It’s A Trader’s Market

Interest rates are zooming higher and stock prices are zipping lower. Last week’s Federal Reserve minutes and spike in Government Bond yields spooked Wall Street. Higher interest rates and persistent inflation could lead to pressure on margins and discretionary spending, which lowers profits and by extension, stock prices.

This is the third, wild swing lower since the middle of November. Each delivered a lower low than the previous selloff, only to be followed by an aggressive snap back higher. Odds are the pattern will repeat as that’s been the trend. As the saying goes, the trend is your friend until it’s no longer a trend.

At the moment, the NASDAQ is more of a traders’ market than an investors’ market. Violent, abrupt swings are good for day/swing trading, but frustrating for longer-term investors. This is how we might consider trading the NASDAQ, be it through futures or exchange-traded funds (ETFs). (If you don’t have a futures account, leveraged ETFs utilize futures to generate 2X, 3X the daily performance of the underlying index.)

If the NASDAQ trades above Monday’s high of 14,953.85, wait 15-30 minutes to see if it stays above the high-water mark. If it does, initiate a short-term position in the index instrument of your choice (Invesco QQQ Trust (QQQ), ProShares UltraPro QQQ (TQQQ) for 2x the daily return of the NASDAQ 100). On the downside, we’d mark a close below the NASDAQ’s 200-day moving average of 14,690 as our exit point.

Stocks are likely to be volatile for the foreseeable future, at least until 4th quarter earnings season begins in the next few weeks. The market’s longer-term direction will be driven by full-year corporate guidance with an eye towards profitability in the next 3-6 months.

If, as we mentioned up top, higher interest rates and inflation hits consumer discretionary spending (it will), coupled with lower margins, stocks could find it tough to break out of its current rally/selloff/rally/selloff cycle.

This is absolutely a time to remember, “It’s better to be out of the market wishing you were in, than in the market wishing you were out.” Investors need to be cautious during volatile market conditions.

SECTOR WATCH

Energy and Bank stocks roared in the last week despite the overall market tanking. Higher interest rates are great for banks and commodities, specifically oil and gas, which tend to be a solid hedge against inflation and higher interest rates. Nonetheless, we prefer the index strategy outlined above than making a bet on a sector/industry.

You must be right about two things for a sector bet to work out. Obviously, you have to pick the right sector and the indexes have to cooperate with higher prices. Whereas you only need to be right about the market’s direction with an index bet.

STOCK WATCH

If the market snaps back as it has the last two times it experienced a similar selloff, plenty of stocks will rebounds as well. Rather than mention just one in this spot, investors might consider adding to their portfolio’s strongest performers with an initial focus on the short-term, playing it day by day from there. Hold on as long as the indexes are rising while setting rising stops to protect profits against another wave of selling.

Rich Meyers
Investing Trends