It was a tough session yesterday that didn’t truly reflect the final print for the major equity indices:

• S&P 500: -1.26%
• NASDAQ Composite: -2.26%
• Russell 2000: -2.36%
• DJIA: -0.80%

Four sectors in the S&P 500 closed higher on the day, reflecting funds determined to remain in equities instead of heading to the sidelines.  But there is no doubt some of the smart money that began buying right after that February 24^th bottom took some off the table yesterday.

There was curious action in Financials (XLF), which should have been the top performer of the session on surging yields. 

Cyclicals continue to sag as investors that thought they could have their cake and eat it too by shifting into Industrials (XLI) and Materials (XLB) are discovering the recession narrative is overtaking the growing economy narrative.

Heat Map

Health Care (XLV) was a bright spot, which was somewhat ironic, considering President Obama returned to the White House for the first time since leaving to celebrate 12 years of Obamacare. While it’s true that more Americans have healthcare coverage, it’s not the promised coverage from private companies but more taxpayer-funded coverage, which is why UnitedHealth Care (UNH) hit a new all-time high and rallied 1,800% because insurance companions wrote the law;  66.5% private and 34.8% public coverage.

Each day sees violent rotation and whiplash, which creates more cause for concern, especially for Technology (XLK) stocks that have moved 1% (up or down) in more than 73% of 2022 trading days.

Yellow Flag:  The NASDAQ Composite continues to straddle its 50-day moving average, unable to break away.

Red Flags

Semiconductors were on a launch pad two weeks ago but have since come tumbling back to Earth. Not only did the VanEck Semiconductor ETF (SMH) crash below the 200-day moving average yesterday, but it also happened on a huge spike in volume.

The pressure came from the spike in the ten-year yield, which surpassed 2.50%, which many assumed would be more of a resistance point. But that move did nothing for Financials (XLF), which also slipped under its 50-day moving average. That goes against the script.

Transportation Derailed

As I pointed out in Payne’s Perspective, transportation stocks have been getting slammed, and for market purists that still adhere to the Dow Theory, this is a red flag. Transportation stocks were slammed on higher-than-average volume. It’s coming to a must-hold support point.

For now, money is rotating into Utilities (XLU) and Real Estate (XLRE) investment trust names.

Market Breadth

We’ve seen worse market breadth, and while certain niches saw spikes in volume on big-selling, overall  volume was just ordinary. But momentum in advancers and new highs was reversed.

Market Breadth	NYSE	NASDAQ
Advancers	648	1,205
Decliners	2,716	3,550
New Highs	122	74
New Lows	116	156
Up Volume	1.10 billion	979.84 million
Down Volume	3.75 billion	3.71 billion

Conclusion

In February, I wrote long-term investors would have to be more nimble than usual or that they are accustomed to benefiting and mitigating wild gyrations. But even then, you are going to have to take losses sooner and get stuck longer than you want or feel comfortable with; here’s the deal – you cannot close it all out because coming out of these stormy periods, markets tend to take off and fence-sitters tend to be paralyzed.

That hesitation is made even worse when you see names you liked or loved rally past the point you closed them because you thought it would let you sleep easier. 

It won’t.

Yes, have more cash than usual, but there will be a time in 2022 when you look back and wish you were a buyer. For now, we are dealing with it minute to minute, and it’s not pleasant – that’s the price of admission to get to the riches part.

Portfolio Approach

We closed several positions this morning in our Hotline Model Portfolio. We are trying to not get sucked into the herd going over the cliff by mitigating risk near term and raising some cash. 

Today’s Session

There is a lot of early pressure as the street grapples with how an aggressive Fed will really look with everyone on board, including the doves.

We see an aggressive Fed out the gate but do not see that aggression into the latter part of the year.  In fact, there are some signs the Fed could do an about face early in 2023. Right now, we are looking at three consecutive 50 bps rate hikes at the next three meetings.

Then an about face next year.

The NASDAQ Composite is at the lows of the morning into the opening bell.  We closed out a fair amount of positions want to have more cash than normal to minimize pain and take advantage of overreactions.

Comments

Good article on how the most productive companies in the world will feel the effects of supply-chain, War in Ukraine and inflation. Buffet said the same thing in the 70's in his shareholder news letter. Thoughts? https://www.marketwatch.com/story/a-big-shift-is-under-way-for-markets-and-old-warren-buffett-shareholder-letters-point-to-which-companies-will-survive-11649156726?mod=home-page&utm_source=Send_List%3A%20%20Newsletter%20-%20Barstool%20Finance&utm_medium=email&utm_campaign=TWC_Newsletter_20210406%20%28V7iHiv%29&utm_term=01FRK6GHY80DSEA7BTHC2KS3TF&_kx=s67ERWcqEXO79M560m5UbLw6tr8lvjc4YneWQ1ztKPY%3D.hvtJAm Bob Pinard on 4/6/2022 9:30:08 AM

I think the supply side issue will ease soon as demand wanes and some kinks come out - an maye China avoids more mass lockdowns.  But well run companies in the face of slower economies are essentially.  The market has already punished newer companies that were up mostly on hype and now will inflict even greater scrutiny on those that fail to execute.  Thanks Bob Charles Payne on 4/6/2022 9:46:19 AM

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