The Stock Market becomes predictable when you think about longer term trends and follow a general set of principles. In this case, the theory BluSuit has is that there are 3 factors that truly move markets:
Liquidity provided by monetary policy
Corporate earning expectations
Technicals and market structure
When we apply these principles to the markets today we can cut through the noise and really simplify exactly what is going on, what sort of market price action to expect for this year, and even when the markets will reverse.
This Market Reminds Me of 2014 - 2016
Recently, we have experienced one of the largest QE programs IN HISTORY. QE is when central banks go to the open market to buy U.S. treasuries, or government debt, and mortgage backed securities (MBS). When central banks do this, it has two major effects:
Inflates asset prices
Stimulates the economy through supporting government spending and lending from banks
The only other time in recent history where we experienced something comparable was from 2012 to 2014 when the Federal Reserve steadily purchased U.S. treasuries and MBS’s.
This lasted from September 2012 to October 2014
The result: the Stock Market had a Comparable Move to what We saw in 2020 - 2021. It rallied with minimal corrections/disruptions.
There are a few major catalysts to note on the chart above:
When QE began on September 2012
When QE ended on October 2014
When the markets finally bottomed on the 150 week moving average
What we can realize; the stock market began to rally and sputter around major QE announcement dates. When QE was announced in September of 2012 the S&P was 1,100 and moved on to rally nearly 100% within the next 2 years until October 2014, reaching 2000. From October 2014 (S&P 2000) to October 2016 (S&P 2080), without QE, the S&P made a near 0% move over two years.
Let’s Apply These Principles to Today
If we assume that a similar pattern follows and the markets end up meeting their major moving averages (the 150 week ma and 40 month ma), the S&P will trade sideways for about 2 years from QE completion. Fortunately, we’re almost a year into this sideways price action.
Expected Market Price Action, Using History as a Guide
2022 Year of Accumulation
I truly believe that inflation is peaking right now. Energy prices are trading sideways and prices at the pump are going down. In addition, commodity prices are stabilizing and housing is cooling off. This means that the Federal Reserve is actually getting inflation all under control and they are manufacturing the “soft landing”.
What people don’t understand, yet, is that the Federal Reserve has jawboned the market to do most of the tightening for them! This makes the most sense when we overlay the 2 year with the Federal Funds rate and interest rates on a 30 year fixed mortgage.
Federal funds rate - note when they started rates and how far it went up
2 year yield - a “predictor” of the federal funds rate
30 year mortgage - a reflection of overall credit conditions from lending institutions
This leads me to make a few conclusions, when applying what we know about history, to the markets today, and how the Federal Reserve is controlling these markets. This is what the data is telling us:
Credit conditions tightened exponentially faster than in 2014 - 2016
Inflation and asset price “froth” became worse in 2021 than in 2014, but not unmanageable
Inflation is “likely” peaking right now
The Federal Reserve has tightened liquidity conditions (with the market doing most of the world for them) more than the market thinks, right now, to combat inflation
The S&P 500 is going to trade sideways for a period of time, till it meets its major moving averages, inflation is under control and economic growth resumes
This means that investors who accumulate shares in high quality businesses (with secular growth and strong cash flows) will be meaningfully rewarded when the market resumes its bullish market trend estimated by November-ish of 2023
By November 2023
It is very likely that inflation will be under control and economic growth will stabilize. In addition, it wouldn’t surprise me to see the Federal Reserve actually cut interest rates next year in the face of stagnating economic growth and falling CPI. This will serve as a stimulus to the economy and will promote higher earnings in corporate America, moving the markets as whole.
My Plan of Action
All BluSuit Subscribers will see exactly which businesses I will be buying during period and my portfolio performance. My first SubStack embarking on this journey was just posted on Saturday. I am going to keep adding to the businesses I believe are going to be long term winners, preparing my portfolio to reap the true rewards of long term, fundamental, investing.
Basically, I am putting my money where my mouth is :D
The Market is Going to Go Sideways Till Everything is Under Control, Then we Rally
I plan on saving money, buying good businesses, controlling my mindset, and preparing my portfolio till the next leg up. Can’t wait to continue to share this journey for years to come in the future.
Stay Tuned, Stay Classy
Dillon