The three main indices were brought to the woodshed on Thursday.
Friday was more of the same.
Both stocks and bonds are sold without further ado. This is a full liquidation. Only the energy sector saw some green on Friday.
There are times to make money in the markets and times not to lose money. We are now in a time of not losing money. A time to focus on preserving capital and avoiding decimation of your nest. The market sell-off has been a complete liquidation. Still, I’m not so sure the pain is over. This reminded me of a lesson I learned from my time training the “Winter Warrior” mountain infantry at Ft. Drum, New York as part of the famous 10 . of the US militarye Mountain Division.
The mantra “pain clears” was instilled in us during this time. The instructors explained that the extreme conditions and hard training were painful but would harden us and prepare us for what a real battle might look like. Many soldiers did not make it for one reason or another. For some it was a physical problem. For others, simply not being able to deal with the freezing cold was a mental dilemma.
This is similar to what happens to market participants in times of severe market pressure. Some participants have used leverage and are quickly wiped out by margin calls, forcing their positions to be liquidated, the physical ones. While others fold under the pressure and sell out at the lows, because they can no longer bear the pain, the mental. It’s all leading to steep sell-offs like the one happening right now. Why is all this happening? I argue that the main reason is that the Fed is flipping the script. Let me explain.
Don’t fight the Fed, or Brad Pitt for that matter
If you’ve been around for the past ten years, you’ve clearly heard the phrase “Don’t fight the Fed.” Well, market participants need to realize that the “Don’t fight the Fed” mantra works both ways.
When the Fed supports the markets with a zero-rate policy and infinite liquidity through quantitative easing, speculative high-growth stocks soar to skyrocketing valuations.
But when the Fed shifts gears and starts raising interest rates, many seem to want to take a stand and fight the Fed. They rationalize that “it’s different this time” and the skyrocketing valuations are justified. Look, when you hear that the Fed is going to raise interest rates and remove liquidity by applying quantitative tightening, effectively shrinking the balance sheet, it’s time to act before it starts.
As a seasoned veteran who has invested and successfully maintained my capital through the 2000 and 2008 bubbles and subsequent crashes, I can tell you that you will never fight the Fed no matter what. The Fed telegraphed what it was going to do well before it hiked rates by 50 basis points on Wednesday.
The bottom line is that when you hear the Fed talk about raising interest rates and unwinding its balance sheet, it’s time to ease the speculative high-multiple stocks. Take that yield and save most of it as dry powder to redeploy once shore is clear if you are younger and still building your nest egg. If you are already retired or nearing retirement, keep some in cash and use some of those funds to increase your exposure to income-generating securities. That’s what I did.
You will hear some say: you lose 7% by staying cash because of inflation. The part they’re missing out on is keeping cash on the sidelines and re-bet once the sale is over. You’ll make up for that and them a little more often than not when the stock bounces back. The seeds of the coming tree are sewn during the current failure. Another issue that I think market participants may continue to sell is the fact that the Fed has lost all credibility.
The Fed has lost all credibility
First, the Fed told us that inflation was only transient. Fed Chairman Powell was adamant about this fact. Inflation would only be temporary as the economy reopened faster than supply chains could get going again. Powell was wrong and now the Fed is way behind in fighting inflation. In addition, Powell essentially took a 75 basis point rate hike off the table on Wednesday. This was first seen as good news by market participants, leading the market to surge on Wednesday. Nevertheless, the euphoria turned to despair as investors worried that the Fed might not do enough to stamp out inflation. This would lead to a hard landing and recession in the coming months. Still, much damage has been done. Now let’s take a look at the current state of affairs and see what positives we can muster.
Current state of being
The following are the positives.
Huge damage already done
Much damage has already been done. We spent quite a bit of time at the lower end of the range.
In addition, the valuations of major large-cap stocks such as Microsoft (MSFT), Apple (AAPL), Google (GOOG) (GOOGL), Netflix (NFLX) and Meta (FB) have fallen significantly. A saying we had in the military was that the battle is not over until all the generals are shot. Well, it seems most stock market generals have already faced firing squad, so to speak. The next positive is that we had a capitulation day.
A big flush has occurred
While we’ve been steadily moving down lately, we haven’t had a 90% drop from advances until Thursday’s sell-off. This is called a “capitulation day”. It’s the day when the margins are called and weak hands throw in the towel. In addition, the market is currently extremely oversold and is definitely in need of a rebound. Nevertheless, I would sell the rip if it occurs. I don’t feel like the sale is done. Let me explain.
Market at a point of no return
I feel like we are at the point of no return for the markets right now. This is a play on words. Basically, I’m saying that I don’t expect earnings growth to continue, causing stock multiples to contract further, leading to an environment with little or no chance of positive returns. I feel a recession is coming. This is why.
Hard landing in the cards
The Fed is so offside and behind the curve that my chances of a soft landing are next to nil. Think of it as a jet fighter trying to land on an aircraft carrier in bad weather.
This implies a hard landing that will undoubtedly lead to a recession. Those are my thoughts on the current state of affairs. Let’s wrap it up now.
Let me start by saying that no one can predict the future. The best we can do is assess the current state of affairs and use our experience and intuition to make the best decision for ourselves. The market is at a point where this could still be the end of a “regular” 20% correction, or the start of a major bear market.
Still, there is enough dry tinder at the moment and the market could bounce back next week. The main factor I see in determining whether or not we’re bouncing off this is whether the indicators are showing that inflation has peaked. Next week’s CPI number will be crucial. I sympathize with those who are fully invested and whose portfolios have suffered huge losses. If you decide to buy the dip, here are some protocols I use, especially in volatile times like these to reduce risk.
Always have an exit strategy
When it comes to investing in speculative or “non-income” stocks, such as high-growth technology games, I always set up exit strategies when starting a position. I have set up a trailing stop sell order to execute automatically. Conversely, I set buy limit orders at lower prices on my income position at points where the new stock will increase my returns by lowering my base. AT&T (NYSE:T) is my largest holding and I’ve even added to it twice in the past few days.
Finally, always build new positions over time to reduce risk. Remember, it took two years for the Nasdaq to drop 90% after the first 2000 dotcom bubble burst. There are two components to bear markets, distance and time. The market may fall 20% in the short term, but it could continue or fall further and take years to recover.
Your input is required!
The real value of my articles comes from Seeking Alpha members’ forward-thinking comments in the comments section below. Do you think the sale is over or we have more disadvantage in the cards? Why or why not? Thank you in advance for your participation.