Bulls were blind-sided Tuesday when Federal Reserve Chairman Powell said interest rates may need to ratchet up much more than already expected given the strength of recent inflation reports, states Jon Markman, editor of Strategic Advantage.
The exact Powell quote that kicked bulls in the teeth: “The ultimate level of interest rates is likely to be higher than previously anticipated.” Oww. The Nasdaq 100 slumped 1.2% for the day, though to be fair it is still up 11.1% for the year.
The central bank news resets expectations about the economy in the second half of 2023. Bulls have been betting since January on a soft landing, a brief slowdown in economic activity followed by reacceleration. Shares of cyclical businesses, like semiconductors and even some enterprise software firms, have been coveted by professional money managers looking to get ahead of the next business cycle.
However, Powell’s comments will renew fears of the dreaded hard landing. This explains Tuesday’s selling. Bears are betting that cyclical issues have been mispriced. The benchmark NDX closed Tuesday at 12,152, exactly on its falling 20-day moving average.
There are no coincidences. Bulls needed to hold this level. Unfortunately, with the hard landing narrative back in play, bears may have the upper hand. A weaker close on Wednesday would set up a decline to test 11,902, the 200-day moving average.
The NDX Loop: Members bought the ProShares Ultra QQQ (QLD) Tuesday at $42.75. The 2x leveraged index fund was sold at $42.80, a modest gain of 0.1%, as per the intraday bulletin.
Members should use the proceeds to buy the WisdomTree Bloomberg Floating Rate Treasury ETF (USFR), a cash alternative. The USFR closed Tuesday at $50.33.