Sage Investment Club

Douglas RissingThe Fed has been tightening interest rates and implementing other tactics in its battle with inflation for some time now. The Fed has taken a stricter stance on rising prices over the last year. Inflation has declined significantly, illustrating that the Fed’s plan is working. Meanwhile, the S&P 500/SPX (SP500) and most markets did not react well to the Fed’s hawkish and more restrictive monetary stance. Major Average 2022 Peak-to-Trough Declines DJIA: 22% SPX: 28% Nasdaq 100: 37% Nevertheless, while the S&P 500 and most markets haven’t responded well to the hawkish Fed policy, we’ve seen inflation come down significantly recently. This phenomenon should enable the Fed to adopt a more dovish monetary stance in several months as the economy slows. The Good News! Many quality stocks have crashed during the recent bear market phase, some may have reached bottoms, and many crucial companies remain very cheap. While there’s a likelihood for more volatility in the near term, as the Fed adopts a more dovish monetary approach, the SPX and many quality stocks, in general, should go much higher as we advance. Top Stocks 2022 Peak to Trough Declines Amazon (AMZN): 57% Alphabet (GOOG) (GOOGL): 46% Meta (META): 75% Tesla (TSLA): 76% Palantir (PLTR): 79% Nvidia (NVDA): 69% AMD (AMD): 67% Alibaba (BABA): 68% Baidu (BIDU): 61% Some of these top stocks have enjoyed significant rallies off their recent low. I bought or added to most of these and other stocks during significant periods of panic like selling. However, many quality stocks remain cheap. Therefore, I kept many positions open here despite realizing some profits recently. Furthermore, despite the significant appreciation in many high-quality tech stocks, they remain substantially below their recent in 2020-2021 and are arguably cheap. While hedging remains a priority, these “top tech stocks” account for a significant portion of my All-Weather Portfolio “AWP” holdings (approximately 20%). Where Markets are Heading Now SPX (thinkorswim)Despite the pullback from the recent high, SPX remains in an uptrend (likely short term). Once this rally runs its course, we will probably see another drop in the SPX and other major averages. Therefore, my target range for the current broad market rally in the SPX is 4,200-4,300. While this dynamic implies a 5% near-term upside potential in the SPX, many stocks should appreciate considerably during this time frame. Also, there is the possibility of less bearish or bullish news coming down the line, which could support the market further as we move through 2023. On the downside, we need to watch 4,000-3,975 support, and the market must stay within this technical level. However, the ultimate near-term support point remains 3,900. Any decisive move below 3,900 would imply significantly lower prices as we advance. Moreover, I will be very concerned if 4,000-3,975 support gets penetrated in the near term. Therefore, I’m considering implementing proactive hedges if price action continues degrading. I also will utilize reactive hedging if stop out and hedging triggers get triggered below critical support points in the SPX. The Fed’s Tightening Cycle – Coming To An End Rate probabilities (CMEGroup.com )The probability of a 50bps rate increase quickly came off the table as inflation readings fell one after the other. CPI has dropped from above 9% to just 6.5% in recent months. CPI in the U.S. CPI (TradingEconomics.com)Moreover, we’ve seen the CPI drop six months in a row, illustrating that the Fed’s plan is working, and the agency can afford to become less hawkish in the coming months. We see an overwhelming probability for a 25 Bpbs cut at the upcoming meeting, and the Fed won’t increase rates much beyond 4.75-5% after that. Therefore, we’re reaching a plateau of how high-interest rates can go. Next, we should see the Fed’s rhetoric turn dovish as the economy slows and economic indicators worsen. Data Is Worsening! Retail data (Investing.com)Due to cooling inflation and other variables, we’re getting much weaker-than-expected consumer and retail readings for December. Recent core retail sales were down much more than expected, and the consumer is something we need to worry about in this economy. Moreover, recent hourly wage increases haven’t kept up with expectations, and we’re finally seeing more inflation impact on the consumer right as the new year begins. Therefore, the first half of 2023 may be very challenging for consumers, translating to slower growth and potentially lower profits for corporations in the near term. Thus, an earnings recession remains highly likely in early-mid 2023. In addition to worsening consumer and retail data, manufacturing and services are contracting, and tech companies are involved in mass layoffs. Therefore, we can probably look forward to the labor market worsening soon. Jobs Numbers Jobs number (Investing.com )For the next jobs report, analysts expect hourly earnings to increase by 4.3%. Please notice that this is substantially lower than inflation, and wage growth could disappoint again. This dynamic further implies that there will be continued pressure on the consumer, which makes up for around 70% of the GDP in the U.S. The Goldilocks number is around the 100-200K nonfarm payrolls zone. Anything more substantial and the probability for a more hawkish Fed increase, and anything lower could raise the alarm about the economy weakening more than expected. We could get the jobs number that the market is looking for, contributing to the factors leading the current rally higher in the near term. The Bottom Line While there are near-term catalysts capable of taking the current rally a bit higher, the SPX and other markets could remain volatile in the next several months. SPX (StockCharts.com)There’s still uncertainty about how significant the recent downturn will turn out and how long the recovery process will take. Nevertheless, it’s clear that many high-quality technology stocks got severely oversold, and I scooped many up on the cheap while briefly down by 50-80% from their highs. Moreover, many compelling deals remain in the market, and I will capitalize on opportunities as more materialize in the near, intermediate, and long term. My base-case year-end target for the S&P 500 remains 4,300. In a bullish case, we could be much higher, but in a bearish case, we may be lower too. Regardless, we should see substantial volatility in the next several months. Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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