Let Chaos Reign

Brit Ryle

Posted October 4, 2023

“From e-e-every mountainside, le-e-t chaos reign…”

C’mon! Everybody sing!

Maybe this isn’t the best time for jokes…

After all, stocks are teetering on the brink of some pretty significant levels. Yesterday, the S&P 500 got within 16 points of its 200-day moving average (MA), before bouncing a little into the close. 

The S&P 500 is now down 7.5% from its high closing price in late July. That’s close enough to the “official” 10% drop needed to qualify as a correction for me…  

But that 200-day MA – that’s the long-term trendline. The trading algorithms will respect that level for a little while, like they did yesterday. But they won’t for long. The 200-day MA sits right at 4,200 on the S&P 500. Break below that level, and the algos will very likely flip the switch to “beatdown.”

The bond market has gone into full chaos mode. The dramatic spike higher for yields – and drop in prices – is a real problem. Remember Silicon Valley Bank – it failed because the value of its Treasury bonds fell to the point where it couldn’t meet withdrawal demand. 

So no doubt, investors are about what chaos the sell off for bonds will unleash. Is something about to break? 

The IPO market and the venture capital markets have basically dried up because ever higher interest rates have sucked up liquidity. 

As the old saying goes:  Investors are more worried about the return of their money, rather than the return on their money. And when you can get a guaranteed +5% yield on a 2 year bond, that starts to look more attractive than the risk of stocks.

It certainly doesn’t help that the Lords of Chaos have moved into the U.S. Capitol building in DC…

Chaos in the House

I keep wondering how I would have voted on Speaker McCarthy if I were a Democrat in the House of Representatives. 

I mean, the House Republicans have a majority. They have a mandate from the American people. The fact that they cannot get their shit together enough to actually back a leader and pass laws… I mean, if I were a House Democrat, why stand in the way of a complete GOP dysfunctional meltdown? 

The Democrats don’t even have to try – the Republicans are all too happy to embarrass themselves.

But of course, complete dysfunction is not what’s best for America.There is already concern that the government shuts down in November when the stop-gap funding bill that led to McCarthy’s ouster runs out. If the choice is 1) House republicans figure how to lead with their mandate or 2) the government shuts down, well, feels like a done deal. American soldiers will stop getting a paycheck, but the clowns in Congress keep getting paid no matter what.

 I find myself wishing that the House Democrats had supported Speaker McCarthy and voted for stability instead of chaos. We could sure use some adults in that room…

Chaos at the Fed

I don’t recommend following the narrative coming out of the Fed on a daily basis – at least not without a couple aspirin, and maybe a couple fingers of scotch. And not good scotch either. You’re gonna get indigestion or heartburn or something – why waste the good stuff?

Because just like Congress, the Fed is tedious, irrational and disjointed. 

Last couple of days, it’s been the Cleveland Fed president Loretta Mester saying that the Fed must hike interest rates. Last week it was Neel Kashkari from the Minneapolis Fed saying the same thing. It’s like a damn relay race, one Fed member handing the rate hike baton off to the next…

What is another 25 basis points going to do that the last 525 basis points haven’t? 

The risk isn’t so much about the economy. The trend for inflation is lower. And I still say that If the Fed hikes rates because of Russia/Saudi oil policy, that is a huge mistake.

The real risk is that something breaks, like Silicon Valley Bank back in March. Banks are regulated by the Fed. And the Fed has proven again and again that they are not good at managing real businesses. They are economists and academics who continue to think that a line item on a balance sheet is the same as money in the bank…

Ignore the pandemic lows from 2020 and shares of Bank of America (NYSE: BAC) are trading at 5-year lows. That’s not real good…but it’s like the Fed isn’t paying attention to the banks’ in its own backyard. 

Premature Allocation

Last week, I started telling you to use the current weakness to get positioned for a year-end rally. The market definitely got a little weaker than what I was expecting. But I can admit without any shame that I suffer from premature allocation. 

I was a little early to advise caution back in late June. And it’s looking like I was a little early saying it was time to “buy low.”Though my exact words on September 25 were:

I can’t say the market’s totally ready for a rebound just yet. After all, we still have the UAW strike and Congressional idiocy going on –  Seems like some sideways action – a little consolidation – while these things resolve would make some sense…give investors a little time to get comfy that the market’s not about to plunge lower…

We are much closer to a bottom than we are a top (Bank of America just raised its year end target for the S&P 500 to 4,600). Don’t sweat the last few percentage points of downside – use the current weakness to add quality for a year end rally. 

I’m especially pleased with the strength we are seeing from my most recent recommendation, Teradyne (NYSE: TER)

We got the Pro Trader Today portfolio online over the weekend, so you can check out all of my recommendations, along with links to the original recommendations. 

That’s it for me today, take care and I’ll talk to you on Friday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today
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