Will the Fed Flinch?

[Midday Momentum] Thursday, June 02, 2022 [Will the Fed Flinch?]( By Garrett {NAME} Improving Sectors: Consumer Cyclical, Basic Materials Weakening Sectors: Consumer Defensive, Healthcare, Utilities Watchlist: ARKK, SARK, DVN, OXY, MRO, PED Dear Reader, My father is in recovery and likely heading home. So thank you for all of your support. The first thing he asked me when I saw him in the hospital was: "How is the market doing?" Once a trader, always a trader. About two weeks ago, he and I were discussing Microsoft Corp. (MSFT). I've been bearish on the software giant because of its primary valuation. The stock has traded north of 10 times revenue in a sector that's seen valuations compress aggressively. Today, Microsoft warned that its revenue and profits will fall short of most analysts' earnings. The company is the second-largest component of the Nasdaq 100 and has a massive weight on the S&P 500. It's still trading at 10x sales. I think that valuation compression will continue to be a massive theme of this market, and no stock is immune to this phenomenon. While I think it's a great company, I'm simply not willing to buy the stock for $263. But I'd be happy to buy it... at $147, which is where a basic discounted cash flow analysis justifies the stock price. MOMENTUM INDICATOR Broad Market: YellowS&P 500: GREEN Recap: Capital is still holding strong in the S&P 500, but we've witnessed significant selling once again in the small-cap and mid-cap space. The markets are choppy right now as investors speculate about the impact of the Federal Reserve. I'm back in cash and ditched my speculative positions in companies like ARK Innovation ETF (ARKK) and the madness that is Beyond Meat Inc. (BYND). I'm happy to wait this out as the Fed starts to drain liquidity from the market. Remember... cash is a position. THREE THINGS I'M WATCHING - Lael Brainard is going to be the head of the Federal Reserve in a few years. It's nice to see that she's taking the role seriously. Just two days after Former Fed Chair Janet Yellen apologized for getting inflation wrong and calling it transitory, Brainard laid out the bearish case for the market. She said today that it would be very difficult to see a pause on rate hikes come September. There's a huge bet right now that the Fed will flinch. The June 15 press conference by Jerome Powell could produce the most fireworks of 2022. - Oil prices are under pressure after OPEC+ committed to a big increase in production. The energy cartel plans to increase its output in July and August. But focus on the word "plans." Members have struggled to reach their capacity goals over the last few months, and there's little reason to believe that they'll suddenly "get it together." There's still a massive supply gap in this market, and you can't go wrong selling credit spreads to the downside on any exploration and production company in the Permian Basin of Texas. I'll discuss a few today. - The bomb went off in the auto market today. Wards Auto released its estimates for auto sales in May, and it was horrible. Total sales came in at 12.68 million - an 11.2% drop from April and a year-over-year drop of 24.9%. Yet, somehow Tesla's (TSLA) stock is up, and Ford Motor Company (F) added nearly 2%. If these stocks are up, think how bad the markets expected these numbers to actually be in May. HOT LONG SHOT I'm holding the line today as I wait this market out. But you know where my heart sits when it comes to the ARK Innovation ETF (ARKK). If we don't get any support and we bet on a big move down due to the Fed, take a look at the July (Third Friday) $38 calls. The big bet is that the Fed is willing to sink this market. Since the central bankers outlawed their own ability to invest in it, they've been pretty harsh on it. The June 14-15 meeting should solidify the bank's efforts to raise interest rates and continue its tightening. If I'm flipping back to a bearish stance, I want to bet against the ETF that has absolutely no commitment to valuations. WHAT YOU MISSED I had to take the day off yesterday, but I'm back in full force today. I'm going to focus on simple valuation strategies and key picks that can help you succeed in any market. Last Monday, I did a full breakdown of the four valuations that matter most to me. - EV/EBIT - PE - PS - Tangible Book Value Check out all of my shows, [right here](. I'll see you tomorrow. Stay liquid, Garrett {NAME} You are receiving this e-mail at {EMAIL}, as part of your subscription to Midday Momentum. To remove your email from this list: [unsubscribe here](. 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