Cash, A Love Story

cash

When I sign off: “Remember, cash is your friend,” I mean it. Friday’s blistering selloff broke the S&P 500, the Russell 2000, and the Nasdaq 100 (QQQ) into the negative channel. 

The negative momentum move that started on April 4 has exhibited lower highs and lower lows. Earlier this week, we saw another “Bull Trap.” But there was something problematic about Friday’s selloff. Remember when I said Thursday that the Buy the Dip investors might pick up on the “lower high, lower low patterns?”

That happened today. Net institutional sellers took over the day – and we saw a SERIOUS selloff in every sector. It was especially problematic in the energy sector, where excellent companies are getting hit hard despite solid fundamentals. Let’s do a quick recap of opportunities in the final week of April. 

Peabody’s Weakness is Stunning

In my view, the selloff in Peabody Energy (BTU) has gone too far. A drop of more than 25% in just a few days makes very little sense. 

Coal prices are rising around the globe. Governments just can’t move away from coal while struggling with the renewable energy transition. So instead, they’re dumping the stocks that will benefit most from the ongoing run-up in energy prices. 

The only thing that makes sense is the ongoing concern about market liquidity. If institutions need capital and are worried about margin, they will raise Cash however they need. But, conversely, we see a profound rush to Cash when momentum goes negative like it did yesterday. 

It’s evident in the vital sectors like energy and materials and the liquid positions of cryptocurrencies like Bitcoin and Ethereum. So when momentum goes negative, I sell my crypto. Because institutions will dump speculative long-term plays like Bitcoin. 

An institutional switch in broad market momentum means Cash is your best option.

Now What?

We’ve had negative weekly momentum for 19 of the last 26 weeks. The trend is highly evident in the tech sector, which continues to experience profound weakness. Fund managers like Cathie Wood are still trying to call a bottom. 

Today, we learned that Wood’s ARK Invest Fund bought more shares of Roblox (RBLX). Do you know who didn’t buy any of this stock? Corporate insiders like the CEO, CFO, and other executive committee members. As you can expect, I shook my head at this news. People keep asking me when we’ll seek a bottom in the technology sector. 

The insiders will likely tell us. But with the Fed set to accelerate interest rate hikes and drain hundreds of billions in liquidity from the market starting in two weeks, the conditions remain bearish. As I’ve noted, I expect further weakness, and we are still sitting at historical highs in valuations. 

While inflation may drive up nominal profits and revenue numbers, remember that valuations are still contracting. The continuous period that I project is known as “Valuation Compression.”

This compression pattern is when we see multiples like price-to-sales and price-to-earnings drop. Anyone buying technology or growth stocks can find this period very frustrating. Some companies may increase their revenues or profits, but the valuation compression will not help the stock price. 

Some Examples

Any given stock may trade sideways, flatline, or go down as this broader market phenomenon accelerates. I warn investors to focus on fundamentals as they build a portfolio for this decade. Stocks that are trading at a price-to-sales ratio over 10 are hazardous, and that list includes companies like Microsoft Corporation (MSFT). 

I think it’s best to focus on commodities, low-valuation banks, and precious metals, which remain cheap compared to historical periods. These recent pullbacks in companies like Peabody (BTU), Vermillion (VET), and Coterra Energy (CTRA) are presenting opportunities to sell puts and establish long-term positions.

I’ll be in the Bahamas on Monday for a week. I’ll be reporting on the ground from Crypto Bahamas. You can submit any crypto related questions here, and I’ll report back on what I learned.

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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