A “make or break” moment for the 10-year Treasury yield… looking for another month of cooling CPI data… when will this latest selloff end?… Luke’s growth stock prediction

Worry not – we still see this current selloff as a technical one that will soon find its footing, before the big rally resumes.

That comes from our hypergrowth investment expert, Luke Lango, from his Innovation Investor Daily Notes earlier this week.

Let’s keep going with Luke’s analysis:

Right now, the market is simply resetting its hopes for a Fed pivot and soft landing in 2022 – both of which were pipeline dreams anyway.

As those hopes get washed away, stocks are retreating. However, the big summer rally was only built partially on those hopes and, instead, was more so built on the prospect of receding inflation.

And that is still alive and well.

Consequently, we expect this current round of selling to end rather soon…

Once it does, we expect stocks to find their footing and proceed to grind higher as the coming inflation prints for September, October, November, and December all show rapidly falling rates.

Today, despite being on track for five consecutive days of market losses, we’re going full-bull.

In recent Digests, we’ve highlighted reasons for concern as we look at the financial markets. But there are always reasons for concern. That’s why the old saying goes: “Stocks climb a wall of worry.”

But today’s market offers bullish data too. And as balanced investors, it’s our job to evaluate all angles.

So, today, let’s analyze some bullish influences and find out why Luke is calling for a 50%+ rally in top-tier growth stocks by the end of the year.

A “make or break” moment for the 10-year Treasury yield should turn bullish for stocks

A moment ago, I wrote that we’re going “full bull” today with Luke’s help.

But let’s clarify something:

Luke is not a “perma-bull.” In fact, he takes a very measured, sober look at the data. It’s just Luke sees a bullish case emerging.

Let’s look at some examples of his balanced analysis, beginning with something that Wall Street is watching closely: the 10-year Treasury yield.

From Luke:

Technically speaking, the 10-year is at an important “make-or-break” point.

It has climbed back to its early-May peak of 3.13%, where it nearly topped out just a few days ago and which is consistent with the range of its current arc topping pattern.

At this point, long yields will either break out to 3.2% and break the downtrend, or long yields will drop back below 3% and preserve the downtrend.

If the downtrend is broken, stocks will suffer. If it’s preserved, stocks will rally.As I write on Thursday, the 10-year yield is popping above this 3.2% level – not what we want to see. However, we’ll be more concerned if this level holds over a series of sessions. A one-day spike, only to retreat in the days to come, wouldn’t be unusual.

Returning to Luke’s forecast, he provides the following chart showing the 10-year Treasury yield.

You can see the “arc topping pattern” Luke references, as well as the lower path Luke expects the yield to take (dotted white line).

As I write on Thursday, the 10-year yield is popping above this 3.2% level – not what we want to see. However, we’ll be more concerned if this level holds over a series of sessions. A one-day spike, only to retreat in the days to come, wouldn’t be unusual.

Returning to Luke’s forecast, he provides the following chart showing the 10-year Treasury yield.

You can see the “arc topping pattern” Luke references, as well as the lower path Luke expects the yield to take (dotted white line).

Back to Luke for why he believes this is the path the yield will take:

We strongly believe the downtrend will be technically preserved, driven by a drop in oil prices, reduced economic demand expectations, and a cool September CPI print.

As to Luke’s point about oil prices, they’ve been falling steeply ever since early June. And though they steadied briefly last week, it appears they’re resuming their downward trajectory.

You can see this below.

This ties into Luke’s prediction of a cooler September CPI print.

Remember, lower gasoline prices (based on lower crude prices) played a huge role in July’s cooler CPI print.

So, what’s been happening with gas prices since then?

The data below come from the U.S. Energy Information Administration. You’re seeing weekly retail gasoline prices in the U.S.

Note the peak price in June, followed by the much cooler price in July, followed by an even cooler price just a week ago.

This suggests another cooler CPI print is on the way – just as Luke predicts.

But what about this market selloff in the wake of Federal Reserve Chairman Jerome Powell’s hawkish Jackson Hole speech?

Should we not be concerned that stocks have much further to fall? What about the “bear market rally” narrative?

Luke says what we’re seeing is simply a re-set of rate hike/cut expectations that’s being priced into the market – and it’s nearly done.

Here he is with more:

If you want to know what this market selloff was all about, look at the chart below. It graphs the number of rate-hikes the market expected from the Fed in the first half of 2023.

As you can see, as recently as mid-July, the market was pricing in two rate cuts in that time. 

Now, though, rate-cut expectations for the first half of next year have dropped to 0. That’s a full reset to where we were in mid-June, right at the beginning of the big summer market rally.

Consequently, we feel that the catalyst for the recent selloff – a repricing of rate hike/cut expectations – has almost entirely washed through the market. 

Luke predicts that when this re-set is complete, stocks can and will grind higher on the back of weaker inflation data.

Finally, let’s zero in on Luke’s preferred corner of the market – growth stocks

One of the best ways to get a bead on market direction is by watching the smart money. We’re talking about the massive hedge funds that can move markets when they buy and sell their positions.

So, what are these hedge funds doing today?

Back to Luke’s Daily Notes:

We’re currently seeing the largest rotation from hedge funds into growth stocks since 2013; and back then, the massive hedge fund rotation preceded a huge melt-up in growth stocks.

Goldman Sachs recent crunched the numbers of Q2 flow data and found that hedge funds rotated very aggressively into growth stocks in that quarter. It was the biggest growth stock rotation from hedge funds since 2013.

As Luke pointed out, that previous big rotation preceded a massive growth stock rally.

Speaking of “massive growth rally,” I’m looking at Luke’s Innovation Investor portfolio right now (specifically, his “Top 10 Picks”) and the recent results are striking.

Here’s the performance of all 10 recommendations since mid-June, which includes the heavy selling pressure over the last five trading sessions:

• 70%
• 43%
• 115%
• 13%
• 13%
• -4%
• 85%
• 24%
• 22%
• 2.9%.

For the record, over a period in which the S&P is up just 6.5%, the average return of these 10 stocks is 38%, with only one negative position.

Bottom line – there’s a bull market in growth stocks.

With this context, we’ll end today with Luke’s forecast of what’s coming – and why you want to be a part of it:

Once the market is done processing the fact that the Fed won’t cut rates, stocks will bottom. And the rally will resume on the back of the remaining hope that inflation is falling.

Technically and fundamentally, it looks like the market is in the final stages of this processing.

Therefore, we think this selloff is in its final stages. We expect support to show up soon – and at levels not much lower than where we currently trade.

Once it does, we believe the rally will resume, and [top-tier growth stocks] will kickstart another multi-month rally wherein they could/should rally more than 50% again!

Have a good evening,

Jeff Remsburg