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Jerome Powell Won? Likely Not – Our Plan For Volatility


Inflation Concept

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Powell’s strategy is working, inflation is defeated, What’s your beef?

I know it sounds like I am abandoning Powell and his approach. Hardly, to my mind, he has been masterful. His rhetoric has pushed up interest rates and recently gave a nod toward the possibility of a recession. That was all market participants needed in the commodity pits to beat a hasty retreat. It’s great, it shows the mighty power of the Fed to influence the markets that we all depend on. Price discovery for all the basic staples that sustain us are handled at these markets. The lubricant that keeps this process going is the speculators, the farmers, the manufacturers, and other intermediaries all keep the process going. Trading psychology is a huge piece of this process as well, even the robots have their algorithms adjusted by humans. When Powell verbally edged toward the possibility of a recession, he caused a minor stampede of all commodities at once last week. He reminded participants of his power to ruin their day. So, no, I have nary a quibble with the Fed Chief. I just think the process of cooling down the economy will take time. Also, more time will give the supply chain more time to evolve. Whatever production can be moved out of China is happening in a dramatic fashion. However, at some point, China will reopen, get its factories humming and the ports exporting. That will push on some of these commodities, while at the same time manufactured components that our factories depend on will be more plentiful, like chips and car parts. So, there are more adjustments that the economy needs to make on the road to bringing prices back to normal. The price movement in commodities is much more than Powell, it has a rhythm all its own, and it just so happened to work in our favor.

Commodities are notoriously volatile. We’ve only noticed the volatility to the upside in beef, soybeans, pork bellies, corn, and of course West Texas Intermediate Oil only recently. They can jump just as violently for no other reason as that is how commodities move. WTI has fallen toward 100 several times in the last few weeks but wasn’t paired with all the other commodities falling. What if all the receding prices were not just caused by the jawboning of the Fed, or even greater supply coming to the market. What if they all happened to come together, or maybe a few prices happened to come down at the same time, and traders being humans saw a trend. When any market does nothing but go up week after week, it becomes more and more vulnerable to any input that makes the other direction plausible. Fear takes over and it travels to other markets. Pretty soon the 10-Year is nearing 3% flat when it was just a tick away from 3.5%, it was just the week before that the 10-Year got that high. As a trader of stocks, I can hardly remember paying this kind of attention to interest rates, mostly because they would go up 10 basis points in a month so who cares. Now, I am watching the 10-Year as closely as I do the VIX, and the S&P. Let’s face it I am not the only one watching these indicators and like a half dozen others. The proof was the very pleasant rally we witnessed last week, with plenty of market participants seeing that drop as the green light to get long.

Just like the commodities, interest rates, and wheat came together so nicely, they could break in the other direction not so nicely and just as quickly. I will even concede that perhaps there are some fundamental reasons that some prices came down. That is what we all are pulling for. Still, I have to hold that serendipity had a lot to do with this happy accident. Combine that with a market that has been going in one direction, opposite of all these commodities, and that is down. It only makes sense that as the commodities were over-bought our stock market was supremely oversold. Bearish sentiment ruled the day, bears don’t want to hear that the commodities were at this point being bid up by every participant. You can’t just finger the speculators, the cattle buyers wanted their allotment and were willing to make ever higher bids because their customers took the role of price takers and not price makers. This means the pushback on prices was diminishing because everyone down the chain including competitors was able to get price increases. Perhaps last week the consumer changed habit and moved to chicken or forswore animal protein altogether, even an imperceptible tiny bit of resistance. That could have sent ripples all the way back to the commodity pits. July 4th is right here, will consumers continue to watch their pennies or are they going to get some t-bones and 80-20 ground beef? So yes, I hold that much of this is happenstance, perhaps the 10-year breaks back to 3.25%, and WTI runs back to 110? Then commodity traders just go back to bidding everything up again next week as the feat turns back to greed. The opposite happens to equities, and how far down we go we leave to the technicians (in this case me).

