Submitted by QTR’s Fringe Finance
Most traders have a tendency to pay little attention to the market, put themselves on autopilot and hope for the best heading from Thanksgiving into the end of the year. This year, I’m getting a feeling that this strategy might not work well for what could be looming in December.
The short-lived rally yesterday on news of Jerome Powell being re-nominated as Fed Chair was a nice reminder that the market doesn’t like surprises, changes, or volatility of any kind. After all, the market rallied on the selection of the “hawkish” choice, between Powell and Lael Brainerd.
While Brainerd was widely seen as the more dovish of the two potential Fed chairs, the market still celebrated the fact that there would be no change at the position by rallying early in the session, as soon as the news broke, yesterday. Then, reality kicked in and the market swung sharply lower during mid-day session, before doing the same at the cash close.
All three indexes finished the day far off their highs. Tech stocks got the worst of it, with the Nasdaq Composite dropping more than 1%.
I have already detailed several reasons why I believe the NASDAQ could be on the verge of a collapse without warning here: Why We Could Be Staring Down The Barrel of A Catastrophic NASDAQ Crash And Not Even Know It
Now, I want to add to those reasons.
I got this feeling yesterday, while it was taking place, that the sharp intraday reversal needed to be paid attention to.
The signs that I think do not bode well for the market heading into the holidays are:
The market’s realization that a taper is now definitely on its way.
A rotation from shitty tech names into value.
The Taper Is Definitely On Its Way
The jitters yesterday, in my opinion, were catalyzed by the realization that even though there will be no change at the Fed chair position, Jerome Powell is going to try to see through his plan of tapering and, upon re-nomination, has very little holding him back from going rogue. By that I mean there will be little stopping Powell from taking extraordinary measures to try to curb inflation if he wants and/or needs to.
This man is officially in the driver’s seat now:
“Why worry about the taper,” you’ll ask. “It’ll never last!”
You might be right – but that isn’t going to change the market’s expectation of it working over the next couple months.
I’ll be the first person to joke that continued QE isn’t going to work. Me and my kind often argue that any taper will be short-lived before it stirs up market volatility and elected officials eventually give in and resort back to more quantitative easing. However, this won’t matter in the short term. That next leg up for the market from another round of insane stimulus is a long, long, long while away. Hell, look at how far we have come since just March of 2020.
Reality is going to have to rear its head at some point.
Whether we follow through or not, with Powell at the helm we now have to at least attempt the taper, which I believe is going to wind up moving the market lower over the next couple of months.
I’m often one of the first people to joke about how nonsensical the idea of a Santa Claus rally is, but it puts the idea of a rising market over the holidays into everybody’s head, every year. Obviously, it’s just made up bullshit-lingo used to provide an excuse for people to buy overvalued money losing crap in the market, but it seems like a good year to remind market participants that a rally doesn’t always have to happen.
For example, remember in 2018 when Steve Mnuchin had to “call the banks” after the market slid heading into Christmas Eve?
I think we could be on the precipice of repeating that type of holiday plunge. In other words, Santa Claus may not be around for the rally this year. Instead, he might drink too much bourbon and pass out drunk on the pool table at his local watering hole.
Jerome Powell has been under pressure – and will continue to be under pressure – during his second term the likes of which he hasn’t seen yet. Not only will he face angry politicians from the right who want to drum up fear about a very real inflation problem, he’s going to have to face sharp criticism from those on the left that wanted him out of his position for not being dovish enough. Either way, I think he commits to try and stick the landing on the taper, which could result in some serious shit for equity markets.
Finally, while I am talking about a potential pullback in anticipation of the taper, I am also expecting a pullback once the taper begins. There’s no doubt about it: tapering crashes markets. It has pretty much always happened and there’s no reason not to expect it won’t happen going forward, especially as we reside in the biggest bubble in market history.
Tech Selling Off Suggests A Rotation From Growth To Value
Another thing I noticed in yesterday’s trading was that several of my value stocks were rising while the overall market seemed to be plunging. I saw green in names like Lockheed Martin, Disney, Walmart and Johnson and Johnson, while the tech index sold off hard.
To me, this looks like the rotation from growth to value that I have been talking about over the last couple weeks could finally be getting started.
Further evidencing a potential rotation was a move out of non-profitable tech companies yesterday, as my kind friends at Zerohedge pointed out late in the day yesterday.
Finally, everyone’s favorite collection of dogshit-placed-into-a-paper-bag-and-lit-on-fire-then-called-an-ETF (AKA the Ark “Innovation Fund”), has also experienced a tough last week, plunging 7.76% in just 5 trading days.
Make no mistake about it, a “rotation” into Dow components and profitable companies from tech garbage would catalyze a sharp move lower for the overall markets. Most of the leverage, unsophisticated investors and super-speculative (read: fraud and bilge) companies in the market reside in tech. There are still huge bubbles in meme favorites like AMC and GMC, among others, that need to have the air let out of them. Crypto remains a multi-trillion dollar air pocket. If the market decides to start valuing 15x PE names like Lockheed Martin – as I suggested it might, days ago – in favor of buying AMC at a $30 billion market cap while the CEO dumps all of his holdings , look out below.
And so what’s the moral of the story today?
The rotation trade from growth to value could very much be on and we may experience a market that decides to pull back with some significance now that the smoke has cleared and everyone realizes Jerome Powell – at least for now – is a guaranteed attempt at a taper.
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DISCLAIMER: I am long JNJ, DIS, LMT, WMT and short ARKK, IWM, SPY. I may add any name mentioned in this article and sell any name mentioned in this piece at any time. None of this is a solicitation to buy or sell securities.