QQQ - Jerome Powell's Speech At Jackson Hole Just Made PSQ A Strong Buy

2023-08-28 08:00:00 ET

Summary

• The Jackson Hole Fed conference allowed Powell to make it clear: The Fed is going to fight inflation, and the stock market is not their concern.
• High rates continue to shift the balance in investment markets and create massive opportunities for the nimble and those who go outside their comfort zone.
• PSQ just became a strong buy, as it essentially shorts the Nasdaq, the last part of the stock market to roll over.

After shaking up the markets in 2022, what happened at the Jackson Hole meeting in 2023? A similar declaration Fed Chair Powell, the Fed Chairman. As strategist David Rosenberg said on Friday:

"We will keep at it until the job is done". By the time the job is done, the economy will be knee-deep in recession.

I could not agree more. And while the Fed is carefully watching every piece of data (they are "data-dependent" after all, right?), my strategy and chart work are telling me more by the week that for investors, whatever the Fed does from here, it's not going to matter. The horse has left the barn.

What is the horse? Actually, there's a whole field of them lining up at the proverbial starting gate (yes, I'm a big horse racing fan). Here are four that I think stand out among a crowded field of worries. Then, I'll tell you exactly what I'm doing about it in my own portfolio, because it didn't take the latest Jackson Hole Conference for me to get positioned for what I think is a likely return to negative stock and bond returns at the same time, a la 2022.

But more than that, as I am not a perma-bear, I think this is one of the best times I've seen in a 30-year investment career to tread lightly, get paid for that, and be in a position to crush it in the next bull market for stocks and bonds. Note, however, that those may come at different times.

To me, that means a very tightly-focused portfolio around a few basic areas. While T-bills and other short-term Treasuries are a big chunk of that, this is one of those times where understanding how to use unlevered, single inverse ETFs like ProShares Short QQQ ( PSQ ). I look at plenty of indicators and plenty of charts, but for the sake of avoiding a lot of jargon here, I'll simply say this: Look at the orange line (20-day moving average) now and look at it in January 2022. Similar. That's just one clue, and one I can show here without turning this into a technical analysis laboratory. This is primarily to make the point that with Powell's latest words, the door is open for the Nasdaq 100, the leader of the stock market rally all year, to reverse course, starting sometime in September. And with the mounting evidence of a weakening economy, stubbornly high and rising bond yields creating huge competition for stocks, and a set of concerning international issues, investors have two choices:

1. Embrace what is happening and learn how to exploit it for profit

2. Ignore it, and hope for the best

I only know how to do #1 as an investor. So, let's continue and look a bit deeper.

Just beware that inverse ETFs, even unlevered ones like PSQ, carry unique risks. The full prospectus containing a complete discussion of risks can be found here .

Here is a part of that document I pulled out because I think it is the crux of the risk of owning an ETF that aims to run opposite an index.

Daily rebalancing and the compounding of each day's return over time means that the return of the Fund for a period longer than a single day will be the result of each day's returns compounded over the period. This will very likely differ in amount, and possibly even direction, from the inverse (-1x) of the return of the Index for the same period. The Fund will lose money if the Index's performance is flat over time. The Fund can lose money regardless of the performance of the Index, as a result of daily rebalancing, the Index's volatility, compounding of each day's return and other factors.

PSQ's assets under management are just over $1 billion, but perhaps more importantly, it trades about $360 million a day in volume. Yes, that means that over 1/3 of assets change hands on a typical day. That tells you that traders use this ETF a lot. Know that before considering this. Here's an example of that, using a 3-year holding period through last Friday for PSQ and the index ETF it aims to run opposite of. As you can see, PSQ fell more than the amount of the index ETF's advance.

Bonds: That inversion is going to reverse. It is just a matter of when, how, and how fast

Where I come from (New Jersey!), they call this a downtrend. This depicts the predicament with the longer end of the US Treasury yield curve. There's a lot of attention being paid to the 10-year yield, which did recently reach the pivotal 4.30% area, the spot at which it could morph from a slide in bond prices to a collapse. But here's something a lot of pundits are not talking about: As of late last week, the 10-year had the lowest yield on the entire Treasury curve! That is, the 4.30% was lower than everything from 1-week T-bills through 30-year bonds. Translation: The 10-year gets a lot of action from traders, but the move up in rates, which is tremendous competition for stocks, is well on its way.

