Hey There Income Hunters,
It certainly felt like the beginning of a bear market on Thursday.
Something of an official switch from buy the dips to sell the rips.
This week has seen the largest drawdown for the Nasdaq 100 Index since May, with big tech suffering the most.
This is a battle for the ages between bulls and bears with volume above average six of the past seven days.
As you can see below, the series of lower lows is starting to look ugly and sustainable based on Fed policy and a shift in money flow from financial assets to hard assets.
Today, we will take a closer look at the colossal wave of capital that needs to move from stocks and bonds into hard assets.
Fed Tightening With Stocks Near Historic Highs
It’s starting the year with stocks at such high valuations when the Fed keeps pounding the table on aggressive tightening.
Even the dove of doves, Neel Kashkari from the Fed, is talking about rate hikes now.
I still have a feeling that the Fed is bluffing just to get the market lower to give them cover to pull back.
Jerome Powell was at the helm in 2018 when he went through with an aggressive tightening only to flip and have to go back to QE and cutting rates after ruining everyone’s Christmas.
Powell doesn’t want to make the same mistake again but he will have to if the market does go down at least 10% before the hiking starts.
That is why I think you can sell the rallies right now in QQQ and XLK until we go down at least 8-10%.
This chart shows how similar 2018 was to today’s situation …
QE tightening can be worse than raising rates because QE is the liquidity that has been driving stocks higher.
We don’t know how weak the markets will get once the Fed removes the liquidity.
Right now I think we have a green light to sell rallies and with the VIX above 20 again, the next couple of days will be crucial.
Bring It Home
I am currently riding XLK put spreads that I bought on Wednesday. I was tempted to close them out yesterday, but I believe we are going to take out the lows from Monday before we take out yesterday highs.
I’ll leave you with one other chart today that may explain why the dollar has collapsed in the past couple of days …
Check out how high the PE ratios are in the US versus non-US. This will become a major issue as other central banks are tightening as well.
Because without the Fed feeding the market, money will flow to where the greatest value is.
Have a great weekend everyone and as always …
Live and Trade With Passion My Friends,