Market Radar 02. February 2023


The Fed lets the stock market off the leash

When yesterday at 8 p.m. German time the Federal Reserve (FED) announced through its chairman Jerome Powell that the US interest rate would be raised from 4.5% to 4.75%, the US stock market lost little of its value. Exactly this interest rate hike had been expected. So there was no surprise. The ETF on the S&P 500 (SPY) danced back and forth between 405 and 402.50 points. Only with the beginning of the press conference from 20:30 German time did Tänzeln become a sprint. By 9:40 p.m., the SPY had risen straight upwards. Only in the last 20 minutes did stock market participants realize their “FED profits”.

The decline in inflation is at an early stage, according to Fed Chairman Jerome Powell. He added that a large part of the economy outside the housing sector had not yet experienced this decline in price increases.

Let’s stay with the housing sector for a moment: For the housing market, November data is now available from the Case-Shiller 20-City Index, showing that house prices fell 0.08% in November, the fifth consecutive month. Once again, the real estate market seems to anticipate what long-lasting price declines companies from other sectors of the economy now have to prepare for.

Companies that have recently made profits mainly through price increases – the producers of everyday consumer goods come to mind first and foremost – must now develop new strategies in order to keep the profit ratios of recent quarters stable at the upper end.

The US homebuilder Pulte Group (PHM), which presented quarterly figures last Tuesday before the stock market, announced on the conference call that the lack of interest of home buyers in the real estate market has now probably bottomed out. When I looked at the chart of the Pulte Group today, I was amazed. The stock is trading just 6.5% below its all-time high and is already nearly 70% above the 52-week low reached in June 2022.

Will stocks from other sectors of the economy soon be trading so far away from their lows and so close to all-time highs? It is quite possible that this path is now the target for the price development of many shares of companies whose problems have recently been characterized by inflation and supply bottlenecks – industrial stocks such as mechanical and plant engineering companies come to mind. But also car manufacturers and actually all companies that produce “devices” for which materials such as wood, steel, aluminum, copper, but also microchips are needed.

During Jerome Powell’s press conference, I noticed that the chairman of the US Federal Reserve did not mention the US stock market as a “problem child”. The Fed focuses on inflation and the labor market. From now on, she doesn’t seem to care what the stock market does. In doing so, it has let the stock market off the leash. From now on, equity analysts no longer have to fear interference from the Fed and can concentrate on analyzing companies. Macroeconomic, monetary policy considerations may be shelved. The “Hawkish FED” case no longer interests anyone.

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What do we see under the radar of the major stock indices?

Momentum currently yields little return for systemic reasons.

Classic momentum strategies are currently likely to underperform for the most part. This can be seen well in the USA Momentum Factor Ishares ETF (MTUM). About 60% of the ETF is in stocks from the healthcare (35.17%) and energy (25.20%) sectors – as of January 31, 2023.

Such models, which look at the winners of the past, are unhappily positioned at the beginning of a bull market. Because today’s winners will only outperform from October 2022 or January 2023 – until September 2022 they were usually among the absolute losers.

From Q2 2023 at the earliest, such momentum strategies, which are often based on the performance of the past 6 months, are likely to include software, internet and semiconductor stocks and perhaps also gold and silver mining stocks.

This systemic mispositioning is another reason for trend followers not to sell partial technology stocks now, but may even increase positions. Because the measurement of the Moemntumstärke from the perspective of six months has proven itself in the past – and should prove itself in the future as a long-term successful parameter choice.

For us traders, this means that the new momentum players are only at the beginning of their “momentum career”. For the current first quarter, momentum players are therefore forced to buy the “new winners” and reduce stocks from the healthcare and energy sectors in the weighting in the momentum portfolios.

Yesterday, shares from the oil and gas and coal sectors were among the stocks that were also sold after 8:30 p.m.
Yesterday, stocks from the transport, carmaker and technology sectors were in high demand. Many semiconductor stocks jumped above their recent interim highs.

In the chart of the Oil and Gas Service (XES) ETF, we saw a daily candle yesterday that formed both a higher high and a lower low compared to the previous day. This is evidence of uncertainty. I rather assume that the low will soon be undercut than that the industry will muster the strength to form further highs.