Last Pillar of Strength Falls as Tech Rolls Over

Hey There Income Hunters,

The post-FOMC rally in tech did not last long.

By the end of last week, names like Tesla (Ticker: TSLA) and Nvidia (Ticker: NVDA) closed in bear market territory (-20%+).

As I have been saying all along, three rate hikes after an initial pull back in QE have zero chance of happening in 2022. 

This is shaping up to be a replay of Q4 2018.

J-Pow announced another four rate hikes in 2019 and the Fed actually ended up CUTTING rates twice. 

The stock market vigilantes have all of a sudden come out in droves and they will pressure the Fed into caving on this path long before it is completed. 

Today, we’ll take a look at the damage that has been done and what we can expect in Q1. 

Tech Valuation to 30-year Returns Going Separate Ways

A complete dislocation has emerged between long-term growth equities like ARK names and long-term returns on 30-year bonds …

Take a look at the extreme dislocation between the two …

This diverging trend is being triggered by real selling of tech longs as opposed to option put buying.

The chart below illustrates the price, volume and volatility trends of NVDA. Notice how Price is trending lower, while volume and volatility are rising. 

Those are the three ingredients that support the probability of a continued move lower in price.

Also notice how implied volatility (red line) is below actual vol (blue line). This represents implied vol trading at a discount to implied. 

Implied vol trading at a discount to actual vol is a signal that long positions of stock are being liquidated as opposed to buying of put options being responsible for the lower prices.

These signals have been common to the large-cap tech sector recently and the market has not seen this magnitude of selling since April of 2020.

Now, with the Fed in tightening mode, this down trade may stay with us for a while. 

The Fed’s Incredibly Hawkish Pivot

Here is a perfect example of how the Fed can flip-flop at any time …

J-Pow doubled down time and again on transitory inflation while Power Income was going long commodities and energy, which are the top buys when inflation is accelerating.

However, now that the Fed has come around to admitting inflation is a problem, the Power Income Trader system has flashed red and signaled a disinflationary environment. 

The recent trades have been bearish strategies in the broad indexes … when the Fed is fighting inflation that has peaked as commodities and energy have turned sharply lower but are not in bearish trends.

Nvidia Heavy Real Money Selling 

Actual volatility versus implied vol is such an important signpost …

$226 Trillion Global Debt at Risk As Rates Rise

The International Monetary FUnd released a report last week stating that a record $226 trillion in debt is raising concerns about its sustainability as interest rates rise. 

Faster-than-expected interest rate hikes could put pressure on heavily indebted nations and force governments and companies to cut back on debt and spending, further hurting economic growth. 

Global debt rose 28 percentage points to 256% of gross domestic product in 2020, the largest one-year surge since World War II, according to the fund’s latest Global Debt Database.

Bring It Home

Continue to favor value over growth. Recent IPOs are off about 4%. Post-SPAC merger stocks are down about 14% on the quarter. 

The most crowded stocks, like Apple and Amazon, are down a couple of percent in the past five days. I have been talking a lot about tax-loss selling, which has been a real factor, as I predicted.

The tax-selling should be done now and those stocks are down double digits since the beginning of November. I will be focused on making purchases this week in the most heavily sold value stocks to hold into Q1. 

Join my Power Income Trader LIVE event tomorrow at 1 p.m. for suggestions on specific names. 

Until then …

Live and Trade With Passion My Friends,


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