Is the Fed leaking dovishness to the WSJ? … a positive surprise could fuel a fall breakout … “price is truth” … a new trading tool from Luke Lango that helps resolve the bull/bear tension
Yesterday’s Digest was bearish, highlighting an ailing U.S. consumer and questioning whether growth expectations next year are warranted.
Today, let’s counter that by outlining a bullish argument for stocks.
To help us, we’re turning to our hypergrowth expert Luke Lango who presents the bull case better than just about anyone we know.
Let’s begin with the Federal Reserve and its rate policy
The Federal Reserve’s interest rate decisions fan out across the entire economy, impacting corporate growth, consumer health, and ultimately, your portfolio. Over the last several months, there’s been a back-and-forth about the decisions the Fed will make this fall…
On one hand, there’s been a growing belief that the Fed is done, or nearly done, with rate hikes thanks to cooling inflation data. On the other hand, sporadic hotter-than-expected economic data have challenged that belief. Whichever your personal leaning, there’s data to support it.
So, which way will this break?
Luke believes the Fed just signaled that it’s done hiking rates – and the clue comes courtesy of a Wall Street Journal article from earlier this week.
In Luke’s Daily Notes from Innovation Investor on Monday, he highlighted an article from the WSJ that “all but said that the Fed is done hiking rates.” Of course, the financial press is filled with opinions about what the Fed will do. Why should we assign greater significance to this article?
Here’s Luke:
The WSJ article was important for one reason in particular. It was authored by Nick Timiraos – the so-called “Fed Whisperer”; nearly everything he writes about the Fed ends up being true.
And essentially, the article noted that given recent labor market weakness, the Fed is really worried about hiking rates again. It even strongly suggested that the central bank will not hike rates again.
Luke and I discussed this yesterday and he added that for past 18 months, whenever the Fed has wanted to leak upcoming policy decision to the press, Timiraos has been their guy. One example is the Fed’s “surprise” 75-basis-point hike last summer that Timiraos broke.
Here’s Luke’s bottom-line from our conversation:
When Timiraos is hawkish, Powell’s hawkish. When Timiraos is dovish, Powell’s dovish. By design.
And last few weeks, Timiraos has gone total dove.
This sets the stage for a surprise rally as we move toward December
In the long-term, the quality of a company’s earnings drives its stock price. But in the short-term, market prices surge and crash for a different reason – surprises to expectations.
Whether it’s an unexpected jump in revenue… a CEO stepping down out of the blue… or perhaps forward-looking guidance out of left field, when there’s a sudden, glaring misalignment between expectation and reality, it moves a stock price.
If Luke is right is about Timiraos and the Fed, then we’re setting ourselves up for a very bullish misalignment between expectation and reality.
To illustrate, let’s turn to the CME Group’s FedWatch Tool. It surveys traders to assign probabilities for different fed funds rate levels at various dates in the future.
Today, there’s virtually zero disagreement that the Fed will pause on rate hikes next week. If the Fed does hike rates, it will result in market fireworks, but such a hike is so unlikely we’re skipping over it.
When we look out to the Fed’s November meeting, the expectation for at least one more 25-basis-point hike comes in at 34%. And by December, we’re up to 42% as you can see below (almost 38% expecting one quarter-point hike, nearly 5% expecting two quarter-point hikes).
Graphic showing the CME Group's FedWatch Tool putting 42%+ odds of at least one quarter-point hike by December
Source: CME Group
These are relatively high expectations for more hikes to come. So, if the Fed is done hiking rates, it sets the stage for surprise/relief rallies following both the November and December Fed meetings as expectations for hikes don’t materialize.
Keep in mind, such bullish surprises would be happening during seasonal strength. November and December are two of the three best months for stocks out of the entire year (April is the third).
So, there’s the potential for these “no hike” Fed meetings to serve as gasoline poured on a bullish bonfire.
But Jeff, what about your rant yesterday concerning the fragile U.S. consumer?
The U.S. economy and the stock market are different beasts. Though clearly interconnected, they rise and fall on separate timetables and for different reasons.
This pandemic-era screenshot below from Jim Cramer’s investment show Mad Money captures this juxtaposition perfectly.
