The market is in a box. The Federal Reserve is determined to keep up the aggressive rate hike talk. The two-week rally in tech is now reversing. The market eventually gets it. This means that every rally for growth stocks gets sold as soon as the next aggressive Fed speaker starts talking. The problem is simple: Stocks will be shaky as long as the market thinks the Fed will be so aggressive that there is a good chance of a recession. How much more does the market need to give up to digest not just half-point rate hikes but now a more aggressive balance sheet runoff? As a result of the treacherous macro environment, we have lost transports, financials, builders and retail — all of which are fading. Fading sectors (since March 29 close) Banks (KBE): down 7% Transports (IYT): down 8.8% Homebuilders (XHB): down 7.6% Retail (XRT): down 7% Tech was strong, but it may also be fading. Tech – particularly speculative tech stocks like Cathie Wood's stocks – may now be what is known as a "value trap." That is, they look cheap because the prices have dropped, but they're not worth buying. Who wants to get caught long tech when everyone in the Fed is falling all over themselves to be more aggressive than the next guy? The only thing still standing: commodity stocks (energy and materials), interest-rate sensitive utilities and real estate investment trusts, as well as defensive sectors like consumer staples and health care. Still holding up (since March 29 close) Energy (XLE): down 0.9% Metals (XME): down 0.7% Utilities: up 2% REITs: down 1% Consumer Staples: up 0.6% Health Care: down 0.6% This has big implications for earnings. They are still strong, particularly estimates for the second half of the year, but no one believes them anymore. Analysts are in a self-imposed blackout period for the moment because they don't want to change numbers ahead of the companies reporting in a couple weeks. First-quarter earnings will be fine (likely higher than expected), but estimates for the third and fourth quarter, which are at record highs, will likely be adjusted downward as CEOs may be reluctant to provide a clear on the outlook in the second half of the year.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, March 30, 2022.
Brendan McDermid | Reuters
The market is in a box.