, we’re at a crucial period where we should get a silver lining critical path to follow. The market is grossly oversold and we’re still in the midst of good earnings.

***Beyond the Fed meeting tomorrow, watch the yield on the 10-year Treasury

Fears of the interest rate hikes and spiking yields are behind this selling, but if you look at the yield on the 10-year Treasury in recent days, it’s falling.

After reaching nearly 1.87% last week, the 10-year Treasury yield has been dropping. As I write Tuesday afternoon, it’s down to 1.78%.

If Wall Street starts to sense that upward yield pressures are easing, it will help restore some confidence to the market. We’ll keep you updated on what happens here in the Digest.

Let’s return to Louis for the final word:

We’ve reached the point where it’s gotten ridiculous.

But markets are manic crowds. Crowds react, they don’t think. And it’s time for the market to get smart…

I think we’re on the verge of a major reversal here.

I don’t know when it’s going to be. It could be triggered by a flagship stock. It could be triggered by the FOMC comments. It could be caused by a Russian retreat from the Ukrainian border…

But the bottom line is it’s gotten ridiculous.

Hang in there, folks. I know it’s stressful, but I see the light at the end of the tunnel.

Have a good evening,

Jeff Remsburg