If you’ve ever been questioned by attorneys as a witness or potential defendant, then you know they ask the same questions over and over with slight variations. That’s how we feel looking at the market this week. It’s the same position we were in last week… stuck between two guardrails with more downside danger than upside reward. It’s also the same question this week with some slight variations, but our answer is still the same.
One slight variation is that the NASDAQ rallied to 14,500, which we identified as a point of resistance because it the was the previous rally’s high, and then sold off. Bouncing off the same address on the chart can be interpreted as hardening the target, making it more difficult to pass it by.
Another difference is that our momentum model is on the downswing, whereas it was on the upswing, ever so slightly in the buy column. Mo’ is nowhere near a buy reading today. On the plus side, our short-term measuring stick is starting to reverse course and point higher, which could lead to some upside in the near-term. The question is can some buying encourage more buying, or will it be seen as an opportunity to sell into strength?
Yet another difference is news from The Federal Reserve. The Fed tried to juice the markets on Monday by saying they will take a measured approach to inflation and that the “initial increase may be smaller than what investors have begun to expect.” (1) In other words, we are going to raise rates by 25-basis points in March instead of 50. Despite trying to split the baby between inflation and recession due to higher interest rates, investors didn’t respond as the NASDAQ, DOW, and S&P 500 finished mildly in the red on Valentine’s Day – appropriate.
Fed waffling also sent commodity prices higher with gold and oil hitting the turbo chargers after the news. With the commodities moving higher, Wall Street is saying they don’t believe a 25-basis point hike is enough to tame inflation. Additionally, by announcing they will not raise rates between meetings and stick to the quarter-point plan, the Fed put itself in a box. If they come out and raise rates before the March meeting or up rates by a half-point, it could be viewed as a panic move, which would likely send stocks into a tailspin.
For now, our answer is the same as it was last week. Investors need to see which guardrail breaks first, resistance at NASDAQ 14,500 or closing support at 13,352.78. And even if Bulls manage to take charge, any upswing is likely to have plenty of stutters and stops.
Investors might think about taking a crack at commodities like oil or gold. Between the two, we’d probably prefer gold after a pullback as both are reaching overbought status. Longer-term, the problem is that interest rate hikes are coming for sure. The question is how many and how high will the Fed go? If the inflation fight of the early 80s is any indication, it could take a few years to put out the inflation fire. No matter what, rising rates will put pressure on commodities.
Once again, the answer is the same. There is no way we’d invest in an individual stock under the current market circumstances. There is too much risk to the downside. This is a traders’ market, not an investors’ market.
1 – https://www.nytimes.com/2022/02/14/business/federal-reserve-rates-inflation.html