Momentum is still red… And that’s all you need to know. Don’t click that box just yet and count all your cash. There are signs that a bottom is forming. And I want to get out in front of this discussion.
Today, we saw a little more volume than usual, and a relief rally came in the mid-afternoon after a few critical words from a member of the Federal Reserve.
I need you to stay informed. If you stay informed, you’ll be ready to launch your boat into the water when the storm clears… and beat the rest of the tepid, tired retail investor army to any short-term rally heading into the summer. Let’s dive in…
David Tepper Looks for the Bottom
Remember the height of the COVID-19 crisis? The one where hedge fund manager Bill Ackman said on March 18, 2020, that “Hell is coming” on-air during a CNBC interview?
It was at that point that retail investors threw in the towel. The market cratered. What we didn’t know is that Ackman was heavily shorting the market. His words would help propel another massive selloff. The SPY – which tracks the S&P 500, had already declined from 340 to 235 in less than a month.
Ackman was shorting the market heavily. He would cover his short not just days after this position, calling a bottom after Minnesota Fed Bank President Neel Kashkari appeared on 60 Minutes and promised to open the central bank’s vaults. Ackman made $2 billion on that short position.
Fast forward to the one-month Apocalypse we’ve endured for the Nasdaq 100. Since momentum went negative on April 5, the QQQ has fallen from 365 to 300.
That’s a massive decline. And anyone who has been shorting has made a pretty penny. That includes David Tepper, the founder, and president of hedge fund Appaloosa Management. Tepper’s a smart money manager who became a leading strategist in identifying distressed debt. In 2009, Tepper’s fund made $7 billion in profits betting on the recovery.
He made $4 billion of that cut.
Tepper told CNBC yesterday that he was shorting the NASDAQ and has projected the bottom down around 12,000. That figure represents an 18-month trading low for the index.
Tepper clearly understands the central bank problem for the markets, even raising questions about their credibility moving forward. With Tepper covering a sizable short position, he appears to be seeing certain things that I am.
Let me show you what elements I think are critical that might stop the bleeding very soon.
The U.S. Dollar
The dollar is surging. This itself is a positive component for fighting inflation. By default, a rising dollar can purchase commodities and other assets for less than exchange-rate prices just a month ago. It’s not perfect, but that stronger dollar does help us with imports. If the 10-year bond settles in that 3.2% or less range for a sustainable period, investors may feel more confident about piling back into recently oversold tech stocks.
Many good tech firms with strong cash flows have moved into very attractive price ranges. If the U.S. dollar remains firm, the Fed might not have to take as much action on interest rates to tame inflation. Remember, the Fed has to pull inflation back down to the 2% range. That wasn’t expected to happen until 2025 (according to Jerome Powell himself). But if the timeline accelerates, and the bank doesn’t need to move to 3.0% this year and only moves to 2% on the benchmark in 2022, that will relieve a lot of pressure on this market.
Finally, I project that the Fed doesn’t follow through on its balance sheet tightening as planned. Nevertheless, the damage is done, and history suggests that the balance sheet tightening won’t be as aggressive as they’ve projected. Even if they reduce the balance sheet at a slightly slower pace, investors will cheer.
Remember, there will be volatility from any draining of liquidity. Still, the markets have already shown their panic NOW before the process starts, possibly pricing in that risk well ahead of time.
Insider Buying Movement Signals Bottom
I’ve been relieved to see some insider buying at the S&P 500 level. Executives at General Electric, Uber Technologies, and General Motors are buying stocks. I want to see more of this trend.
Remember, there is no bigger signal that the bottom is in than when the insider buying-to-selling ratio on a dollar basis surges (on a five-day moving average). The insiders have repeatedly called the bottom during the worst market turmoil in 2008.
Finally, let’s mention that we are at Peak Fear right now. We are witnessing intraday periods of trading that produce 2%, 4%, and even 6% swings positive to negative and back during the day. This was common during the COVID-19 calamity.
Hedge funds continue to use any short-term rally to dump the expensive crap that they were stuck holding to start the year. The sentiment is incredibly bearish about the economy, the market, the war, the housing market, and on and on. At some point, things become so bearish that you have to become bullish, right?
Goldman Sachs’ “Sentiment Indicator” emerged last week. The indicator tells us on a scale of -1.0 to 1.0, one where investors are from bearish to bullish. Anything that expands outside that range is considered extreme, and we start to move into statistical variances that become quite fascinating. Typically, extreme bullishness or bearishness coincides with short-term market tops and bottoms.
The sentiment indicator came in at -2.7.
And it’s not just Goldman. There are countless indicators out there that show incredible amounts of selling at retail and institutional levels that suggest the worst has to be approaching… because it starts to become unsustainable.
Unless… of course… We are truly in a bear market. I’ll leave you with that thought… because it changes the calculus of everything. And with it, it draws us into a much different action plan.
Cash remains your best friend right now. I am not buying anything until I see two to three solid days of institutional buying or massive insider buying that rivals the purchasing that we saw in 2018, 2020, or early 2022.