Market Briefing For Monday, Jan. 24

The 'grand wind-down' - continues; as it has for months internally; masked a lot by the handful of mega-caps (today's version of the 'Nifty 50' of my youth), holding up the facade of strength via Indexes. I noted in the pre-Close video, how tough it has been to short these stocks through the year; as there were spots of very overbought conditions (low VIX concurrently), that were useful to play drops; but dips were fast to recover, so tactics had to be hit-and-run.

Now, you have a significant wealth effect damage that's pretty wide; including the weakness in crypto and so on. The widely-held mega-cap assets are part of a mosaic, that includes crypto that I've persistently warned was doomed; at least for awhile. Small-caps were doomed generally all year; seemingly cheap but nevertheless cratered further or just eroded; with a handful of exceptions.

Virtually everything suggested last year in a complex investment environment has unfolded, not always pleasantly; but realistically 'regression to the mean' never really occurred for the S&P. Until now. However, the stalling of the Fed to impose a bias they had for months, contributed to greater concentration of pain; creating a liquidation wave. So now the struggle to hold back 'la deluge'.

A 'liquidation wave' is essentially what I refer to as the Nevada bordello raid; a situation where they come for them all. Many leave the 'industry' (market) and the survivors are often wounded but matured for better future behavior. Much damage has occurred; the mega-cap techs (I opposed Tesla being in the S&P when that came along) have space below. It may take a long time to bottom a lot of these. They remain a huge portion of the S&P as several of us realize; a true impediment for a meaningful recovery of the S&P.

Think of this year as perhaps better for the throw-away small-caps that have a decent business model or innovative trend, than for the big-caps. Essentially it would be somewhat opposite of how the past year or so has behaved.

Executive summary:

• Rallies occur, but are false and abortive, pending completion of a bearish process which (presumably) relates to a confluence of uncertainties, and a few certainties; Friday's action continued the erosion; more still looms, especially for the mega-caps, while small-cap specs sort of flounder;

• War, the progress of Covid, and how the Fed will respond to those are the uncertainties (and more); plus the Republican Congressional sweep late this year and relative inflation (even as it mitigates later), are certainties;

• Evacuation of U.S. diplomats and staff from Kiev will signal a hostility risk increase; but that is already indicated by Russia moving more forces and jet fighters into Belarus;

• The Russian LST (landing ships) heading into the Med and Black Sea I'd think are intended to invade Odessa (large naval base and port) and if it comes to engagement, that's why the USS Truman Carrier Battle Group has been cruising around the Greek Isles (no more Mykonos & Santorini);

• One key variable the Fed cannot impact is the 'supply' issue as relates to hard goods (anything coming from China to be more specific); production there is constrained by the Covid-related sequestering of the population, a gargantuan task in China's major cities; and it also prevents a so-called 'herd immunity' by virtue of a sweep of Omicron through the country;

• It's important that the Fed grasp the significance of 'global factors' and not retain a myopic view that somehow tightening in the U.S. fixes the issues;

• In essence the pandemic darling stocks faded over the past year and did do their washout plunges most recently; which doesn't mean they're buys;

• Nasdaq had its worst month in over a decade; but that's because mega stocks (mostly techs and formerly hot pharma stocks) caught-down with a lot of negativity that already prevailed in the broader Nasdaq market;

• Small-cap 'bets' that were already cut-in-half eroded further and although anxiety prevails; a drying-up of demand may make some attractive anew;

• The backdrop always looks grim before a low, but we don't yet know if this is 'the' low; so far only Semiconductors are trying to carve-out a trough;

• Cryptocurrencies took the hardest hits; but we've been properly bearish on Bitcoin since 65,000 and now my 2nd phase downside goal of 38,000 has been hit; that doesn't mean it can't go lower as I've mentioned likely;

• The bull-run in crypto should be over; but there are so many protagonists that they will view it as a correction; either way downside has more to go; I think even though my realistic downside Bitcoin target is now achieved;

• S&P 'might' get a bounce from the 4200-4300 area; but low-confidence if so; more optimism for a serious rebound will be if S&P breaks below the 'standard deviation envelope' (bands) and probes 3900 or lower;

• But of course if it plunged that low it would probably do more than that; so we'll be content to play with whatever downside prevails early in the new week, with a caution to tread lightly still, as it might just be an 'eye in the storm' if we don't get a dramatic washout to precede the upside.

(Of course 'if' Russia strikes hard; Oil will thrust to 100 plus almost instantly.)

In-sum: I spoke to the differences between the 1987 and other breaks; this is one where essentially a crash comes from oversold in some indicators; and it might be done. But the wild card will relate (beyond issues you know, like the war clouds and Covid evolution) to whether the Fed 'Put' is reinstated at some point, or verbally they tone down their bias.

Like I said, this is a broadside by the market to get the Fed's attention (China gave a warning in the form of a 'request' not to hike rates); and all of it stems a lot from the Fed's failure to snug-up policy well before they inflated big-caps insanely; but excess liquidity injections for too-long a period of time.

