Blogs -The Low is in for Bonds, As Well As Most Stocks (For Now)

The Low is in for Bonds, As Well As Most Stocks (For Now)


November 11, 2022

Knox Ridley

Portfolio Manager

Last week, the market went through one of the largest intraday swings since the bear market began in 2022. Since then, we have reclaimed that high. The question is: what does this mean for the market in the long term?

How the Chaos Began

It started with the FED. They indicated they are now more open to pausing interest rate hikes, which sent markets soaring. The Federal Open Market Committee (FOMC) announced that, instead of reacting to only the latest inflation numbers, they will take in the “cumulative effect” of all their rate hikes.

They further acknowledged that the aggressive actions they’ve taken to combat inflation need time to play out. In other words, it remains to be seen whether they will they be seriously damaging, ineffective, or somewhere in-between. This startling self-awareness implied that the FOMC may not need to aggressively raise rates until the effects of their rate changes are truly obvious.

The market jumped 1.5% on this announcement, as pundits began to suggest a pause was insight.

However, in the speech that followed, Jerome Powell halted bullish emotions. He acknowledged that inflation has not come down as expected, even though supply chain issues that plagued most of 2021/2022 have been resolved. But he called a pause “very premature”— there’s still so much further to go, both in how high the rate could go and in the duration that they need to stay in the stratosphere.

And so, the press conference led to a plunge in the S&P 500, which closed down -3.4% from its high earlier in the day. It became the worst sell off on a FED-day since January, which has led to a retrace of most of the bounce from the October 13th low.

What Happens Next

You might assume we should brace ourselves for a new low in the S&P 500. That would be the prevailing trend preceding every FED meeting this year, but the market isn’t operating in a vacuum, and when you look outside of the S&P 500, a different story continues to emerge.

While some FAANGs and tech darlings, like TSLA, continued lower, many sectors and global markets continued higher. We’ve been trained for over a decade to follow tech, as it will lead the market. However, a seismic shift is occurring in real-time, as new leaders are being minted. The bond market was signaling to anyone listening that this FOMC meeting was different, as the complex bottoming process we have been discussing for weeks continues to build.

This shouldn’t be a surprise to our regular readers on Seeking Alpha. Here’s what we’ve been saying:

“…more and more signs are pointing to a bigger trend reversal underway.”

“…global markets did not follow the S&P 500 to new lows last week. Instead, they are signaling that a new push higher is likely to follow.”

“…the last time we saw these patterns was in mid-June, just before the market moved up 18% in less than 2 months…”

Those predictions, by the way, were all within the past month.

Value is a Major Indicator of the Next Upward Swing

The Big Five tech companies, also known by the acronym the FAANG, are having a rough time, especially Facebook (where thousands are being laid off), and Amazon and Google, which hit new lows, most people ignored what the rest of the market was saying.

Last week we discussed how boring Caterpillar and JPM Morgan have made their first higher high, as they are closer to making all-time highs than lows. This week, we will continue with theme from a broader perspective.

The DOW

The oft-ignored Dow Jones Industrial Average (DJI) has just given us a clean and clear 5 wave pattern off its late September low, while also reclaiming the 200 day-moving average. Not only did it bottom before the NASDAQ and S&P 500, but this 5 wave pattern suggests a much larger trend is developing. Translation: If the next pullback holds the low, and we can breakout to new highs, I see the Dow Jones powering to new all-time highs in the coming months.

Dow Jones Industrial Average Index Chart

This is not only limited to U.S. value stocks. Global markets are also setting up for a bigger push higher. The French CAC-40 and German DAX have recently broken out of their bear market down trends. This is in light of Europe facing all the problems the U.S. is facing currently facing with inflation, on top of a serious energy crisis.

The Canadian TSX as well as the Australian XJO have broken out of their bear market trend lines. Interestingly, these too markets appear to be setting up for a run the higher highs like the Dow Jones.

