All Hell Breaks Loose… Over 25 Basis Points

Fed basis points

It was fitting that I discussed the weakest stocks from the S&P 500 on Tuesday night. Because all hell broke loose for these companies on Wednesday afternoon. Let’s look at the outcome from Wednesday’s release of the minutes from the Federal Reserve’s meeting in December. But first – let’s explain what the heck happened.

Possible Basis Points Hike

The Fed’s minutes didn’t tell us anything that was overly surprising. The central bank is going to continue tapering its balance sheet and end that program in March. But there was a somewhat surprised number of people who learned that the central bank might — and I stress “might” raise interest rates by 25 basis points in March. And the speculation that we might have an additional 25 basis points hike in 2022. 

The result was a pullback to levels from Christmas Eve. We wiped out all of our gains over the first two days of the year. And we saw some pretty aggressive selling in the FAANGs that suggests that we’re going to see some “margin” pressure among investors who were flying too close to the sun.

We just had one of the most incredible selloffs that I’ve witnessed in a while, and it’s a sign that investors are simply not ready for the air to come out of all things tech. We are still well away from any rational level of price discovery to accompany this market. Cathie Wood’s Ark Innovation ETF (ARKK) has already seen the largest drawdown ever. 

Twitter (TWTR) – which I think is going to fall under $30 because it’s a terrible company with horrible metrics and catalysts – dropped like a stone. I was going to recommend a short on this today, but the market moved ahead of me before I could even react. That happens. 

And momentum, which was positive this morning, is now negative again. More than 60% of more than 8,300 stocks are now AGAIN under their 50-day moving average. Now, let’s look at those weakening S&P 500 stocks. 

Whoa… It Was Like a Stone

These stocks were the worst performers in the S&P 500 last year. As you can see, the market isn’t done selling them off just yet based on Wednesday’s returns. I expect that these will continue to get weaker if the market continues to shake out due to worries around rate hikes.

  1. PENN: DOWN 6.35%
  2. GPN: UP 0.72%
  3. LVS: DOWN 4.37%
  4. ATVI: DOWN 1.35%
  5. MKTX: DOWN 3.89%
  6. CTXS: DOWN 2.16%
  7. WYNN: DOWN 3.70%
  8. IPGP: DOWN 2.91%
  9. FNF: DOWN 0.20%

A lot of investors were looking for a reversion on these stocks to start the year. And after some gains that happened during the first two days, new buyers were left holding the bag. I would suggest that you steer clear of this list. 

I had been positive on Penn National Gaming (PENN), but the concerns and the negative momentum are too strong to ignore. Right now, continue to focus on value, income, and strong companies with good balance sheets. 

We need price discovery on a lot of these companies. Don’t be surprised to see a continued decline in very pricy tech stocks (I’m looking at Atlassian Corp. (TEAM) to potentially fall to $250 by February). 

It’s going to be choppy. We’re back in negative momentum right now, so stay cautious in the small and micro-cap space for the coming days. I’ll be back with more insight into the energy sector this week.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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