Market Update: 11-14-22

Junk off the Bottom! The Issachar Fund is 20% invested in 10 (mainly energy) growth stocks! Stocks hit disciplined sell triggers Wednesday as the market dipped below its 50 DMA right before the surprise lower 7.7% inflation report on Thursday. The market took the weaker inflation print to mean the Fed may “pivot” and slow its aggressive rate increase attack on inflation. The S&P 500 Index rallied about 6.5% into Friday. The dollar confirmed the less aggressive rate hike Fed by declining almost -4%, and 20-year treasury bonds jumped about 3.5%. The dollar (-6.5% since 9/27/22) and 20-yr yields (-7.6% since 10/24/22) may have peaked, and gold may have bottomed (+8% since 11/3/22). These are good signs the bear market may be over, but some of the strongest rallies occur in bear markets, so I doubt this is the start of a new bull market. Lower yields suggest lower inflation, just like rising yields predicted higher inflation this year. CME Fed Futures now puts the odds of a 50-bps hike in December followed by a 25-bps hike in February. The Fed has the last word, and they will be speaking this week so they could join the party or cause a retest of the 10/13/22 low. I have never seen a bear market end when the Fed is still raising rates, yet the market is going gaga on the upside at the mere hint of a Fed pivot. I am optimistically looking to buy more growth stocks, but they are not jumping off the screen like in 2020. I manage risk to avoid life-changing losses and capture most of the upside since the market determines the return. (There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses.)

The Fed pivot rally was mostly from “junk off the bottom” stocks that had been beaten down this year. The S&P 500 index was down over -24% YTD as of 10/12/22, so it was primed for this 12% rally. The next resistance area is about 2% away from its 200 DMA. I consider stocks like META (-73% as of 11/3/22), MSFT (-35% as of 11/3/22), and AMZN (-48% as of 11/9/22) to be “junk off the bottom” fundamentally weak old leaders that were oversold and due for a short-covering rally. If this rally is real, I expect to see fundamentally and technically strong growth stocks break out and hold their gains. The energy, electronics, and medical groups have produced the best-looking charts of institutional accumulation, so I am focused on that. If this rally is real, I expect the current leaders to continue advancing. If not, the leaders will retreat, and a retest of the lows will be back on the table.     

The Fed’s balance sheet increased by $2 billion last week, so the Fed may slowly be taking its foot off the breaks. Maybe the Fed thinks inflation has peaked, and they will pivot to less aggressive rate hikes. I believe the market may know what the Fed will do before the Fed does. The market knows everything that is known and immediately discounts the future income stream into today’s present value.   

Bottom Line: I am 59 and have been actively managing risk since 1990, pursuing my passion until God calls me home. I believe there will be another few bull markets in my lifetime that I plan to capitalize on and surpass the averages. Bear markets require patience and discipline to avoid life-changing losses. Just because the markets have always made new highs, there is no guarantee that they will again in our lifetime. We must protect physical and mental capital in bear markets to take advantage of the next bull market. I believe this bear market is long in the tooth and could have seen its low. However, price is the arbiter of truth, so I rely on what the charts say and not what I think the markets should do. This week, the high-risk crypto markets could be a significant disrupter as investors lose faith in cryptocurrencies. I was disappointed we did not see a red wave of republican victories last Tuesday. However, I put my trust in God, not the government, because God is still on the throne and loves us unconditionally. Grace & Peace! (if you do not want to receive these updates, please unsubscribe below)

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Dexter Lyons