CAC 40 Index TradingView Chart

The reason I am mentioning this is because really big trends occur when all markets are moving in the same direction. While tech and some FAANGs have a setup to go lower, the rest of the market looks like it is setting up to go higher. It’s important to track these markets in order to get clues on when bottoms (and tops) are developing. A bottom never happens when everyone is expecting it, and it almost always happens when sentiment has reached a bearish extreme.

Transportation Is Having a Bonanza

The transportation sector has historically been a leading indicator of America’s economic growth, and therefore it often leads the stock market.

The Dow Jones Transportation ETF (DJT) is also exhibiting relative strength compared to the broad market. While the Tech heavy NASDAQ-100 is about 9% off its lows, and the S&P 500 is 12% off its lows, DJT is over 16 % off its lows.

Dow Jones Transportation Average Index Chart

Also, like the Dow Jones, it has just completed a 5 wave pattern off the low, suggesting that a bigger rally is likely.

If the next pullback can hold the low, and then turn back above to make a fresh high, it will be signaling that a major low was put in as we move into the heart of a new rally.

The Bond Market Called the FED’s Bluff

The FOMC announcement triggered an odd reaction in a sector few were paying attention to: bonds. The further one gets on the curve, in our experience, the less of an effect FED decisions has on rates; instead, growth and inflation expectations affect them more. After every hawkish policy decision this year, we have seen rates go higher, as long duration bonds hit a fresh low.

Last week, we discussed how bonds were setting up for a multi-month rally. This week we will acknowledge the very important fact that bonds not only failed to make a new low after the last FED speech, but they have since reclaimed the high on FED-day. This is significant, as the bond market is pricing in inflation and rate hikes, and signaling a low in bonds.

Ishares 20+ Year Treasury Bond ETF Chart

As bonds catch a long-term bid, rates will only go lower. This will force many beaten down tech stocks, which are simply long duration assets, to get repriced. This will be a tailwind for tech, and we believe today was the beginning of this repricing.

In anticipation of favorable repricing, coupled with tech’s beaten down valuations, we have been building key positions with real-time trade alerts sent to our premium subscribers.

Sign up for I/O Fund's free newsletter with gains of up to 221% - Click here

Market Levels

Reminder: the market rallied about ~12% just on a rumor of a potential pivot by the FED. Regardless of whether you believe we had it, the market definitely sold the news, and failed to make a new low. Not only that, but the S&P 500 reclaimed the 3912 level which was the high going into the FED speech. This is significant, as it is the first FED high the market has taken back in 2022.

With the divergences we have been talking about for weeks, if we do see continued volatility, it will likely be setting up a buyable low as we setup for a larger rally in the coming weeks.

The S&P 500 is not as clear as the Dow Jones. Like DJT, it completed 5 waves off its October 13th low, but it did so in a messy fashion. There are two primary probabilities: either the S&P 500 will make a new high in 2023 OR will instead play out a larger degree bear rally. If the next pullback can hold the low, then turn back and make a new high, I will be leaning towards the S&P 500 seeing new highs into 2023.

This would occur in large swings and likely take us back to 4300 SPX. It would be the scenario where some stocks and markets make new highs, while others do not. However, what is important to understand is that when you combine what rates, the dollar, global markets and many value stocks are telling us, it is that a large rally of some kind is under way.

S&P 500 Index TradingView Chart

What’s Coming— And When

The potential for some stocks to make a new low is present. However, the larger setup is for stocks to keep pushing higher. Short of a black swan event, we think most of the risk over the intermediate to long-term time frame is up --- but the FAANGs do not appear to be leading, as we have been accustomed to expect. However, weakness in these companies does not seem to be signaling weakness across the market. As long as rates hold their high, and many of the value stocks that are well off their highs hold, I see any additional volatility as a buying opportunity.

