I Am Still Cautious on Stocks

Stocks have been volatile recently! The S&P 500 looks like it topped in April and it has bounced since that pullback. It's up ahead of the market open today.

I first wrote about stocks on this blog on March 5th, warning readers to get out of two stocks. Those stocks, NVIDIA (NVDA), which I am currently short, and Super Micro (SMCI) are both down since then. Both companies have reported the March quarters recently - no problems there!

I followed it up with my view on a few stocks that I thought were buys two weeks later. I haven't owned each of them since then, but my IRA has positions in all four at this time. Two have declined since then, and two have rallied.

The next view of stocks I shared was focused on the overall market, as I discussed a very big but not well understood concept: the inverted yield curve. It was my 34th anniversary, and also the second anniversary of my near-death tragedy in 2022 on April 15th. I discussed there how rates, if they don't decline, could lead to lower stock prices. This has been the case!

On April 21, I shared my ideas about how low stocks might go, suggesting SPY could hit 340. Well, not yet! It closed yesterday at 500.35, and it is at about 504 this morning ahead of the opening of the market. While the market is up a little from when I posted this prediction, it has been all over the place since then:

Well, maybe not! It's been up, and down (and up almost 1% in the pre-market today). I had called out information technology stocks as the sector about which I was most concerned. The NASDAQ 100 ETF (QQQ) is perhaps the most loaded-up popular ETF on this front, and it has rallied a bit more than SPY since then. I am still very concerned about this part of the market. Here is the QQQ chart for the past six months, during which is has rallied 18.1%, which is a bit less than the 18.4% gain in SPY:

I am not sure why 420 has been important to me on this chart, lol, but I was surprised when it went through 420 for the first time earlier this year. It got through there last month going the other way, but it's just above 420 now. I see the two gaps that concerned me earlier this year still open, and I have my eyes short-term on 400. The ETF closed 2023 at 409.52, and 400 would be a decline of just 2.3%. I think it could go down a lot more!

So, the market looks toppy to me, and the former leader, QQQ, now lagging SPY in 2024 excites me as a bear. How bearish am I? Well, my trading account is 100% short right now. Actually, it is more than that, as it is leveraged. My IRAs, though, are slightly long effectively. I currently own a dozen stocks and am pretty much fully invested, but I have a lot of NVDS, which is an inverse ETF for NVIDIA (way too much of a percentage!) and some SQQQ, which is triple-negative QQQ.

The 10 stocks that I own in my IRA include the four that I wrote previously about as well as six others. I recently bought a large-cap technology company. Weird, huh? Intel (INTC), though, looks overdone to the downside. It is down almost 40% in 2024 and a little more than 40% from where it was five years ago. I also own a large-cap pharmaceutical, a small-cap stock trading near tangible book value and a small-cap with a great symbol, TBI! I bought a beaten-up store/pharmaceutical services company that has lost 1/3 of its value this year and is down 67.7% over the past five years. Finally, I added a new name to my watch list and decided to buy it. I have always been a fan of Southwest Airlines (LUV), and I own a small amount now. While I am bearish overall, I think that some stocks are priced at levels that make sense to own.

The point that I am trying to make today is that what I have been worried about for too long is playing out: Interest rates are not coming down! Since the article I shared on the inverted yield curve, rates have increased. The 2 -year Treasury note, which closed at 4.96% and traded recently above 5%, was then at 4.90%. The 5-year Treasury note has increased from 4.56% to 4.71%, while the 10-year Treasury note has lifted from 4.52% to 4.68%. The 30-year Treasury Bond, now 4.75%, was 4.63%. The curve is higher and now a little less inverted.

Treasury rates are important, but there are rates of interest that are more important, like mortgage rates and what credit card companies charge. Also, corporate borrowing rates matter a lot. Many watch high-yield rates too. I don't have deeper information today, but I will follow up in the future.

For now, I remain very bearish, and the recent information supports my view. The world is starting to understand that rates aren't likely to fall, as had been widely expected. It's still a great time to rethink things about investing!