Can Powell Deliver a Soft Landing? The Markets Say It Could Happen

The late comedienne Judy Tenuta, best known for her trademark phrase, “it could happen,” might smile if she read this column. Ms. Tenuta would usually utter the words after blurting out some outrageous comment, such as the premise for this column.

So here it is: The Fed may pull off a soft landing. “It could happen.”

I know it sounds ridiculous. And I will say it up front: I may be wrong. But even as the headlines blare that things are about to collapse, the markets seem to be suggesting that the nearly impossible feat of the Federal Reserve pulling off a soft landing is now plausible.

That old saying, when the cat’s away the mice will play, is often applicable to the stock market. That’s because when most traders are paying attention to one or two things, the smart money is using the distraction to build positions in areas of the market that are being overlooked and offer value.

In today’s market, the obvious elephant in the room is the Federal Reserve and the direction of interest rates over the next 12 months. As a result, daily price action is exhibiting a tremendous amount of volatility as short term option strategies create uncertainty.

But as would be expected, while the majority of investors fret about the intraday volatility, others are using the smoke screen to their advantage. In this article, I offer some strategies to help cut through the fog of the daily grind.

In addition, I am building on the themes I put forth in my prior post, which details the interest rate increase cycle during 1994-1995 which led to Alan Greenspan’s fabled “soft landing.”

The Big Picture Can Be a Smoke Screen

As Yogi Bear once quipped: “You can observe a lot by watching.”

When applied to investing, visualizing what’s going on in the major indices, sector exchange-traded funds (ETFs), and individual stocks and then comparing their price action to the headlines is a great exercise.

I’ll start with the last 30 days of trading in the S&P 500 (SPX). As you are likely aware, there has been quite a bit of price volatility daily. But basically, the index has been range bound between 4050 and 4150.

We’ve seen large intraday declines, such as April 25 and 26, as well as May 2-5. Yet, these big down days have all been followed by sizeable up days which bring prices back to nearly even.

You can see that the Accumulation Distribution Indicator (ADI) and On Balance Volume (OBV) are basically moving sideways. That means that short sellers (ADI) and Buyers/Sellers (OBV) are just trading the short-term trend of the market. Notice how ADI rises on up days (short covering) but falls on down days (short sellers putting on new short sales.

You can also see that the volume bars are all similar size, which suggests that there is limited interest in the market, as most investors are cautious. Thus, the trading action is likely due to program traders and options related strategies.

This type of trading pattern is usually a smoke screen fueled by the big trading houses and big investors as they protect their market maker accounts and as they slowly deploy money into areas of the market that are offering bargains.

Seek and Ye Shall Find

During these periods when the market’s major function is to frustrate investors, it pays to review individual sectors of the market with a contrarian bent. Specifically, I look at headlines and then match the tenor of the headlines to what I’m seeing in the market.

For example, the news of late has focused on consumers’ struggles as inflation works its way through the system. Yet, the most recent consumer price index (CPI) numbers suggest that perhaps inflation has topped out.

To make sense of this situation, I review what’s happening in the Consumer Discretionary Select Sector ETF (XLY). This ETF holds the stock of companies where consumers would spend disposable income, including Tesla (NSDQ: TSLA), Home Depot (NYSE: HD), and Booking Holdings (NSDQ: BKNG).

As you can see by the price chart, the sector has been quietly recovering of late. The shares have recently climbed above their 200-day moving average signaling a return to a long-term bullish trading pattern. Moreover, the ADI is moving higher as short sellers abandon their bets.

A closer look at some of this ETF’s components shows that online travel agent Booking Holdings has been in a bullish trend for the past six months as consumers make up for lost time and book trips as pandemic fears fade.

Aside from stocks that reflect potential consumer spending patterns, the utilities are showing some quiet strength. Here the headlines tell us that the power grid is in a dangerous position and that utilities are ill prepared for the transition from fossil fuels to clean energy.

Yet the Utilities Sector SPDR ETF (XLU) is quietly under accumulation. As with XLY, this ETF has crossed above its 200-day moving average as short sellers have been leaving their bearish positions.

Moreover, utilities are very interest rate sensitive. This means that when traders expect interest rates to fall, they move money into utility stocks.

All of which brings me to the bond market, where the headlines are blaring that the U.S. is about to default on its debt as the White House and Congress argue about the debt ceiling.

As the price chart shows, the U.S. Ten Year Note yield (TNX) has stubbornly failed to rise above 3.5% over the last two months as inflation shows signs of slowing and bond traders begin to factor in a decrease in price increases.

For reference, CPI (all inclusive) topped out at 9% in June 2022 while the highly watched “less food and energy” metric topped out at a 6.6% year-over-year (YOY) growth rate in September 2022.

The April readings showed a 4.9% YOY rate in all prices with a 5.5% growth rate less food and energy.

Bottom Line

The headlines are creating a climate of fear based on “rising inflation,” the failure of the U.S. electric grid, and a possible “debt default” by the U.S. government. And yes, it is plausible that one or more of these possible events could become reality.

Yet, the market is not trading as if the odds of these situations are close at hand.

Utility stocks, in conjunction with the bond market, are confirming the possibility that we’ve seen the worst of inflation. Discretionary spending stocks suggest that consumers are spending money on leisurely activities as they try to put the pandemic in the past.

Most important, the action in the bond market is suggesting that perhaps we’ve seen the worst of the inflationary spiral. Even more prescient is the fact that bond traders would be selling bonds aggressively if they thought that there wouldn’t be a deal on the debt ceiling at some point.

My conclusion is that against all odds and despite his actions, unless something truly awful happens, Mr. Powell may well get away with perhaps not a smooth soft landing, but at least not a full-blown recession.

The argument for a soft landing may seem overly optimistic. But just the same…”it could happen.”

PS: Here’s another seemingly counter-intuitive argument that actually has a lot of validity: Crypto is poised for a new surge, with long-lasting momentum.

The world’s richest people have been on a buying frenzy, but these “Masters of the Universe” aren’t loading up on stocks, gold, or Treasury bonds…they’re buying crypto.

My colleague Jimmy Butts, chief investment strategist of Capital Wealth Letter, explains in a new report why now is the most important time to buy crypto.

Jimmy also steers you toward three crypto tokens that could unleash massive wealth into the hands of everyday Americans. Visit this URL to learn more.