Regarding tech, not all companies are equal. One of the strongest companies in the market, is a well-known tech name, bottomed in May and is nearly 40% off its lows. While we will likely not see an all-encompassing tech rally, we do believe some names are setting up to be new leaders. The prices we are seeing, we believe, will pay off handsomely in the coming years.

Who’s ready for it?

Every Thursday at 4:30 pm Eastern we provide our Premium Members with a weekly market webinar where we discuss the stocks we’ve entered and exited throughout the week, plus stocks that are about to break out and our buy plan. The information from our weekly webinars have been used to successfully hedge our portfolio multiple times in 2022, as well as build positions at key levels. When we buy positions, sell positions or hedge the market, real-time trade alerts are sent to our Premium Members plus we offer a fully managed portfolio including details on allocations.

Gains of up to 403% from our Free Newsletter.

Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!

+344% on Nvidia

+403% on Bitcoin

+218% on Roku

*as of March 15, 2022

Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.

If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 324% on Zoom, 601% on Nvidia, 445% on Bitcoin, and 4-digits on an alt-coin. The I/O Fund is audited annually to prove it’s one of the best performing Funds on the market with returns that beat Wall Street funds. 

More To Explore

Newsletter

Podcast on Cloud Stocks: Consumption Model Vs. Subscription Model

In October, we talked with Jeremy Owens of MarketWatch on a Barron's podcast about the consumption model versus the subscription model. With Snowflake reporting this week, it's a good time to revisit

December 02, 2022

Nvidia Stock: Evidence Gaming Bottomed And Why It’s Important

The new Ada Lovelace architecture uses 76 billion transistors and a 4nm production process. In the keynote, the CEO stated: ‘Nvidia engineers worked closely with TSMC to create the 4N process optimize

November 29, 2022

The Low is in for Bonds, As Well As Most Stocks (For Now)

Last week, the market went through one of the largest intraday swings since the bear market began in 2022. Since then, we have reclaimed that high. The question is: what does this mean for the market

November 11, 2022

We'll know this week if the low is in

Capitulation seems to be taking hold in many tech stocks, specifically in the SaaS/Cloud space. The market has been trained to look to tech, specifically FAANGs, as the sector to lead. However, what i

November 10, 2022

FAANGs are not Leading this Market Lower

Panic selling commenced in the broad market after the FED's recent attempt to stop a rally. Interestingly, the bond market doesn't seem to buy it, nor do many key value stocks in the U.S. The divergen

November 04, 2022

Meta Stock: The rising expenses and Capex are worrying

Meta shares nosedived 25% after the company's recent Q3 results. Meta's expenses are rising and the company is seeing softer revenue growth and softer margins. The slowing advertisement revenue has fo

November 04, 2022

Netflix Stock Will Be A FAANG Again

Netflix lost it’s status as a FAANG when the stock fell from a $300 billion market cap to a $100 billion market cap this year. My firm entered Netflix in August as we fully expect the stock to become

November 01, 2022

This Bear Market Rally has much Further to Go

Markets do not top together, nor do they bottom together. For this reason, identifying the leading markets can help you stay ahead of the trend. We continue to see evidence of these divergences, which

October 28, 2022

Divergences Point Toward Market Moving Higher (Technical Analysis)

Divergences are important to track. There is always a leading market that can provide advanced warning that a top or bottom is ahead. For example, from the COVID low in 2020 through February of 2021,

October 21, 2022

Sentiment and Divergences are Pointing Up

The stock market continues to power higher on the heels of bad news. We are up over 6% since the CPI reading signaled that inflation is stickier than hoped. The last time we saw the broad market ignor

October 19, 2022

Sign up for Analysis on
the Best Tech Stocks

The I/O Fund specializes in tech growth stocks and offers in-depth research for Premium Members. Investors get access to a transparent portfolio of 30 positions, a private forum, webinars, and real-time trade notifications. Sign up for Premium.

We are on social networks


Copyright © 2010 - 2022
Get Free Weekly Analysis on the Best Tech Stocks