Tactical Investment Strategy Post FOMC: The Key Phrase from Jerome that now shapes the future Narrative for Markets
Concise Opinion on March FOMC: The Worst is Yet to Come.
Note: This is an intermittent update outside of my usual Bi-Weekly updates. It is much more concise, and informal given time constraints. Thoughtful preview is provided here to hint my sentiment.
Just a brief note for everyone so that folks here are updated with my thoughts post March FOMC. I have to keep this concise because of other obligations that I must attend to.
For those of you guys who follow me on Twitter, you probably get the sense that I’m watching the markets closely and my Tweets are in-tune with live events happening (make sure to follow me if you haven’t yet already - especially if you’re a Member as my Tweets are good contextual supplements to my private letters to the folks here).
Now, just a quick note - due to various wide-ranging opinions that many public folks may have when they consume my content, I just want to put it out there that I generally no longer read comments on social media (Twitter/Youtube) because social media has its way of attracting people who write off putting remarks (sad, I know). For this reason, if you are a big fan of mine, and you comment on my content - know that I appreciate you v. much.
Back to the FOMC: I watched the full conference along with the Q&A.
Although the initial market reaction was supportive, I didn’t believe I heard a supportive/dovish Fed and sent out this quick blurb for brevity.
Some folks may have misinterpreted the Fed’s new phrase “policy firming” as dovish. I shared on Twitter my thoughts on this new phrase.
In this note, I’m going to discuss what I believe is the next catalyst that has been newly introduced today from the FOMC.
And no, it’s not the fact that Jerome raised rates by 25BPs and that he believes in “higher for longer.” No, no we already know that.
It’s something else that is even more important.
If you’re a public reader, it would be in your best interest to know what it is and prepare accordingly. This will shape the economic landscape in the coming months, and possibly for the remainder of 2023.
This doesn’t just affect markets, it will possibly affect you on an individual level.
Straight to the Point: What I believe to be the most important observation from FOMC.
Most of what we heard from FOMC today in terms of interest rates rising 25BPs and the terminal rate staying above 5% isn’t necessarily new developments.
The new development that I heard was that Jerome believes that credit availability could start to be challenged and lending standards are about to get far more strict.
This is key. Very key.
As of today, much of the U.S. economy is functioning very much on credit. I’ve discussed quite frequently both publicly on social media and privately here that I believe one of the only reasons the U.S. economy is functioning “well” on the surface is because everything is being financed on credit.
By having the ability to continue to borrow from more credit cards, consumers have (almost) an indefinite ability to keep postponing paying the full final balance (which eventually must be paid) .
With SVB and First Republic’s failure, Jerome discussed the fact that credit standards would have to go higher and lending opportunities would most likely have to decrease.
If we have been looking for an intermediate-term catalyst on what can dramatically slow down consumer spending, this is it - the lessening of credit availability.
This will make it even harder to qualify for Homes
Harder to qualify for auto loans
Harder to get access to credit cards (and even if people qualify, the line of credit will be less)
For those who were paying attention to today’s conference, Jerome mentioned that the credit tightening standards has the impact of a 25BP interest rate hike.
That’s an understatement, in my opinion.
I personally believe that tightening credit standards and making it harder for people to borrow is equivalent to MORE, Far More than just a 25BP hike.
It could have the tightening effect of an additional 200-300BPs, not just 25BPs.
People can deal with higher interest costs - but can they deal with not being able to get an additional card to pay for X, Y, or Z when they really need access to it?
We will soon find out later this year.
From my previous letters, a few good things have happened (for the timeframe in which ideas were intended)
Banks rallied (briefly), and levels shared were precisely entry points that I took and reduced upon a 3-5% gain
FAAMG rallied (briefly), and they approached by resistance levels before retracing further. For example, NVDA hit my 275 resistance level and then came back down.
China rallied (briefly) before the U.S. market dragged it back down again. BABA was a high-conviction idea for me at 80 - went as high as 85 before the U.S. markets sold off.
