A ‘Hurricane Is Right Out There Down the Road Coming Our Way’


The market started the day with a positive bias as Amazon (AMZN) and Alphabet (GOOGL) , and a few of the big cap favorites, produced some relative strength, but the mood shifted quickly on economic data.

The ISM news was better than expected, but the problem is that all data is now viewed through the lens of inflation. What the market sees is that the labor market is still very tight, there is still extremely high demand that makes supply chain issues worse, and there are no indications that inflation is starting to slow.

As that news was digested, bids disappeared, and breadth went to 2 to 1 negative. Unlike the last two days, we are now seeing more new 12-month lows than highs, but it is at a very low level.

Quantitative Tightening (QT) is starting this month which means that the Fed will not reinvest all the proceeds of securities that are maturing. There will be about $47.5 billion invested each month by the Fed, and that will ramp up to $95 billion in September. Powell has said that it is roughly equivalent to a quarter-point hike but that this has not been done before, so the consequences are very uncertain.

There are also some comments from this morning from Jamie Dimon, the CEO of JP Morgan (JPM) , that are a good summary of the uncertainty that the market faces: “It’s a hurricane. Right now, it’s kind of sunny; things are doing fine. Everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don’t know if it’s a minor one or Superstorm Sandy or Andrew or something like that. And you got to brace yourself. So JP Morgan is bracing ourselves, and we’re going to be very conservative in our balance sheet on – with all this capital uncertainty, we’re going to have to take actions.”

If the CEO of one of the largest banks in the world is this uncertain about the economic fallout that lies ahead, then it isn’t a big surprise that the market may also be quite uncertain about what awaits us.

As I wrote this morning, my view is to stay patient and wait for things to develop further. There is no rush to put precious capital to work. This market does not look like it is going to run away to the upside, although there will be some folks that are fooled by counter-trend bounces and will be anxious to put cash to work.

I’m doing nothing right now. Eventually, good opportunities will develop, but my view is that it is better to be late than early to the next party.

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