Remember that bond prices fall as rates rise. I'm showing you the "bond prices falling" chart below, and you can see that it is struggling mightily to hold its ground, price-wise. So I think it's much more likely we see long-term rates eventually pop through that 4.30% with gusto, and head toward something with a 5 or a 6 in front of it, in terms of yield.

And that gets me to the "inverted yield curve" issue that Powell and his Fed board are well aware of. T-bills yield more than long-term bonds. That is what happens when the economy is messed up, but not yet in recession. More on that in a minute. The point here is that the curve will eventually go back to normal, with long-term yields higher than short-term yields. How does that occur? It looks more likely to me that it happens by long-term yields moving up, above those of things like T-bills and the 2-year Treasury Note.

The other way it could happen is if all heck breaks loose this autumn, and the Fed has to slash rates in an emergency move. Most investors don't want that to be the way they get the rate cut they've been begging for.

So, I think dip buyers in long bonds are probably a bit early here. That trendline I've drawn below is the key thing to look for as a clue as we enter September. And based on Powell's comments last Friday in Jackson Hole, there is no reason to expect that the Fed is anywhere near stopping rates from climbing at the long end.

Recession: Don't obsess about labels. The US economy is not healthy

Here's one reason. The housing market is frozen. Mortgage rates have risen to a point where those who locked in low mortgage rates are staying put, and those wanting to buy a home for the first time are shy to do so because that monthly mortgage payment is now way above what it was compared to a 12-18 months ago.

Inflation: Nothing is over until we...er, the market...decides it is!

However, while the housing situation is one of the early examples of "things getting real" for consumers after 14 years of easy money policy by the Fed, there is a lot more behind it. The lag effects of all of those rate hikes since March of 2022 are likely about to hit.

And while there are arguments on the other side of this lag effect, consider that just the resumption of student loan debt repayments, and the polls showing that many people plan to ignore the payment notices make me suspect that a period of massive "moral hazard" is waiting for us after Labor Day. There are also credit card borrowings outstanding in the area of $1 Trillion, at the same time the average rate being paid on those balances is...wait for it...22%! How does the US economy, with its consumer-driven engine, accelerate for much longer with these headwinds? I just don't see it.

And, here's a chart that has been circulating across social media. I think it is one of the most chilling you'll find if you are in the "inflation is transitory" camp. And, to the Fed's credit, this is why they will remain vigilant against inflation. Powell does not want to be remembered like Arthur Burns, the Fed Chairman who let the 1970s inflation run amok and ruined the economy for half a generation. He wants to get the economy out of this, even if, as he said in his 2022 Jackson Hole speech, there is some "pain."

Global economy issues: China, Japan, and Europe, oh my!

China's real estate market is in big trouble and making headlines. Japan, the biggest buyer of US Treasuries has been repatriating a ton of that investment in order to support its own market. This has been a risk to the bond market, and by association as I've mentioned, the stock market, for many years. It just so happens to be hitting us at the same time as many other bubbling issues.

This is why on a recent episode of Seeking Alpha's Investing Experts podcast, I referred to what's happening right now as "Night of the Living Dead Trades." It is as if all of the temporary worries that caused temporary market selloffs this year are all making a creepy comeback, just in time for September, and of course Halloween in October!

What's next for stock markets after the Jackson Hole meeting?

Powell had a chance to make the market mood euphoric, even if it would be a mirage. But he didn't. And that might have been the door opening for us to finally see the "clearing" of the markets that will allow a new bull to start, eventually. The recent decline in stocks could just be another correction, a false alarm. But it looks very serious to me. There are too many similarities to past August-September declines (1987, 2000, 2022) to just blow off what's developing.

The investment plan: Nasdaq bubble busting

What am I doing about that collective picture to turn it into a portfolio plan for September and beyond? A combination of put options on ETFs and stocks, inverse ETFs, and lots and lots of US Treasury Bills and Notes out to about two years in maturity. I pour through hundreds and hundreds of charts, data, and news every week, looking for something, anything, that would prompt me to be more bullish on things other than that set of strategies above.

The S&P 500 is about flat over the past two years. Small caps are up only modestly this year. And microcaps are down. The one market segment lifting things and creating a false picture of how healthy the stock market and economy are is the Nasdaq 100. In particular, about 7 of its biggest stocks. Maybe that trend can last for months or even years more. But I'm not counting on that, and while I always allow in my portfolio for the possibility that what I think will happen does not happen, the strong tilt with my own money is angling toward profiting from the downside this autumn, buffered by a huge slug of 5%-ish short-term Treasuries.

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