I understand that all these ideas aren’t home runs and also very near-term in nature, and that they really only had 3-5% of upside from my shared levels.
Yes, I know.
However, I want to everyone to know that I am being extremely proactive about finding opportunities - rather than just say “hey, go get your 4% in cash” so that everyone here can get additional alpha.
I see a lot of Strategists say just stick to cash - and while that’s not a bad idea, if you have the experience (key word here is if you have experience) to squeeze out a few more percentage points here and there, it definitely adds up.
That said, please understand that in NORMAL markets, my ideas are intermediate-term and long-term in nature. Remember that the biggest, best ideas are always intermediate-term/long-term in nature.
This, however, just isn’t a normal market. 😔 So I’ve had to adapt my timeframes to find alpha.
I am literally on the watch for any decent enough mis-pricing, which I then study closely, and if appropriate, I share my findings/levels with our friends here.
If there’s no good ideas, I will stay silent. This is a very important principle that must be understood and respected. If there is no setup to share, then we wait. And then we wait some more. That’s the only way we can maximize probability on our side.
I have recognized that this is a trader’s market where one day’s gain becomes the next day’s loss. This can be frustrating for long-term investors, but don’t worry, I do believe better days for LT investors will absolutely come later this year and in 2024.
Investors do NOT need to participate in this wild chop in the markets.
I only share tactical ideas so that those who are interested in capturing some of these mis-pricings at least have my due diligence done on the name.
As for new ideas/setups, I don’t see any yet on my radar.
But you know I’m always looking, and once conditions become appropriate again for new ideas, I will let you know.
For now, hang tight, and hope you did all-right with the brief rally in Banks.
Post FOMC Action?
Post FOMC, I think that large, sudden rallies are opportunities to reduce into. Any large rally in the face of tighter credit standards & higher difficulty of getting access to credit will be on borrowed time in my opinion.
I hope that stocks do in fact come back lower, which will allow me to find names that have a more attractive risk/reward profile.
I believe that most investors should be using this environment to find craters to tactically buy and then sell into the rips. That’s mostly the guidance I’ve been discussing.
Short-selling and going bear on highly stretched names worked at 4200 SPX, but I can’t provide guidance on that strategy with SPX in no man’s land currently now at 3920.
My personal strategy right now is to wait for craters, tactically buy areas of value, and then sell into rips. And in every transaction, sizing smaller, and increasing the number of ideas to reduce concentration risk.
I’m not doing short-selling at the moment. Choppy/mean-reverting markets make short-selling challenging. This strategy is better used when the market trends, rather than mean-reverts (which is what it’s doing now).
Will be researching in background. Will let you know if anything catches my eye.
Most likely will catch up with you in a letter again next week. Enjoy your weekend.
Get interested in Craters, not dips.
Craters! Not dips!
Please make sure to read my 4-6 previous letters to understand my fundamental/macro views. This note was primarily technical analysis. I write quite frequently now so make sure to read many of my previous editions, which often also include valuable educational content to help you grow as an investor/trader. While I do enjoy sharing my personal journaling of the markets, this is not individual customized financial advice.
Tell friends and family about the work we do - I appreciate you. Spread my methodology where I simultaneously employ Fundamentals, Macro, and Technical analysis into my views to help the good folks find alpha.
Disclaimer: My investment community is not investment, financial, or trading advice, but for educational informational purposes only. I am happy to share my personal opinions which I provide as my personal journal. Trading of any kind of securities involves a lot of risk. No guarantee of any profit whatsoever is made. Investors may lose everything they have. Practice extreme caution. No profit is guaranteed whatsoever, You assume the entire cost and risk of any trading or investing activities you choose to undertake. You are solely responsible for making your own investment decisions. Owners/authors of this publication are NOT registered as securities broker-dealers or investment advisors either with the U.S. SEC, CFTC or with any other securities/regulatory authority. Make sure to consult with a registered investment advisor, broker-dealer, and/or financial advisor.