Market Briefing For Wednesday, Feb. 15

Hearts & Flowers for the market's ability to hold-onto most gains during this choppy Valentine's Day session. We thought it would 'come back' from earlier selling on the mildly disruptive inflation report, which really isn't very troubling.

Freepik

If anything, rates 'higher for longer' is now the consensus, and Fed-heads for the most part are starting to realize the 'target' 2% inflation rate's unrealistic at this time. We think 'climate change' impacts food prices (like Orange Juice in Florida which is almost double what it was last year) and there's the war with an impact on Energy (while the US Government successfully 'trades' Oil as it appears.. by buying for the SPR near 70 and then selling from SPR near 80).

The point is that monetary policy itself (hubris of the FOMC aside) isn't going to impact costs of living as much as the Fed might believe themselves able to. The Fed and market are nearly in-alignment, and that supports the 'softish' or discounted impact of the Fed going forward.. so we may get a Spring rally.

Meanwhile... idiosyncratic factors or existential events that may shake things a bit, there's more focus on the 'core' areas we're focused on: Silicon Carbide and it's Quality Control (testing) and Ai that's focused on Government contract prospects, along with a side 'bet' on Quantum Computing that's a buzz too.

Of course I'm primarily referencing AEHR Test Systems. That specifically did hold the 30 area and move up to the 33-34 level as I suspected. Now trickier a bit daily, since there's huge 'open interest' in options written with a 35 strike. If AEHR gets through that headed higher 'even before Expiration Friday' with a lack of news, that would be truly impressive. With news it would rise as well.

As you know AEHR has been our continuing 'pick of the year' since late 2021 for 2022 and beyond... and remains at that status. Not for the faint of heart as it tends to fade just enough to trip (where stops might be) or rally just enough similarly to hit the bear's buy stops, but overall works higher (stair-step). Such volatility has been present all along, since we first entered around 6-7 a share and we anticipate high 30's / low 40's after the next significant contract news.

Major Semiconductor stocks like ON Semi and Wolfspeed are big creatures that we nailed the low on, and join remaining portions of our 4 year ago ~17 buy of AMD looking for movement especially as may relate to Silicon Carbide. No doubt AEHR Test Systems remains central to the theme and most 'fabs'.

 

In-sum: 

The market is believing or not believing 'higher for longer', but really it is a market of stocks here, hence our 'active not passive' approach. The Fed's approach is not quite as adversarial as historically was the case, partially as it can't influence certain areas as we've noted, and I think by now they realize it.

China is playing tough with the Philippines, so there's that concern beyond the 'spy balloon' or devices (rhetoric softened for now). Also today the USAF was forced to scramble F-16's, F-35's and even a refueling tanker.. to intercept not less than 4 Russian long-range bombers and fighters. This time they stayed a bit out of US Airspace but entered Alaska's 'Air Defense Identification Zone'.

So it's an Expiration week and that's going to cause some moves in a couple days, but all of this remains 'healthy digestion' of the January gains before we go higher a bit for S&P, and varying for individual issues.

Of course the risk of exogenous shock remains, but is being 'tamped-down' in a sense based on Washington trying to claim the 'objects' were corporate or a private launch, which is possible but generally nonsense since until they really identify 'it', they can't truly say that. But it is likely intended to calm the heat of the moment before Secretary Blinken meets with Chinese officials late this week.

I might add this is obvious when you hear even the Sec'y. of Defense 'state' the American people need not worry about extraterrestrials (does that mean they are friendly, or that aliens are not exploring us?). Hah.. sort of kidding as if we can't identify the objects or their origin, how can he say yay or nay?

The Fed and some analysts have pounded into everyone's head that Funds rate is going over 5%. OK.. normal rates. Just seems odd because business and investors were used to unrealistically low rates for too long. Discipline is the nature of 'this' Fed and they keep rates elevated for awhile. Draining the Balance Sheet too.

We are less optimistic about the Indexes, but not pessimistic either, because we ought to muddle through the Winter into a Spring rally, even though one or even two minor rates hikes 'might' follow. There are issues that could restrain expectations once we're through this projected February consolidation, while it is pretty clear what they are: Energy crisis renewed, China conflict, Russia's expanding invasion of Ukraine (especially if NATO has ammunition shortages that are being soft-pedaled so far), Middle East (Iran) and so on. Barring the 'wild cards', this should become an interesting Spring for specialty stocks.

Something will break, they'll adjust, and it's hard to know when that occurs. Of course we can talk about Fed 'tweaks', but there's too much maneuvering room to contemplate 'higher for longer' especially if geopolitics .. interferes. At this point we expect continued chop ahead of February Expiration, reminding that open interest in huge in a lot of stocks around near-strike levels. Writers, more so than usual, want most options to expire worthless. In fact where we have any options near a strike and care about it, we'd roll durations forward, so as to not be spooked out (this is not common, just here and there).


More By This Author:

Market Briefing For Tuesday, Feb. 14
Market Briefing For Monday, Feb. 13
Market Briefing For Tuesday, Feb. 7

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