Market Pullback As Predicted
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Our SPX $6,000 target appears to be prescient as it touched that price and promptly sold off. Here’s the post where we came up with that target. Sometimes, the simplest methods are the best!
Now that we’re here, what’s next? The market has moved a lot in the past week so we’ll discuss where it’s going next and which stocks to buy. Our best market timing indicator just fired. All of this can be found in the premium section.
In today’s post: Studying the market pullback, Powell and interest rates, our broader econ call, new signal, portfolio updates, and stocks to watch for.
The pullback is here
The pullback that we warned about last week is here, with all the major indices retesting their post-election breakout levels. Here is the chart we showed last week for paid members (dotted line being the predicted path) and so far it’s playing out to a tee:
Many of the stocks that broke out sharply on the news of Trump’s win (e.g. TSLA due to Musk affiliation, COIN due to deregulation of crypto) have pulled back equally as sharply. These trades were far too exuberant as the full economic impact takes time to materialize, and the negative effects are now also coming into view. Funny how a mere week ago, people thought tax cuts and deregulation would rain money from the sky — where did all those gains go?
In terms of negative policy repercussions, they are now coming to light:
Rivian (electric vehicle company) tanked as the EV tax credit would be reduced.
Pfizer/Moderna (drug and vaccine makers) tanked as vaccine-skeptic Robert F. Kennedy Jr. was tapped to lead the Department of Health.
Solar stocks took a nose-dive as climate policies are now at risk.
Semiconductors tumbled as these companies bear the brunt of tariff actions and national security concerns. Market darlings AMD and SMCI led the way down.
The takeaway is that not all companies will thrive under this new regime so investors will want to be selective. Market euphoria like this can rush out of the market as reality sets in. So you get these sudden spikes and collapses. Witness the July IWM spike when inflation cooled, or more recently the China stock spike on stimulus hopes.
As traders we need to recognize when these phenomena are occurring in real time, and not chase the hype. A good clue is the price gaps up several days in a row, which usually leads to pullbacks that “fill the gap”. A good example of this happened in the September pullback (pictured below). In the premium section we’ll give our predictions for the market path going forward.
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Powell pours cold water
Powell gave another speech on Thursday. While he said “the labor market is strong” about a dozen times and called the US “by far the best economy in the world”, he also said they’re in no hurry to lower rates. Inflation is still not at 2% yet, and the path could be bumpy. This fueled the equity selloff as odds of a December rate cut went from 72% to 59%.
The Fed does not dispute the labor market strength. Labor went from “red hot” in 2021 to just “strong”. Historically if the unemployment rate was at 4% and payrolls 200k, it would be considered good. But this time we have anchored at a higher level, so the normalization feels like a steep drop. Either way, the Fed will cut to keep it strong since they see minimal risk of labor inflation even under the new administration.
Neel Kashkari, one of the more hawkish Fed members, spoke too. He suggested it’s a high bar for the Fed to pause in December since “there’d have to be a surprise on the inflation front to change the outlook so dramatically”. We would agree. Investors are trying to balance this against the risk of inflationary tax and tariff policies.
The path for interest rates…
We wrote before that when the 10-year rate rises above 4.3%, the SPX sells off. This week was no different…
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Interest rate and inflation prediction
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