Q: How much more will interest rates rise and how will that affect equities?
A: We've essentially discounted all the negative effects of rising interest rates for the rest of the year with this correction, so I don't believe we'll have much interest rate impact from here. I'm looking for 3.25% on the 10 year by the end of this year - that's 10 1/2 months, so we're basically almost there.
In regard to how it will affect equities: It won't. We basically digested 150 basis points of interest rate rise ALREADY. Now, if we get another hot CPI in a month, all bets are off. Then the sushi will really hit the fan.
Q: Which sector will lead after this meltdown?
A: Technology, technology, technology. That's why I started a technology letter at the beginning of the month. I want to focus everyone's attention on the technology letter. It will overwhelmingly lead, not only this year, but for the next 20 years.
Q: Has the Volatility Index Bottomed?
A: Absolutely. We'll never see the $9 number again. We're now looking to find a new volatility range. Currently we are at a (VXX) of $41.65 and a (VIX) of $19.61. I expect we'll find a range-maybe $15-$25-?and we'll trade in that range for the rest of the year. With the entire short VIX industry wiped out you will never again return to those old low ranges.
Q: With volatility so high right now, is it better to buy naked calls instead of call spreads?
A: No it is not. Assume your range will be $15-$25 in the (VIX) you want to be buying the put spread at the top and the call spreads at the bottom; that way you don't get wiped out with time decay. If you go outright naked long calls or puts the time decay in these things will absolutely destroy you.
Q: Does this market shake-up change your end of year targets for the S&P 500?
A: The answer is yes. I know I upgraded them to a 20% increase this year. My original, beginning January forecast was for 10% correction, which we got, then a 20% rally to be up 10% on the year. That's a much more realistic forecast than the upgrade that followed. So yes, it does change. I'm still looking for 10% by the end of the year -we're essentially at 0% right now. We gave up all of the year's gains, and at the bottom we went all the way back to October/November prices.
Q: Will wage increases and higher inflation bring down companies who have high labor costs?
A: Yes, they will. Who are the highest labor cost companies in the United States? Walmart (WMT), Target (TBT) and McDonald's (MCD). And that may be why those share prices have recently been acting so poorly.
Q: Will housing stocks like Lennar (LEN) get crushed with the new interest rate narratives?
A: They've already been crushed, which you can see on the housing charts we'll be looking at. However, I expect them to recover; interest rates are rising but not enough yet to hurt the housing market. It will be a year or two before they get to that point.
Q: Which is better: Bank of America (BAC), Goldman Sachs (GS), or J.P. Morgan (JPM)?
A: J.P. Morgan is the better-quality company, but that is already discounted in the price. If you want to buy a laggard, I recommend Goldman Sachs, which should be making significant profits trading in these conditions and is much cheaper. Goldman can double from here, whereas (BAC) and (JPM) may only increase 50%. J.P. Morgan also held up at the 50-day, which is incredibly encouraging; that's a buy right here, right now. No need to wait for a dip on J.P. Morgan. If I had the funds, I'd be buying myself.
Q: Should I sell the (AEX)? (a Europe-wide ETF traded in Holland)
A: No. If the U.S. rallies to new all-time highs over the next several months, which it will, Europe will do exactly the same, but probably rise twice as much. So, if anything, I would be a buyer of Europe at these levels, including the (HEDJ), which hedges out your Euro currency risk.
Q: I still own the Apple 140/145's. Thoughts?
A: Keep them. I think there is just 0% chance Apple will ever return to $150 a share, at least not until the next real recession, which is 2 years off.
Q: Is it acceptable to enter a Trade Alert a few days after it was originally issued, if I can get the same price?
A: Yes. If you can get that Trade Alert at a good price- and often, you can- then take it.
Q: If the market can absorb interest rates grinding higher, what is the next red flag that will take the market down?
A: Even higher interest rates.
Q: Microsoft's (MSFT) cloud business grew 100% YOY- would you look at getting into these levels?
A: I would. In fact, if I could take an 11th position, it would be a long in Microsoft at these levels.
Q: Which part of the stock market should I avoid if interest rates are rising?
A: You want to avoid heavy borrowers; those include REITS (SPG) and Utility Stocks (XLU).
Q: Are commodities a buy since you have been telling us to stay away for years?
A: While the stock market may be going crazy, the global synchronized economic recovery continues, and that is a very pro-commodity move- when people move out of expensive stocks, what do they buy? Cheap commodities. Which have been in a 5-year bear market.
Q: How will the new Fed Governor Jerome Powell change from Yellen once he saw the huge sell-off on the first day of the job?
A: He won't change but he will be facing different challenges than Yellen did: the need to raise interest rates faster. Yellen was all about keeping interest rates low for as long as possible- that is now ancient history. It's all about how fast we raise rates from now on that impacts the market.
Q: Is it ok to keep my Freeport-McMoRan (FCX)?
A: Yes, it will rally back strong and this is a good entry point. Historically, going into silver is better than gold. Historically that has been true, but it's not happening this time. I would stay away.
Q: What do you think about commodities this year?
A: They will outperform stocks.
