In a tough market for investors, trading opportunities are developing, Real Money’s James ‘Rev Shark’ Deporre argues.
While much of the U.S. stock market has largely been in correction mode for months, major indexes and large-cap stocks have only corrected for a week or so.
According to Real Money’s James ‘Rev Shark” Deporre, adding higher interest rates to the cauldron won’t make a march forward any easier for investors.
“Several market strategists at large brokerage firms such as Goldman Sachs (GS) are now predicting the Fed will begin raising interest rates in March and will follow with a series of four or five more quarter point hikes,” Deporre wrote recently in Real Money. “In addition, it’s now anticipated that the Fed will begin running off its balance sheet.”
This is the most hawkish the Fed has been in over a decade, and the market is struggling to deal with it. “Both bonds and equities struggled during the first week of the new year, with bonds having one of the sharpest drops in a very long time,” Deporre noted.
From a trading standpoint, there are two primary questions.
1. How long will it take the market to discount this shift in Fed policy?
“The stock market is a discounting mechanism and prices in future expectations,” Rev Shark said. “It didn’t do a good job of anticipating this level of hawkishness from the Fed, but that is mainly a function of the Fed being behind the curve.”
2. The second issue that the market is dealing with is rotational action.
“This is not a correlated selloff, with everything sinking at the same time,” Deporre added. “Financials, energy, and value names are benefiting while growth stocks and speculative names are hit the hardest.”
That makes for an extremely tough trading market, but the negativity is intensifying, and the potential for some counter-trend bounces is building.
“Also, fourth-quarter earnings are starting soon as big banks kick things off, and that may help to shift some focus back to stock picking,” Rev Shark said.