A graphic of Jim Cramer's investment show that juxtaposes a great week in stocks with a horrible stretch for the economy
Source: Mad Money
Yes, I believe the weakening U.S. consumer means there will be a stock market reckoning at some point. But in the meantime, as long as the market is climbing, then my rant from yesterday amounts to little more than an old man angrily shaking his fist at the clouds.
That’s because when you boil it down, there’s only one thing that matters to your wealth – whether today’s market price is higher than your initial buy price.
This reality is what’s behind the old trading axiom “price is truth”
Luke stresses this point in his elite trading service, AI Trader:
…The only thing that will make a difference to your portfolio is whether the stocks you own rise in value while you own them.
Let’s say you found a truly atrocious company – we’re talking the opposite of a blue chip. It’s hemorrhaging cash, has awful management, and is in a dying industry.
But what if its stock price had just broken out and, hypothetically, was on its way to doubling from $5 to $10? Would any of those negative characteristics matter to you?
If what you care about is your personal wealth, they shouldn’t. Why would they?
All that would matter is that the stock is doubling while you’re invested.
None of this is to say that Luke doesn’t see fundamental reasons for bullishness as well. It’s just he ties data back to the Fed, and by extension, Wall Street prices.
For example, in his Daily Notes from this week, Luke acknowledged sagging U.S. consumer strength, but then linked it to Fed policy and the market:
The U.S. consumer is about to hit a wall.
One of the reasons firms are hiking prices less and less is because consumers have begun to balk at high prices and have stopped paying up for goods and services.
This trend will be accentuated in the final few months of the year thanks to high financing rates, tight credit conditions, a shaky labor market, weakening wage growth, and overall economic uncertainty.
With consumer spending set to slow, the pace of price hikes across the economy will likely drop even further, only adding more firepower to the disinflation trend.
August’s inflation data did – and we believe it provides a solid foundation for broad disinflation to resume in September, the Fed to permanently pause its rate-hiking campaign, and stocks to soon snap back into rally mode.
If you find yourself falling somewhere between “full bear” and “full bull” today…
Here in the Digest, I’ve suggested readers reconcile any inner bearishness with 2023’s bullishness by approaching the market with a trading mentality. That means riding the bullishness for as long as it’s here without committing to those positions as long-term, buy-and-hold additions to your portfolio. Instead, use wise position sizes, maintain your stop-losses, and just ride the winners until the situation sours. At that point, move on to the next bullish set-up.
This approach puts the “price is truth” axiom we highlighted a moment ago above all else – as it should. After all, we don’t invest to boast about having the most accurate fundamental analysis, but to have a portfolio of stocks that rise in value when we own them.
So, with this reorientation, the question becomes “well, regardless of the Fed, inflation, the U.S. consumer, and everything else, how do we find stocks that are most likely to have much higher market prices tomorrow than today?”
That brings us back to Luke…
Earlier this week, he debuted a cutting-edge, artificial-intelligence-based trading tool that’s engineered for one central purpose – identify stocks that are on the cusp of a major price breakout.
Prometheus was trained on hundreds of thousands of financial market data points, with the sole purpose of pinpointing when a stock is about to surge higher.
That is, this next-gen AI scans the entire stock market every week to gauge the probability that a given stock will surge higher in price over the next month.
All you have to do is ask Prometheus about a stock, and it’ll give you a score.
The higher the score, the more likely the stock is to surge over the next month. The lower the score, the less likely.
Forget the guesswork and uncertainty surrounding investing. Prometheus provides answers.
That’s an absolute game-changer for anyone with money in the markets.
To Luke’s point, below is how Prometheus looks. We used this example from Microsoft earlier this week in the Digest:
Yes, a weakening consumer could spell bad news for the stock market in the coming quarters.
Equally, yes, the bullish surprise that Luke sees coming from the Fed could spell fantastic news for the stock market in the coming quarters.
In the meantime, what’s here-and-now is a bull market. That’s what prices have been telling us all year, and price is truth.
Whether this bullishness lasts another month or another decade, it’s with us today, so keep riding it – whether you do so on your own, or with the help of an AI tool engineered for detecting price breakouts.
