“Looking at the DJIA and its component stocks Friday you are thinking something happened this wk to trigger the pullback“– Paul Ebeling
Caterpillar Inc. (NYSE:CAT) and Dow Inc. (NYSE:DOW) have fallen hard. Also hit have been Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), Walgreens Boots Alliance Inc. (NYSE:WBA), and the list of big blue-chip went on, pulling the group as a whole deep into technical oversold territory.
The Big Q: What happened?
We would expect interest-rate-dependent banks like JPM and Citi to retreat if the Fed had started hinting about rates remaining depressed for a longer period of time. But that is not what the Fed said.
If anything, the rate environment now looks a bit hotter than it did a wk ago. That is constructive for the banks and for the broader financial sector too.
Plus, DJIA’s decline suggests a slowdown in commodity inflation, which is not what the Fed anticipates. Instead, the FOMC policy makers have left the door open to higher prices ahead.
The entire commodity group shares the DJIA’s grief this wk.
Copper producer Freeport-McMoRan Inc. (NYSE:FCX) is down 14% this wk. Gold miner Newmont Corp. (NYSE:NEM) almost looks defensive with a mere 9% correction.
Then there are the consumer stocks. Giants like Walmart Inc. (NYSE:WMT) are down alongside WBA, even though Main Street is as eager as ever to bounce back from the VirusCasedemic and get back to the normal business of living life without masks and draconian lockdowns.
Wall Street does not re-rate what stocks are worth long term without a reason.
So, unless you can create a strong narrative explaining so many simultaneous declines, it is all just transient Noise, and part of the “random walk” that people believe moves stocks in circles day in and day out.
Remember, 2 steps up, 1 step down: that is how the market moves, it is what separates real-world investment performance from a random walk.
That being the case, without a fundamental cause, any random move will reverse itself as fast as it 1st emerged. So, in that scenario, this wk’s losses for 75% of the S&P 500 are temporary.
This is the kind of dip that investors can buy with a degree of confidence that stocks will rebound to at least the level they commanded a wk ago.
Just keep listening for the signals that are behind the day-to-day Noise.
Friday afternoon, 18 June was especially Noisy because stock and index options, as well as futures, expired, forcing traders to make quick moves on a very tight time limit. After this, real headlines will be scarce until 13 July, when the big banks report their quarterly results.
That leaves us with nothing but Noise on the calendar for the next 3 wks, putting signal-oriented investors at a temporary disadvantage, but the signals are strong.
People who like Noise do their best to amplify it. They would like it a lot it if people got distracted or nervous and discarded great stocks in a moment of weakness.
The Big Q2: Have inflationary expectations receded?
The Big A2: The Fed thinks the economy is moving in the opposite direction. The same logic that drove the DJIA and the commodity stocks higher is unchanged.
The Big Q3: Are banks going to starve?
The Big A3: Our earnings target on Citi is back to where it was a month ago, this stock was on the way to 78/share. And no 1 lowering their targets on JPM after the Fed announcement. These are the exact same earnings projections that made this a 166 stock a few wks ago. Wall Street is a bit more Bullish here than ever.
Do your work, go across the market, and you will see entry points emerging all over the Key sectors.
But of course, exploiting the entry points requires attention to fundamental picture, and ignore the Noise as big Wall Street investors use this pause in the headlines as an excuse to take some money off the table.
Have a happy healthy weekend, Keep the Faith!