Forget the Fed’s Mind-Numbing Message – These Three Signals Say It’s Time to Go Bargain Hunting
I didn’t expect the Federal Reserve to sound the “all clear” signal yesterday.
I didn’t expect a ticker-tape parade with Chair Jerome Powell flashing the “V-for-Victory” sign to celebrate the vanquishing of inflation and an end to interest rate hikes.
I did expect the Fed to keep rates where they are… and it did.
But while I got everything I expected, I didn’t get what I always hope for – some clarity for investors.
As is too often the case when it comes to “Fed-speak,” we came away from one of the central-bank’s policy meetings with a forward view that’s confusing – if not downright contradictory.
Inflation is down – way down – meaning rates may not have to remain high. Yay.
But the Fed wants “more progress” – and wants to “proceed carefully” — meaning it may raise rates again before the year ends. Boo.
The economy is “expanding at a solid pace.” Yay.
But that expansion is stronger than expected – meaning rates may “need” to stay high for a while. Boo.
Economists, investors, and everyone else is now trying to figure out what it all means.
I get the concept of “transparency” – and not wanting to be secretive. But this lack of clarity I’ve just outlined is a catalyst for the very speculation it tries to avoid. Despite the good intentions.
That said, one of the best tightening tools the Fed has at its disposal is too simply sound negative. Hawkish talk is like putting on the parking brake. (And I think we’ve all driven with parking brake on once or twice.)
It would have been so much better if the message had been: “We’ve made great progress. Inflation is down. The economy is strong. We’re monitoring the data, and we’ll keep you posted.”
Chair Jerome Powell did actually say that: “What people (Fed committee members) are saying is, ‘Let’s see how the data come in.’”
Thank you.
My data will indeed determine our next moves.
Beating inflation is like steering an ocean liner. You move the rudder but must then wait patiently for those adjustments to put you on the right course. And you take care not to move too aggressively or overcorrect.
We are on the right course, and that won’t change suddenly.
And for investors, that course means it’s time to go bargain hunting – top take advantage of seasonal volatility and post-Fed confusion to buy the best stocks in the market at discounted prices.
Three “Signals” that Tell Us Stocks Are Headed Higher
While “Fedspeak” feeds into “paralysis by analysis” – causing investors to make a lot of costly mistakes – in my Quantum Edge services we are already positioning ourselves for higher stock prices and bigger profits are in our future.
And it’s the data – not some myopic crystal ball – that says so.
Indeed, these three specific signals (data points) tell us so:
1. Inflation has plummeted.
The data is clear. Inflation has dropped from above 9% last summer to 3.7% today.
It gets really interesting when you add a trendline to this bit of analysis. The Fed’s “ideal” target for inflation is 2%. And that trendline takes us right there.
And, by the way, that 2% Fed-target inflation rate is a unicorn – it only exists as a bit of stock-market mythology. I ran a personal study on the consumer price index – going all the way back to its 1960 creation. The average reading over the last 63 years is 3.77%. That’s nearly double the 2% goal – and it’s right where inflation is now.
That level of inflation certainly wasn’t harmful to stocks: The S&P 500 has gained more than 46,000% during that studied 63-year span.
Yes, inflation has bumped up last couple of months. And, yes, the data analyst in me is watching this. But most of the CPI surge has been “fueled” (couldn’t resist) by spiking oil and energy prices, which are notoriously volatile.
The overall downward inflation trend remains intact.
Which is great news, because even as higher interest rates slow things down…
2. The economy keeps ticking.
Once the Fed launched its inflation fight 19 months ago, the big fear was that it would push the interest-rate rudder too hard – tipping the economy into a full-blown (and painful) recession.
And that’s a legitimate fear.
But I kept watching the data, and it never took us into that scary future… even as most analysts kept predicting a recession.
In fact, as part of its message yesterday, the Fed boosted its growth forecast to 2.1% – a big jump from the 1% forecast it released back in June. Unemployment remains low. And consumer spending – which accounts for 70% of the economy’s growth – remains “particularly robust,” Powell said.
And, most relevant to our work together here, companies continue to make money.
Speaking of defying expectations…
3. While too many investors waste time “reading the tea leaves,” the bull market rages around them.
Yes, August and September have been their typical, choppy selves. But the S&P 500 remains in a bull market – up more than 20% from their October’s lows.
Investors can wring their hands all they want – and say stocks “shouldn’t” be trading this high – but they are.
That hand wringing isn’t restricted to investors. The analysts and strategists who are supposed to be market “seers” have been wrong about this year’s strength in stocks are now playing “catch up” – and are boosting their year-end targets for the for the S&P 500. As Bloomberg just reported:“A slew of Wall Street strategists have been forced to ratchet up their forecasts as stocks extended their climb this year.”
Given the data we just analyzed, we can be confident that stocks will rise as rate hikes end (really, they will). We’re heading into the strongest slice of the year for stocks, and companies and the broad economy will continue to build on a foundation that never crumbled.
Take Advantage of This Classic Buying Opportunity
The Fed’s decision and clear-as-mud “explanation” didn’t short-circuit the current trends or outlook. Instead, at the signals I just detailed for you – and understand why they say now is the time to buy.
Today’s trading indicates the expected late-September shakeout is brewing right on schedule.
Volatility has increased in the last week. The CBOE Volatility Index – better-known as the VIX because of its ticker – has surged nearly 30% since last Thursday.
My Big Money Index – which is a part of my proprietary quantitative analysis system that measures the amount of buying and selling by hedge funds and institutions – has fallen steadily since the beginning of August. It may fall more, but it is now close to where it historically reverses higher.
Market “breadth” is low, meaning more stocks fell today than moved higher.
Algo traders – trading driven by computer algorithms – will pepper bid prices (the price a buyer is willing to pay) and try to drive them lower. When they succeed, they can make a lot of money.
All of this means that conditions are ripe for a final pullback (or two) that we typically see this time of year before stocks make the turn to a rousing finish.
When expectations are for higher prices even as stocks are falling to lower prices, you have a classic buying opportunity.
Figuring out the best stocks to buy isn’t complicated. Regular Power Trends readers known that high-probability, high-potential stocks exhibit these three characteristics:
- Superior fundamentals that tell us the business itself is a powerhouse.
- Strong technicals that reveal strong buying pressure and indicate continued momentum.
- Big Money inflows – the really big money that moves stocks.
These are the cornerstones of my M.A.P. system that we use in my Quantum Edge services, and we just added new stocks today that meet our requirements.
I’m confident they – and other quality stocks – will be much higher by the end of the year.
And that’s why now is the time to be buying – when other investors are willing to sell you good stocks at discounted prices.
Talk soon,
Editor,
Jason Bodner’s Power Trends
P.S. We made 34% in four months in the stock I just recommended today in my Quantum Edge Pro service.
It’s exactly the kind of opportunity I’m talking about – buying great stocks on short-term pullbacks before the end-of-year rally kicks in.
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You can learn how to access it and all of my recommendations here, as well as all find out more reasons why now is the time to buy.