They absolutely facilitated that; hence buyback bonanza overvaluation result; fluffy earnings (as lower share float gave the impression of better results), and a gift to increased executive compensation, with insiders engaged in historic insider sales last year; amid almost all the major mega-caps. I tried to warn about these aspects, the structure for which predated hospitalization for me (that's a year ago); and often called for limited S&P potential, with so much extra risk building in the big stocks. Distribution under S&P cover throughout.

Now we search for a trading-low; but the first turn may be temporary.

This has all been brutal of course; even for the small-cap speculations. These may become interesting over the next year; for some. I'm not even sure all will stay in-business, because some areas depend not just on corporate financing but on consumer demand being present.

The general thinking on Wall Street, and I think Washington also, is that post-Covid demand will be so great as to enliven things regardless of stock market or crypto's disastrous action. I think that's an elitist view; or wishful thinking. It is notable that Bitcoin tracked the S&P (something I've noted regularly lately), and thus was an unsafe have for those preferring it to Gold or Silver (which did do better recently and still are).

The Russian prohibition of crypto joins China; and that's a little known big deal since there was a trend to shift 'crypto' mining from China to Russia and that's now contributing to the liquidation. Much better to build semiconductor fabs vs crypto-mining. And less crypto might mean less computer demand for awhile.

Finally everyone has sensed the 'bifurcated' market I've talked of for a year; as ow you have a catch-down with reality. I need not expand on this; but more or less it's the Generals that were out ahead of the Troops; and now all are in the trenches or retreating to the beaches, and wondering if they're kicked-out of the battlefield, or will fight again. Those who want to fight will; but like WW2 campaigns some were slug-fests that weren't pretty and took lots of time.

Technically - everything has more to prove before a battlefield is re-engaged fully. And that includes small caps; not just the big and mega-caps. Stocks of course that benefited from the pandemic are the most clobbered; and that's a sector that (at best) will have rebounds within their revaluation to lower levels.

Smartphones are not a hot field now; and the carriers have great expense for their 'true' upgrade to wide-band (the highest ultimate speeds so far) for 5G. I have limited optimism on AT&T (partially long-held) Apple for that reason and although declining too; Microsoft, no longer in that (cell) business; but they're heavily involved in 'cloud' realms, so that matters (relative speaking better). I have been bearish on Zoom, Netflix, Docusign, Google, Amazon, Peloton, Boeing and more of the Covid-theme types (or for other reasons.. think 737 Max) for longer-than I can recall (sometimes far early; sometimes about right).

On Microsoft about two-thirds of their business is Cloud-based; even their insider millionaires were selling last year. Most calls are for a 5% increase in earnings; but beware it could still invite 'sell the news' action. I know some are playing for an upside from the trendline where it is; but I would fear a break of that trend. A buyer here is solely doing so on an earnings-beat expectation; at the same time I don't see much any of these big stocks can say to get surges now; it's a bear market; and it's not over. A break in MSFT might even be the nail in the coffin that contributes to the S&P plunge; if hasn't happened yet.

Sentiment for many of these stocks is at pre-Covid levels; purging the fluff. I rarely mention Home Depot or CostCo; but as they break too; more pressure as those were beneficiaries of Covid too. I know some analysts see them as 'hiding places'; I don't and they are 'only' about 20% off their highs (or less). In this kind of market that's not enough to come off the top. Not to mention many of these companies will be conservative with earnings guidance for awhile.

Sure we may get a washout (or a false-start rally which would be bearish just like it was a couple times this past week), and then a turn higher; but damage has been done; percentages to recover for the S&P are not going to allow the return to anything like higher highs (stunned to hear some pundits suggest it's possible); and frankly it would take peace with Russia; a deal with China; the end of Covid, and a neutral Fed; and then you could construct that. Consider that geopolitical issues are rising, not contracting, along with everything else.

But seriously, you will have winners and losers and hit-and-run trades; which is what has already been going on for months; though mostly noticed recently. I have suggested holding enough cash to take advantage of washouts without too much upside expectation thereafter. We're semi-neutral to Banks (helpful when you get rallies); favorable to Oil (have been for the entire past year) and we are getting sufficiently oversold to 'contemplate' putting a little more in.

As to smaller stocks I view them all as gambling (have said so); and generally not stocks I'd even look at 'if' the big-companies weren't so expensive. I might increase focus again on major companies if they're cheap enough; like we did in the successful cases of Apple (years ago) and Chevron and (recent) Ford.

Meanwhile the smaller stocks are so suppressed (can't just look at spreads of multiples because the big-caps were generally absurd) that ones with liquidity or the ability to fund their ventures, become interesting at give-away prices. Of course in many cases there are reasons for low prices; this time it's indeed at the behest of conforming to the general market evacuation (trap-door) effect.

The Fed is going to be busy working-down their Balance Sheet; so there's a combination factor at work. Friday was heavy but not so bad as Black Fridays of the past; hence the bearish alternative would be continued orderly decline, versus a 'whoosh' to the downside, which would set-up a bullish entry point. It may be an entry anyway, but one should tread lightly pending more evidence.

It's a widely divergent market; there is unanimity of decline for the moment; it should be noted that's often a sign of capitulation and an end to suffering not instantly but on-tap; so we have our eyes out for that. So must the Fed. We're not at the extreme of washout that I'd anticipate for a high-probability low.