Date: May 11, 2022

Finding a Few Rays of Sunshine

The government released CPI today and it came in .2% hotter than expected. Pre-market trading saw an immediate plunge in the equity markets. Early morning trading shows moves in both directions so we will need to see how everything settles out at 4pm. It will be a huge win for the bulls to close mildly lower today and more of the same for the bears with another route. The stock market has been really ugly and I have certainly been too complacent about it. While I saw a sloppy and choppy year, I definitely underestimated the magnitude of the decline.

As everyone knows, the technology sector has been bludgeoned. Interestingly, we are seeing huge amounts of insider buying in tech shares as those companies plummet. While that is a crummy short-term timing tool, insider buying has a tremendous longer-term track record. And when the dust settles this time, I expect the tech sector to be a big winner a year out.

Market sentiment has also become extreme, but nothing prevents it from becoming more extreme. I can only say that readings like we are seeing now usually lead to strong intermediate-term rallies once stocks stabilize. The selling wave is approaching its 30th session which is very rare historically. I have never been good at predicting the catalyst, only that something will trigger and ignite a big rally sooner than later.

Finally, I will close with a comment about bonds again. I said the other day that I really, really like bonds for at least the next two quarters. We saw a powerful reversal on Monday to begin the rally and that could be added to today. For those with spare cash who don’t like investing in stocks, you should consider the bond market here.

On Tuesday we bought levered inverse S&P 500, levered NDX and Russell 2000.


Paul Schatz, President, Heritage Capital