10 Suggestions To Thrive During “The Mother Of All Supply Chain Shocks”
Keith Schneider | Jan 17, 2022 02:31AM ET
Over the past few weeks, we have questioned what the 2022 song might be so you can profit from being in tune with the market’s trends.
Last week we highlighted a skip in the early 2022 song. If you missed last week’s article, click here.
As you’ll read, this week we find good news, but also a report of the “mother of all supply shocks!”
Over the past month, Wall Street has certainly been optimistic about the upcoming earnings reporting season. The market, however, may be telling a different story altogether.
After a significant rise in stock prices in 2021 fueled by high consumer sentiment, the Fed’s accommodative policies, huge public inflows into stocks thru ETFs, and historical corporate buybacks…
The market is beginning to play a different tune.
Our criticism has been that the Fed has been too sanguine in their view that inflation was “transitory.” We’ve been highlighting the signs of stagflation.
Finally, the Fed is talking about changing its policy. Unfortunately, they will have to adopt an aggressive change in their policy to “catch up” and slow down the accelerating inflation rate.
It appears likely that to correct their mistake of doing nothing last year, they may have to overshoot and raise rates more times in 2022-23 than previously expected.
These interest rate shifts will likely slow down consumer demand and begin to put the “brakes” on the hot consumption trend fueling the economic growth rate story (which has fueled rising stock prices).
A small piece of evidence supporting our view showed up in Friday’s worse than expected Retail Sales report, which reported…
“Total retail sales were down 1.9% month-over-month in December (Briefing.com consensus 0.0%)” Breifing.com eloquently summarized this negative surprise this way:
“The key takeaway from the report is that total retail sales, which are not adjusted for inflation, contracted at their fastest pace since last February in the face of broadly higher prices. This suggests that inflation is weighing down consumer spending.”
We agree.
However, the song that causes us even more concern this week is the ever-increasing break in the global supply chain.
Given China’s “COVID-zero” policy in general, they are beginning to lock down manufacturing hubs including some of their most important ports.
Bloomberg wrote yesterday:
“As a result of the slow movement of good through some of China’s busiest and most important ports now means shippers are now diverting to Shanghai causing the type of knock-on delays the world’s biggest container port that led to massive congestion bottlenecks last summer that eventually translated into a record number of container ships waiting off the coast of California, a glut that hasn’t been cleared to this day.”
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See chart below:
This prompted an economist in one of the world’s largest banks, HSBC, to warn that the world economy could be headed to the “mother of all” supply chain shocks.
This is becoming more well-known as companies begin to report earnings and warn that their supply chains are disrupted.
This, in turn, will likely hit stock prices as analysts tune down their expectations for earnings and investors lower the multiple (earnings valuation) they’re willing to pay for stocks.
Lower earnings expectations and multiple contraction have both been primary factors that have weighed on technology stocks in 2022.
In this environment…
We offer these 10 suggestions to invest successfully in these volatile times…
- Follow our weekly narrative.
- Don’t follow the mainstream media when they tell you to just “buy the dips.” That may not work every time.
- Make sure that you control your position sizing, and have some type of rules in place to sell your positions if the market moves dramatically against you.
- Look for the signs that will help you make constructive moves in the market: what are interest rates doing, what is the market sentiment, what do money flows look like, and is this a growth or value stock environment?
- Diversify your holdings by including inflation hedges such as commodities, gold and silver, agricultural ETFs and include favorable regions of the world you may not currently be invested in.
- Get out of fixed income investments if they are moving against you.
- Learn to buy hedges whether through options, inverse ETF’s or investments that will grow even if the markets drop.
- Become an Alpha Rotation subscriber and take advantage of our reliable and defensive signals that will help protect you from market turbulence and significant downdrafts.
- Put your investment money to work using one or more of our Risk Managed dynamic tactical models. Over time this should help you protect against unforeseen risks in the markets and will give you a long-term plan.
- Stay vigilant. Get an active plan and work that plan.
Here are this week’s market highlights from our Big View:
h2 Risk On/Bullish/h2- The Dow (DIA) was the only index to close the week in a bullish phase, as its components are value stocks
- Semiconductors (SMH) +3.4% recovered on the week due to continued global demand paired with the Omicron variant forcing manufacturers to temporarily shut down worldwide
- The McClellan Oscillator remained neutral despite the selloff in SPY this week
- Risk Gauges for SPY have improved to Risk-On
- This key intermarket SPY/XLU relationship has improved to being Risk-On
- Regional Banks (KRE) hit all-time highs, benefiting from higher rates moving forward
- IWM is barely holding on to its current distribution phase and is likely to see a death cross very soon and is the only major index with a negative TSI. SPY and QQQ are in strong warning phases.
- New high/new low ratios for QQQ continue to languish
- Volume across the major indices is showing more distribution days than accumulation days over the past two weeks (-)
- 12 of the 14 sectors that we monitor were down on the week, led by Retail (XRT) -4.1% and Transportation (IYT) -2.8%, with IYT also now in a warning phase
- The cumulative advance/decline for underlying NASDAQ stocks continues to deteriorate, especially with Ark Investment’s basket of stocks leading the whole index down
- Short term interest rates got smoked due to inflationary concerns and comments from the Fed
- The yield curve is flattening (2-year/10-year), a lead indicator for a potential recession
- The move to value stocks (VTV) continues to outperform growth stocks (VUG), with VTV making a new all-time high and VUG finding support at its 200-day moving average
- Gold (NYSE:GLD) has reclaimed a bullish phase and is tightening on a long-term weekly wedge formation that started in 2020
- US Dollar (UUP) The has gone into a warning phase
- The predominant theme this week is that energy prices ( XLE) +5.0% have run up hard due to expectations of Winter Storm Izzy hitting North America this coming week
- Foreign equities (EEM) improved against US equities, with emerging markets moving back into a recovery phase. However, they may be subject to a bit of pause due to overbought readings on both price and Real Motion
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