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MarketSmith powers the charts in this video

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The fed raised the benchmark interest rate 25 bps again to 4.75%-5%. They hinted that they are very close to pausing hikes for the year but don’t expect to cut unless either inflation comes down quickly or unemployment skyrockets – none of which seems likely in the near term. The market thinks that the Fed is bluffing and it is currently projecting rate cuts starting in June because of recession risk. The market has been wrong a lot when it comes to anticipating Fed’s decisions in the past year or so. 

The S&P 500 is up almost 4% year-to-date. The index is market-cap weighted, meaning mega companies like Apple and Microsoft have a much bigger impact on it. The equal-weighted S&P 500 is actually down 2% for the year. The Nasdaq 100, which is also market-cap weighted, is up 17% YTD. A few big tech companies account for all market gains so far this year. The rest of the market has been under pressure. The rule of thumb is that such a concentration of strength is not sustainable. We have seen similar play in the recent past and we know that it can continue a lot longer than most expect. 

Semiconductors have been especially strong. SMH is up 26% so far in 2023. If the market is really worried about a recession, semis should not be outperforming by such a wide margin. Maybe the pullbacks in energy, basic materials, industrials, and financials are not about a potential recession but about the unwinding of the so-called inflation trade from the last year when anything tech was clobbered and money went to other sectors.

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MarketSmith powers the charts in this video

I published a new trading book recently. Check it out on Amazon.

Last week I wrote that if the Fed has to choose between preserving confidence in the banking system and fighting inflation, they will understandably select the former. The consequence was a $300 Billion increase in the Fed’s balance sheet in a week which basically wiped out half of the reduction they did in the past year. As suspected, the big winners were government bonds, gold, and bitcoin as people flew to perceived safety. What was a bit surprising was the big surge in mega and large-cap tech stocks. I get the reasoning – they are cash-rich, they have pricing power, so they are likely to endure any crisis. There are rare assets in a way. People gave them a vote of confidence. There might have also been a significant rewind of the inflation trade. We saw crude oil and most commodities taking a decent plunge while big tech squeezed higher.

In the meantime, the banking crisis hasn’t been resolved yet. Just look at the price action in bank stocks last week. The bank ETF, KBE was down another 20% and finished near the lows of its weekly range. In-between financials and basic materials in the gutter, the S&P 500 and Russell 2k don’t stand a chance for a sustainable rally. 

Next on deck is another FOMC meeting this coming Wednesday. The Fed is expected to raise rates by only 25bps, if at all. Their guidance will matter more as the market is basically expecting a pivot very soon. I don’t want to guess how the market will react. I rather position after the dust settles on Wednesday and take things one day at a time in this environment. If Powell makes more hawkish statements, the market might get worried and accept a recession scenario during which the tech sector will also get hit. If the Fed blinks and says that they will wait on further rate increases, we might see a continuation in tech strength. Gold and bitcoin are likely to do well in both scenarios.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 40 list of market leaders, and much more. See some of the recent testimonials.

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Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email to get an idea of the content I share with members.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.

MarketSmith powers the charts in this video

I published a new trading book recently. Check it out on Amazon.

It was a week of panic in the market. First, stocks sold off when Fed chairman Powell mentioned that they were ready to raise rates by 50bps if the data require it. He said that rates are likely to reach a higher level than previously anticipated. Then, the bank crisis came along and spooked everyone. The 15th largest bank in the US – SIVB announced they need to raise money to strengthen their capital position. This led to a run on the bank and a massive selloff in the entire banking sector. On Friday, the FDIC closed Silicon Valley Bank. This is the second biggest bank failure in history and the biggest one since the Great Recession in 2008. Literally, half of all venture-backed startups and venture funds have accounts with SIVB. Most accounts are significantly higher than the FDIC-insured minimum of 250k. You can understand why this led to contagion and a selloff in many other financial, biotech, and tech stocks.

On Sunday, it became clear that all depositors will have full access to their accounts on Monday. The uninsured deposits were essentially bailed out. The Fed has also set up a liquidity facility that allows banks to pledge Treasuries and MBSs at their original value to take short-term loans and recapitalize. This should stop the panic for now but for how long is anyone’s guess. Everyone knows that if the Fed is eventually forced to choose between fighting short-term inflation and saving the banking system, they will choose the latter. One thing is sure – volatility will remain elevated in the next few weeks.  

I wonder what the impact on crypto will be. Currently, I don’t have any crypto holdings. The current bank debacle might eventually become a positive pivot for select cryptocurrencies. I can see some companies deciding to keep 5-10% of their cash in bitcoin, Ethereum, or others and store them in cold wallets for emergencies. It’s just an educated guess. We are already seeing cryptos rallying and the US Dollar pulling back this weekend.  

Semiconductor stocks showed notable relative strength in the first half of the week, but the overall market weakness on Thursday and Friday also took them down. Obviously, if the stock market really starts to worry about a recession, semis will be one of the hardest hit sectors. 

The silver lining of last week’s bank debacle is that the 50bps rate hike is now off the table. Even the 25bps might be off if equities have another leg lower. Panics create incredible opportunities but you have to put yourself in the financial and mental condition to capitalize on them.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 40 list of market leaders, and much more. See some of the recent testimonials.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email to get an idea of the content I share with members.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.