March Madness, revisiting the first trimester

For a host of reasons, March is a month most Americans look forward to.

For those who live in cold climates, March signals the start of spring and warmer weather. Many people are traveling to warmer temperatures and March is a time to get away from it all. For children in school, especially students, March is the gateway to “spring break”.

March Madness, of course, describes the NCAA basketball teams that face off in brackets and how often some of the top-ranked teams don’t make it out of their first brackets. This year only 5% of the brackets submitted to sports betting operators were still framed after only the first round!

You might be surprised to learn that bets on March Madness this year topped $3.1 billion. This number only covers legitimate contests and bets. I am convinced that it is much higher than that.

The NCAA earns almost a billion dollars thanks to March Madness.

The college basketball team that survives March Madness will be crowned national champions on Monday night (April 4), and this chapter of March Madness will be closed.

This year, March Madness also happened in the stock market.

The bears appeared to be the ratings favorites in March after January and February’s volatile 20% drop in the tech-heavy NASDAQ. However, true to March Madness, the bulls responded by staging one of the strongest 4-day rallies ever.

This rally caught many traders and investors off guard, however, unlike the NCAA, the market crowned its winners for March Madness (and the first quarter) last Thursday.

Also, unlike the NCAA, the year isn’t over, and there’s a lot more “excitement” to come (not necessarily good).

For example, this year another form of March madness was the outbreak of war in Ukraine, which only continued to grow and complicate the markets.

Will the fix last?

Corrections of this magnitude and speed usually do not recover as quickly. Going back to 1928, the average decline from peak to trough was -16.3%. Over the period from 1928 to 2021, stocks fell by at least -10% in 63% of the years.

Given the factors of:

• higher inflation,
• Potentially 5-8 more interest rate hikes by the Fed, and
• The noise of the midterm elections…

We expect above-average volatility with both ups and downs in stock prices.

We’ve written in this column many times over the past few weeks that inflation could be the worst thing for stock prices over the next 1-2 years.

With numbers similar to those of the early 1970s, we are all too aware that high inflation leads to rapidly rising interest rates, reduced revenues and corporate profits, and then a slowing economy.

When the market sees this coming, it causes market multiples to contract, i.e., stock prices to fall.

We fear that we are witnessing unprecedented stagflation on top of market declines and, at best, a market performing sideways.

Quarter recap

• Global Bonds– worst drawdown ever
• US bonds– 3rd worst Q1 since the Civil War
• US yield curve– the largest flattening ever recorded in Q1
• Merchandise – best start to the year
• Oil– best start to the year since 1999
• Regular gasoline (at the pump) – the fastest climb ever recorded to reach heights
• US stocks– 3rd biggest short-term bounce in March since Lehman Brothers collapse after worst start to year for stocks since 2009 (2nd worst in over 30 years)

Here is a good chart of stock market volatility over the last quarter.

Here are some more details about the rally (March Madness):

• We had one of the fastest 10% rebounds from the bottom to help markets recover much of the 2022 correction in just a few weeks.
• This rally ranked in the 99.5th percentile of raises for a “bull” market and in the 98th percentile of bear market rallies.

Over the past several months, in this column and by our own Mish in national television appearances, we have suggested diversification into commodities, oil-related stocks and ETFs, agricultural ETFs, oil-related ETFs, energy, and .

We want to continue with this mantra and draw your attention to a number of our positive investment strategies for the year. Mainly those concentrated in energy, agriculture and precious metals.

In fact, gold was the best performer of the quarter, as the chart below illustrates:

What have we learned?

1. Markets can and will turn a penny. The risk management we use is the best way to create a safety net under one’s portfolio.
2. Following the advice of an experienced trader, like Mish, will help you take advantage of changing trends and short but profitable opportunities. Her model portfolio was positive for the quarter, but more importantly, she avoided major losses as she suggested staying in cash and preserving capital.
3. Include commodities, agricultural ETFs and selective energy-related stocks in your portfolio to provide insurance against runaway inflation and rising interest rates.
4. Allocate more of your assets to our mechanical trading systems that rotate across sectors and market areas (themes related to energy, mining and commodities) and from multiple high growth stocks that can yield 20-50% in a short time, as many have done.
5. Get a “financial tune-up” from a trusted investment advisor for little or no cost.

Last Week’s Remarkable Market Conditions

Risk-On/Bullish

• Key indices worked through modest overbought conditions by going sideways and holding their 10-day moving averages (+)
• Support retested at its 200-day moving average and bounced off it (+)
• Market internals for SPY and are consistent with market action, working out of overbought conditions and still remaining strong (+)
• The New High/New Low ratio for SPY also continues to improve (+)
• Risk gauges are still in Risk-On mode but have fallen slightly due to the SPY vs Utilities ratio (+)
• Sentiment indicators have improved, with volatility falling below the 200-day moving average of cash (+)
• The number of stocks above key moving averages fell slightly, but still retained a Risk-On scenario (+)
• Growth stocks versus value (/) continue to be risky as growth outperforms value (+)
• Foreign equities ( and ) outperformed US equities across the board, with EEM returning to its meaningful 200-week moving average (+)

Risk-Off/Bearish

• Risky sectors such as semiconductors () and transportation () have been wrecked this week; each was down more than -4%, while Risk-Off sectors like Consumer Staples () and Utilities () stabilized the market (-)
• Short-term rates () jumped this week in anticipation of several more rate hikes to come this year (-)
• The Yield Curve continues to flatten (-) [It has since inverted]
• Despite holding up for the week, most of Mish’s modern family was down this week, including retail (), regional banks (), semiconductors (SMH) and transport (IYT) (-)
• Retail (XRT), transportation (IYT), semiconductors (SMH) and regional banks (KRE) all lost support from major long-term moving averages, the iShares Biotechnology ETF (NASDAQ: ) being the only modern family survivor this week (-)

Neutral

• Volume patterns remain mostly positive, with the exception of the which has only one day of accumulation remaining in the last 2 weeks (=)
• Foreign stocks led all asset classes this week, including Brazil (), India (), China (), as well as biotechnology (IBB), having a surprisingly strong week (=)
• Commodities (, , ) are in a high-level compression zone which is a watershed moment for global commodities (=)