Stocks plummet, bonds whacked, and geopolitical tensions soar – What's next for investors?

• Bam! Stocks breach 5100 and then Boom!

• Iran/Israel conflict continues to raise concerns – What will Israel do now?

• Bonds get whacked, Oil holds steady and gold inches up.

• Contra trades prove the winners in an anxious market.

• Global stocks all under pressure – US futures conflicted.

• Try the Linguine w/ Broccoli Pesto.

Stocks got whacked (again)!  the Dow lost 280 pts or 0.7%, the S&P lost 62 pts or 1.2%, the Nasdaq -290 pts or 1.8%, Russell -28 pts or 1.4% Transports -110 pts or 0.7% while the Equal Weight S&P lost 56 pts or 0.8%.

What started out as a ‘boomerang’ rally ended being a dead cat bounce…. Stocks appeared to be relieved after the weekend drama was not as bad as expected.  But investors, traders and algo’s found more reasons to be concerned looking forward.

It’s economic data, it’s the ongoing battle over IF the FED will cut OR raise rates and it’s the ongoing conflict in the middle east and around the world.

The morning started with investors trying to handicap the Iranian ‘attack’ on Israel over the weekend – which is now beginning to raise some questions.

You see – in a conflicted way- the Iranians wanted to bang their chest and show ‘strength’ while at the same time apparently ‘not really wanting’ to get into a fight…..You see, it was well telegraphed, the Iranians made sure to make everyone aware about what they were going to do, giving the world, including its Arab neighbors the chance to create a response that would neuter the attack.  This way they can save face at home, but act like they are the thugs they are…Israel is now in the position to ‘save face’ as well….and so now they bang the drum – Like I said yesterday – this isn’t going away anytime soon…. and the ongoing war rhetoric will only keep the angst alive.

And then at 8:30 we got some more economic data points that only helped to cause more confusion…the Empire Manufacturing report was substantially weaker while the Retail Sales report was substantially stronger and Ex autos and gas was even stronger still and this just speaks to the fact that US consumers are spending MORE but buying LESS…. Capisce?  Inflation remains a real problem….and the idea that the narrative continues to suggest a 21% chance of a June cut and a 47% chance of a July cut remains illogical to me and a host of others.  

What the move is telling us is that the rate cuts that some people were expecting – just aren’t happening…. Inflation is NOT transitory and it’s about time that we put on our big boy pants and demand change. Spending is out of control, college loan forgiveness is out of control, billions spent to support illegal immigrants out of control and that is the fuel igniting the fire - and remember that ‘inflation reduction act’?  Yeah, well all of that spending hasn’t even hit the economy yet – so brace yourself for another surge of inflation.

Pay attention to the recent trends in inflation, pay attention to the surge in commodity prices…As I said last week – the BCOM (Bloomberg Commodity Index*) is up 9% off the February low while the BCOMIN (Bloomberg Commodity Industrial Metals Index) is up 16% – in line with the hotter CPI/PPI reports that began that same month and continues thru last week’s report – and most likely will continue next month and the month after….

*The BCOM includes Gold, oil, copper, silver, soybeans, corn, coffee, cattle, Nat gas, lean hogs, wheat, cotton and lead.   The BCOMIN includes Aluminum, copper, nickel, lead and zinc.

And so, you have to ask – is reality setting in? Do the algo’s now recognize that the FED (and the ECB & BoE) will be in NO rush to cut rates?  Anything Tech got whacked – the XLK down 2%, Disruptive Tech – ARKK down 4.5%, Expanded Tech – IGM down 2%, Semi’s – SOXX -1.3%, Cyber Security – CIBR – 2.5%. MSFT, NVDA, TSLA, GOOG, META leading the way lower……Not one sector of the broad 11 sectors saw gains. Real estate – XLRE – 1.7%, Communications – XLC – 1.3%, Consumer Discretionary – XLY -1.7%, Utilities – XLU – 0.9%, Healthcare – XLV -0.9%, Basic Materials – XLB – 0.05%, Financials – XLF – 0.5% and Consumer Staples – XLP -0.4%.

But there were GAINS -

The sell off – caused the VIX to surge – up 11% yesterday alone…. leaving it at levels not seen since last October – when markets got concerned about no rate cuts and stocks sold off about 10% while the VIX surged by 75%! The VIX is now up 57% off the March lows….and the S&P is now down 4% (after having pierced 5100) and likely going a bit lower…..the Nasdaq is also off 4%, the Dow is down 5.6%, the Russell off by 7.5%, the Transports lower by 5% and the Equal Weight S&P is off 5.3%.... Now – we’re talking…. we finally got beyond that 3% drawdown that always seemed to be the ‘buy the dip’ level.

Just to be clear – the Dow Transports has now broken all 3 trendlines – closing below its 200 dma (15,503) to end the day at 15,388. The Dow Industrials and the Russell have broken both the Short and Intermediate term trendlines, the S&P, Nasdaq and Equal Weight S&P have all broken their short term trendlines – so this is significant – because the algo’s that trade off of ‘technical patterns’ have all received ‘sell’ signals as we break these ‘key’ pattern points.  And the sell signals just say sell, they don’t define price limits, they just define ‘sell’ and what that usually does is cause the buy side algo’s to cancel inline bids and move lower…. leaving voids in prices causing prices to fall at a faster clip. – so, think about it this way – you want to buy a house and there are 5 houses on the block for sale – you are the only buyer…. what do you do?  Do you bid up? No, do you bid last sale? No, you bid LOWER – leaving a void in the market and challenge all 5 sellers to react…. Capisce? Bingo!  And that’s what we are seeing…. the question is – how many more sellers will appear? 