We broke above 3820 on the S&P, and just kept going

The S&P 500 shot up and surged into the close on Friday. It was glorious to see a bull move once again. I have completely forgotten what a good stock market rally felt like. It just kept chugging higher and higher finishing at 2911 right at the highs of the day. The momentum was so strong that I set up some of my selling to “Market on Close” orders. I haven’t done that in like ever, certainly not this year. I am sorry to say that this week’s trading could likely be the opposite, and the chances of commodity prices moving lower is highly unlikely. As commodities are wont to do if they don’t go down, they will drift up, and depending on a myriad of factors for commodities who knows maybe we see WTI back at the pivot point of 115. What I mean by pivot point, is sometimes you can identify a level where pricing accelerates higher. If I see WTI move briskly past 115, I will expect to see WTI challenging 120 in short order. If anyone thought that WTI was going to break under 100, I believe that time has passed (for now). Speaking of levels, as I said earlier, I noted that 3820 was an important level having at one time been a support level, I think it has become a support level again. If we hold 3820, I will adjust my view as far as whether the market is moving past its bearish behavior.

In these volatile days, the Cash Management Discipline is working very well.

The up-and-down motion is giving ample opportunity to load cash in reserve during the downturn and then unload cash to buy back shares that were sold at much lower prices. When I first hit upon this notion of trimming shares it was really about taking profits and losses and reducing “buyers/sellers remorse”. Working to reduce emotion while trading helps to eliminate trading errors. Cash Management Discipline also proved to be useful in volatile markets to trade around positions by trimming expensive shares and buying them at lower prices reducing average prices. Also, trimming into rallies and waiting for the market to sell off helps to buy new names at better prices. How many times have I jumped on a stock that I liked as it was going up, only to see it fall right back down even 15% lower? Our group really salted away a nice slug of cash knowing that no one has repealed volatility. The VIX did drop into the mid-’20s and that has not happened in a while. Does that mean the market is overbought? No, that doesn’t mean that it can’t sell lower next week anyway. Discipline means you do something like a reflex and rely on the discipline to do its work. I managed to pull together about 12% cash, and as I said I was trimming right into the close on Friday. I didn’t pay attention to the calendar as much as I should have. It turns out that building cash was a very good move indeed.

Next week is going to be interesting

The first piece of obvious data to glean from the calendar is that June ends, which means the 2nd quarter ends. Month end invites a bit of volatility as hedge funds try to clean up their portfolios, but triple that when the quarter ends. We may begin to hear of earnings warnings, which many bears are expecting as a matter of course because of higher input costs. I am not adding my weight to this position, I am just observing the situation. I have no doubt that fingers are poised to start shorting at the first hint of warnings. Then there are the economic reports next week Thursday the CPI, and the PCE indicators. The PCE indicator is the main vehicle for the Fed to observe inflation so which raises the chances that the market will be unsettled into the end of the week. I will be determined to hold back on buying shares until Thursday morning. The announcement will be 12:30 PM. I am hoping that the selling earlier in the week will have discounted prices enough to add shares at that point. I might initiate new positions before Thursday since I tend to buy in quite small stages. So besides, trading around positions last week, what else did I do?

My Trades

I am still shorting EVs Lucid Group (LCID), and Rivian (RIVN), I may look for other EV targets. I’m shorting Bitcoin using ProShares Bitcoin Strategy ETF (BITO). I am still shorting Digital World Acquisition Corp. (DWAC).

I moved back into the oil names Exxon Mobil (XOM), Apache (APA), Phillips 66 (PSX), Vertex Energy (VTNR). I suspect that as WTI moves back towards highs, oil stocks will turn around and generate some good alpha even if other stocks may suffer.

I went into some new names Salesforce (CRM), to join my second tier of quality names like Adobe (ADBE) and Intuit (INTU).

I also added some smaller names like Confluent (CFLT) after I saw that Brad Gerstner bought nearly $1M in shares. I added to UiPath (PATH).

Finally, I am dipping a toe into “old tech” and buying Oracle (ORCL). I think that ORCL is executing its mission to be a player in cloud services. Right now, it’s an inconsequential player, I think they will acquire their way to number 4. They acquired Cerner and are converting to the ORCL database. After spending billions to acquire it, they are showing quite a bit of hubris, or confidence that their technology is superior. They will be a consolidator taking advantage of the cheap stock prices.

I want to wish you all a lot of luck. I do believe that we will see prices even out and we may well have that summer rally we’ve been looking for. I just think after all the tough weeks the bear won’t stop growling that easily. Next week hopefully will be the beginning of the end of this bear. Powell will bring us through, and the great US economy will handle the rise in interest rates. Are we already in a recession? It may feel that way but not with the level of employment we still have. I want to encourage you to stay in the game. Remember to trim into rallies and add back slowly into selloffs.

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