The Fed spoke and the markets responded. Think about value. | Top Advisor Corner
“It was impossible to start a conversation, because everyone was talking too much,” said Yogi Berra.
It’s easy to lose focus when everyone is talking. This is especially true when there are large market movements and the uncertainty that often comes with them. But instead of wavering, it’s important to focus on these simple principles: Values never go out of style. So while some people may worry about the present and predict the future, smart investors look for market areas that are likely to be the next leaders and trade accordingly.
Values never go out of style
Bonds and stocks have risen dramatically since the Federal Reserve recently reversed interest rates to a stronger level. Both markets have made great progress in a short period of time and need a break. So, with many investors worried about the future, those who are patient enough to identify sectors in the market where value is building, as we explain below, are likely to be rewarded in the end.
In his press conference after the FOMC meeting on December 13, Fed Chairman Powell noted that interest rate increases have stalled and hinted that the central bank is now “talking” about cutting rates. Both bonds and stocks have exploded recently as rallies have accelerated. But by December 15, New York Federal Reserve President Williams said the Fed was not actually talking about cutting interest rates. His comments led to a reversal in pre-market futures, which spread into a much calmer trading day.
Stay calm
This public disagreement between the two giants of the Federal Reserve is understandable. Perhaps the huge movements in the markets took the central bank by surprise. Central banks are desperately trying to achieve a soft landing, where the economy slows enough to quell inflation without a recession.
Soft landings are rare. In the last 50 years, the Fed has succeeded only once. Consider Alan Greenspan in 1994.
The bottom line is that the market is trying to sort out what to do next and what the Fed’s most recent actions mean. This suggests that trading is likely to be choppy after the huge rally in stocks and bonds. The advantage is, as I recently explained, Your Daily 5 videoThe choppy market is perfect for bargain hunters and value players.
So while you wait for the next big move, follow these four simple steps:
- Stick with what works. If a position is being held, hold it.
- Profit from overextended sectors.
- Consider a short-term hedge. and
- Find value in off-the-beaten-path areas that are showing signs of revival in the market.
Bond yields have plummeted, pushing mortgage rates below 7%.
The US 10-year Treasury yield (TNX) tumbled on the upbeat news from the Federal Reserve and closed below the key 4% zone last week. This is considered a critical level of support. While the long-term implications of this are generally optimistic, investors should examine the reaction of each individual sector of the market and portfolio positions to lower returns before making any decisions.
For example, the Fed’s actions were initially bullish for the homebuilding sector (SPHB), but the news hit new highs. However, since I recommended it at the end of September, quite a lot of people who are building houses have come in a short period of time., so integration is planned. On the other hand, if mortgage rates fall below 7%, homebuilder stock prices are unlikely to fall by more than a moderate amount until proven otherwise. Meanwhile, the average mortgage rate is approaching a test of its 6.8% level.
REITs such as homebuilders have rebounded recently. The iShares Residential Real Estate Capped ETF (REZ) may have hit a near-term high as low mortgage rates affected potential renters’ ability to purchase homes, causing investors to worry about a decline in occupancy. However, until proven otherwise, the supply and demand scenario favors homebuilders and residential rental professionals who can offer potential renters and homebuyers the best products at the best prices.
Click here to get the bigger picture on homebuilding and real estate stocks.
Be patient and find value
Last week in this space I wrote that with inflation data releases the same week as the Federal Reserve meeting, it makes sense to “review your portfolio carefully, consider taking some profits, and explore some potential ways to hedge.” mentioned. “We expect the Nasdaq 100 Index (NDX) to be big and potentially strong soon,” he added.
Let’s catch up. Invesco QQQ Trust (QQQ) has been a magnet for funds since the bottom in October. But gains have slowed since the Fed’s pivot. Much of that has to do with consolidation in Microsoft (MSFT), which is under selling pressure as seen by the rollover of the OBV line and the stock’s decline below its 20-day moving average. But don’t even consider QQQ, which has become incredibly diverse. It hasn’t come out yet. Both the ADI and OBV lines are rising as funds continue to flow.
Microsoft’s near-term stagnation suggests investors are looking elsewhere and money is once again moving away from the AI atmosphere. However, QQQ’s rising ADI and OBV lines indicate that funds are moving into other areas. Surprisingly, building materials and metals stocks are still performing well as the market considers another uptick in infrastructure projects.
Positive fund flows and relative strength can be seen in the Materials Select Sector SPDR Fund (XLB). Note the bullish rise in ADI (Acquisition/Distribution) and OBV (On Balance Volume) for XLB. Especially when compared to Microsoft, both started to roll over as short positions were built (ADI) and sellers began to outpace buyers (OBV). .
Explore global shipping. With the situation in the Middle East and the severe drought affecting the Panama Canal, this area of the market presents opportunities for patient and value-oriented investors. The actions of the little-known and thinly traded Global Sea to Sky Cargo ETF (SEA) suggest that shady money is making a home in the sector. Both ADI and OBV are displayed here.
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Market breadth remains upward biased
The NYSE advance decline line (NYAD) is overbought, in a bullish trend, and trading above its 50-day and 200-day moving averages. The recent rally is likely to trigger some sideways movement from here. A reversion to the 20-day moving average is not impossible.
The Nasdaq 100 Index (NDX) rose above 16,000 as short sellers were pressured by upbeat comments from the Federal Reserve. NDX is currently trading outside the upper Bollinger Band, suggesting a near-term correction or consolidation is imminent. With both ADI and OBV rising, overbought conditions may become more likely before consolidation occurs.
The S&P 500 (SPX) rebounded above 4600 thanks to the Federal Reserve. RSI is well above 70. A sideways move is expected and perhaps a return to the 20-day moving average.
VIX remains below 20
The CBOE Volatility Index (VIX) is at 20, indicating strength for the stock. If VIX continues its downward trend, there may be more room for upside.
When the VIX rises, it means traders are buying large amounts of put options. When market makers’ put option trading volume increases, they sell stock index futures to avoid risk. A decline in VIX is optimistic because it leads to fewer put option purchases, which ultimately leads to call purchases. This forces market makers to hedge by buying stock index futures, increasing the probability that stock prices will rise.
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Joe Duarte
money options
Joe Duarte is a former money manager, active trader, and widely regarded independent stock market analyst since 1987. He has written eight investment books, including bestsellers. Trading options for beginnersRated Benzinga.com’s TOP Options Books of 2018 Now the third edition is out. A book about everything you should know about investing in your 20s and 30s And six other trading books.
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