Why this major buy signal makes me nervous about current market conditions…

by Ana Lopez

This week we had the last meeting of the Federal Reserve. The central bank raised rates by 25 basis points and indicated that we are probably close to a pause. You’d imagine the stock market (SPY) would cheer… But I see something else that makes me nervous. Read more.

(Enjoy this updated version of my weekly commentary originally published March 23ed2023 in the POWR Shares Under $10 Newsletter).

Market Commentary

So in addition to the POWR services that I run, I also headline this options trading newsletter called Income Trader.

And our choices are based on this amazing, patented, Charles Dow award-winning algorithm. And this week there was something bizarre about all the “buy” signals it gave…

About half of the tickers on were short ETFs.

For this algorithm, when a stock has a buy signal, it is usually an indication that the price is more likely to rise in the near future. It’s not a guarantee by any means, but it’s what the numbers have shown over the course of a decade.

And while we certainly have ETFs that track different asset classes (bonds, gold, etc.) that appear on our list from time to time… we never see short/inverse/leveraged tickers.

Even in past downturns like what we saw in 2022, I don’t think I’ve seen them pop up.

I will be honest; I’m not exactly sure what it means…

But this week we had purchases on inverse funds for a number of major groups: large-cap stocks, mid-cap stocks, the Russell, the S&P 500 (SPY), real estate, China, European equities, consumer discretionary, emerging markets — and it doesn’t feel… right.

My take on this is that it’s a weird time in the market. People are nervous and possibly bearish, and we see that reflected in the results of that algorithm.

And I’m not usually one to point fingers… but I think a lot of that nervousness stems directly from the Federal Reserve’s latest actions.

In 2022, it felt like the Fed had a clear goal and a clear plan: We’re going to curb inflation by raising interest rates.

At the time, our greatest fear was that we would go into a recession…and there were many other voices and indicators confirming that potential.

But we’re now a year in and all the Fed has been able to do is put a small dent in inflation and break a few banks.

The labor market is still unexpectedly tight. And the central bank’s plan, which once felt very predictable, seems to be going in all directions.

What will the rates look like in three months? We can’t know for sure because Powell’s plan is “it depends on what the latest economic numbers look like.” It’s a very reactionary plan.

At this latest meeting, Fed members finally agreed to raise interest rates by 25 basis points, though Powell indicated during the press conference that they were considering a 50 basis point hike until the banking crisis came into play.

Speaking of which, Powell shed a little light on that too by saying there were only a few problem banks, but the rest of the financial system was “sound and resilient.”

Many new financial outlets are focusing on the idea that we will only have one more rate hike in the future, as an important line about “continued hikes” has been removed from the official statement.

The median for their plot forecast also indicates only one more increase this year.

Still, stocks are back up today and the S&P 500 (SPY) is trading back above its 200-day moving average, which is what we normally see when things are bullish.

But I feel skeptical.

Maybe it’s because I’ve been trying to help our 20-year-old nanny sort out dozens of Taylor Swift ticket sellers who are really just scammers trying to steal her hard-earned money. (Seriously, what’s wrong with people?)

Maybe it’s because I just had to file an FTC fraud report on a company that claimed to be selling refurbished Herman Miller chairs.

Maybe it’s because my trading algorithm is doing really bizarre things.

Maybe it’s because I can’t imagine how an additional 25 basis point hike will suddenly beat the inflation beast (still at over 6%) or how Powell can play down the problems of the banking system, even after the recent collapse of Credit Suisse, a global systemically important bank (G-SIB).

I’m not usually a pessimistic person, but I feel like we’re about to relapse again…I hope I’m wrong.

Conclusion

We currently have about 50% of our portfolio in cash and 50% invested. Right now, that’s the best position we can be in right now.

I’ve heard some analysts say we won’t see a major capitulation moment because all those potential “sellers” have been sidelined for months. Based on everyone I know… that sounds nice on the nose.

We’ll continue to monitor the market, but I think there’s going to be a continued stutter step over the next few weeks until we figure out what’s next.

What to do now?

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All the best!

Meredith Margrave
Chief Growth Strategist, StockNews
Editor, POWR Newsletter Stocks Under $10


SPY shares closed Friday at $395.75, up $2.58 (+0.66%). Year-to-date, SPY has gained 3.88% versus a percentage increase of the benchmark S&P 500 index over the same period.


About the author: Meredith Margrave

Meredith Margrave has been a well-known financial expert and market commentator for the past two decades. She is currently the editor of the POWR growth And POWR shares under $10 newsletters. Learn more about Meredith’s background, along with links to her most recent articles.

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