Now some of the money raised is going to cash (my gov’t mm fund at Fidelity is paying me 5.25%) – not even to treasuries (right now) as the bond market came under pressure as well - causing rates to surge and more likely causing them to surge even more in the weeks ahead.  The TLT down 1.5% and the TLH down 1.3% and that is sending yields UP…. the 2 yr. kissed 4.99% before settling in at 4.94%, the 10 yr. kissed 4.66% before settling at 4.64%. Shorter duration 3-month bonds are paying you 5.39% while the 6 month is paying you 5.37%- and 12-month CDs are paying you 5.5%.  Now annuities are becoming popular again (even though they are awfully expensive to get out of – so be very careful what you do) - 5 yr. annuities paying you 5.25% and 10 yr. annuities paying you 5.6%.  Talk to me goose – happy to help you make sense of it all.

And with all of this of RED washing across the markets – where could you find some GREEN…. think the contra trades – the VIXY up 5.65% (think FEAR index), the SPXS – the Direxion 3X’ levered S&P Short ETF + 3.7%, the DOG +0.7%, PSQ + 1.65% and the SH + 1.2%. My sense is that these ‘stocks’ will continue to push higher as anxiety rises.

Oil continues to thrash around…. WTI breaking down thru $85 before taking it back on the back of Israeli commentary suggesting that Israel has ‘no choice’ but to respond to the Iranian attack on Saturday. My sense is that Israel, like Iran, will telegraph their intent, they will not strike Tehran directly…. but may strike a proxy…. This morning oil is trading at $85.03 – and I continue to think we remain in the $85/$90 trading range.

Gold – which has been trading higher over the past month – ticking at $2,448 last week is trading at $2,390 this morning.  The pullback is part technical (after the surge straight up), part surges in Treasury yields and part hope that diplomatic efforts to calm the conflict down will be successful. Anymore ‘war rhetoric’ will cause some investors to buy gold, while higher treasury yields will cause some investors to sell gold and buy treasuries…. but as long as conflict tensions remain elevated – my money says buy gold.     

This morning - US futures are mixed…. the Dow was down, but has turned up since UNH and JNJ (both Dow members) reported their earnings which ‘beat’ the estimates - Dow futures +50, S&P’s -15, the Nasdaq -65 and the Russell is -18 pts. 

But I do not think this marks the end of this drawdown.  Stocks around the world are under pressure…. Asian markets ending their day down between 1.5% and 2.25%, Stocks in Europe are all lower across the board – France, Germany, Spain, Italy and the UK all down by 1.5%+.  Economic data continues to support US economic strength, conflicts in Russia/Ukraine and Iran/Israel as well as the ongoing clown show in the RED sea caused by the Houthis (think Iran) risk higher energy prices, rising commodity prices and higher inflation. 

The recent weakness we are seeing in the magnificent 7 suggest that just maybe there needs to be a repricing, that their steep valuations are just that – steep. Look, - the markets have been looking for a reason to pull back – we have been talking about this for months…..and so the rising geo-political risks, the rising inflationary pressures and a FED that is trying to change the multiple rate cut narrative are all providing the cover for what some hope will be a decent pullback.  The rate cut narrative is now favoring a November cut (after the election, not before) – to which I would still say – Not happening.  UBS in fact is out with a note this morning that suggests a rate HIKE rather than a rate cut while Société General is out with a note that suggests NO rate cuts this year.  Oh boy…..Strap in…how long before the big investment banks all start singing THAT song – because you know – they are like a herd of goats – they all follow each other….it’s all very orchestrated by the FED – they need one of the banks to start to build the narrative then they encourage the others – one by one to join in.    

The S&P closed at 5061 – down 62 pts…. slicing thru 5100 like what?  A hot knife thru Butta (thanks Barbara Streisand – that’s so NY). So now what?  Well the next trendline is at 4916…which would be a 6.5% drawdown from the high or another 2.5% from here…. Still well within what is considered a normal trading range within a bull market.  In fact, we could trade down a full 10% to 4735 and still be within the normal trading band – so get ready…don’t get anxious.

The market appears to be accepting the narrative that we are not getting any rate cuts anytime in the near future – so the focus will try to turn to earnings but will be overshadowed by the global political drama. Remember – the geo-political drama creates short term angst (thus the opportunity) but does not usually price stocks in the long term…So be strategic with your money…Look for those opportunities.

Linguine with broccoli pesto

Made this last night…simple, easy and so good.

For this you need: Broccoli florets, garlic, parmegiana cheese, olive oil, pignoli nuts, s&p, fresh basil and of course the pasta.

Begin by bring two pots of salted water to a rolling boil. In one – add the florets and blanch for 3 – 5 mins.  Remove  - run under cold water and then strain. 

Now – in the other – add the linguine and let cook for 8 mins.

Now, in a food processor – add the broccoli, garlic, cheese, olive oil, basil, nuts and a dash of salt (just a dash) and some pepper.  Blend. If you aren’t sure – add a bit more oil…never hurts.

Now strain the pasta – saving a mugful of the pasta water.  Put the pasta in a bowl, add 2 heaping spoons of the broccoli pesto and 1 ladle of the ‘tears of the Gods’ (pasta water) – Mix well and serve making sure you have more cheese on the table for your guests.