More Rain & the Market Levee Could Break
|By Mike Larson|
"If it keeps on rainin', levee's goin' to break
If it keeps on rainin', levee's goin' to break
When the levee breaks, I'll have no place to stay"
— Led Zeppelin, When the Levee Breaks
Do you know what interest rate hikes are like for the markets? Rain.
A half inch or two of it falling on a city doesn't matter. The ground will soak some of it up and the rest will get shunted away into the sewer. An occasional downpour won't flood a farmer's fields, at least not for long.
But when you get storm after storm in your area ... dumping inch after inch of rain over a long period of time ... you're in trouble.
As Led Zeppelin sang in 1971, the proverbial "levee's goin' to break."
Now, I'm seeing signs investors are worried about exactly that scenario ... and that means you have to be on high alert!
Consider: Just last Friday, the Dow tanked 981 points while the S&P 500 lost almost 3%.
It was the worst day for the Industrials since October 2020. The technology-heavy Invesco QQQ Trust (QQQ) just keeps coughing up more points, and it's now down around 17% year to date.
Then yesterday, the Dow plunged another 809 points, while the S&P shed an additional 2.8%. As of writing, the Nasdaq is on track for its worst month since October 2008 in the depths of the Great Recession.
But what I found even more noteworthy is that selling pressure spread. Formerly strong sectors got swept up in the selling, joining their weaker cohorts.
As of earlier this week, only three of the 11 S&P 500 sectors were showing positive returns for 2022. Energy was the only one with double-digit gains.
Looking at some major exchange-traded funds (ETFs) that aim to track the performance of each sector, we get a better sense of this YTD performance:
Broader indexes like the Russell 2000 are lagging even more.
In fact, the iShares Russell 2000 ETF (IWM) is trading at the same level now that it first hit in December 2020. That's almost a year and a half of gains wiped out.
Plus, the formerly "red hot," highly speculative junk ... the stuff I recommended readers avoid like the plague ages ago ... is continuing to implode.
The Defiance Next Gen SPAC Derived ETF (SPAK)? An ETF chock-full of Special Purpose Acquisition Companies (SPACs) Wall Street cranked out like crazy a while back? It's down 25% this year.
The Renaissance IPO ETF (IPO)? An ETF packed to the gills with money-losing turkeys and other stocks our Weiss Ratings system grades as "Sells?" Down 35% YTD.
The ARK Innovation ETF (ARKK)? An ETF loaded up with wildly overvalued, overhyped names that needed rock-bottom rates to thrive? Down 42% this year.
This is all happening with the Fed having only ONE 25 basis point rate hike under its belt, too. The next policy meeting wraps up on May 4. It'll be followed by meetings that end June 15, July 27, Sept. 21, Nov. 2 and Dec. 14.
Investors expect rate hikes to "rain down" at each of those meetings. And not just 25-point increases. Increases of 50 points at one or more.
Translation: More and more water is going to be piling up against the market levee. We're already seeing it spring leaks. The question is, how many hikes are enough to cause it to break?
Rather than waiting to find out, I recommend you take "Safe Money" actions and adopt Safe Money strategies immediately. They're designed to help you prepare NOW so that you don't get swept away LATER.
Specifically, raise some more cash. Trim some losers that are holding you back. Scrub your portfolio using the Weiss Ratings we provide, eliminating "Sells" that don't deserve your hard-earned money.
Rotate OUT of overvalued and overowned junk like tech or consumer discretionary stocks and IN to defensive, late-cycle sectors like utilities, consumer staples, REITs and the like. Favor dividends and defense.
That's certainly what I'm recommending to my subscribers. If you want to get all the details — and specific, actionable advice — just click here to join them.
The flood may be coming, but smart investors can prep their drainage.
Until next time,