Things you need to know 

• Vlad has no intention of supporting a cease fire yet
• Oil under pressure after Joey announces the release of more oil from the SPR
• It is the end of the quarter – expect lots of window dressing today
• Tech resistance levels ‘ill prepared to fight – just like the Russians’
• The move up has been more technical – but the road ahead remains volatile
• Try the Veal Rollatini.

It is the end of the 1^st quarter 2022….and while stocks are still lower for the quarter – they have shown great resilience and we can expect lots of movement today as portfolio managers go window dressing to ‘doll up’ their portfolios for the quarter end statements. I suspect stocks will end higher on the day – not big but in the plus column….as investors comb the landscape for beaten up names.  Going into this morning- the Dow is down 3% ytd, the S&P down 3. %, the Nasdaq down 7.7%, the Russell off by 6.8% and the Transports UP 0.4%.

So, stocks fell on Wednesday after advancing on Tuesday as the idea that a cease fire agreement was not as cut and dry as we were led to believe on Tuesday – when Vlad made it clear that he was ready to stop shelling Kvyv and stick with the regions in the east that he has taken control of.   Because what is clear is that he is getting his a** kicked by the Ukrainian’s….more so than he anticipated  – so he is changing the course of the invasion (or at least that is what he led everyone to believe) and that helped investors feel better about this crisis as they took stocks higher….….but in the end – he has no such intention – and so the fighting will continue until it stops…. So, while stocks celebrated the possible cease fire on Tuesday – they did an about face on Wednesday…. the Dow lost 65 pts, the S&P down 30 pts, the Nasdaq gave back 178 pts, the Russell lost 45 pts and the Transports which had gone positive on the year fell by 170 pts sending it back into negative territory.

Part of the Tuesday rally was also the significant drop in oil – on hopes of a cease fire – which would take the pressure off of rising prices (think slowing inflationary pressures) but that would not last either…. yesterday we saw oil jump by 4% (and this morning it is down by 5% – see below) …Why?

1. An unexpected drawdown in crude stockpiles – that saw a decline of 3.4 million barrels last week – leaving us at the lowest level since September 2018.  (Again, this goes straight to my point…. the idea of demand destruction is false…. unless of course they try to shut the world down again…. And
2. The potential for new sanctions imposed on Russia even as he tells us that he is prepared for ‘peace talks.  These new sanctions would be on more sectors of the Russian economy that would further cripple Vlad causing even more pain on the country.

In addition, Vlad is now demanding that oil and other commodities (think food, grains, fertilizer, coal, metals and timber etc.) be paid for in Roubles…. hoping to strengthen the Rouble and weaken the dollar and the Euro…. According to Vlad – the WEST has made a declaration of economic warfare on him and now he is intent on trying to destroy the reserve status of both the dollar and the Euro – Yeah, let’s see how that works.

In order to really do this, he would need China’s help – and the rumor is that China is ‘willing to work’ with the Russians – helping to solidify their budding relationship against the West. Now China is walking a fine line here…..remember – China does more ‘business’ with the West than they do with Russia – so Xi Xi has a lot to consider when trying to decide what to do……not only about Russia but also about his plans on potentially taking control of Taiwan – which would be another disaster to the global ‘supply chain’ of semi-conductors – Capisce?

Now the move up over the past week was all around the technicals….as we have tested and retested resistance points – finding that they are like the Russian army – ill prepared to fight (the onslaught of buyers)….On Monday we pierced 4560 – a key level that had proven to be resistance but then failed on the 3^rd attempt and then I told you to watch 4590 –  which wasn’t a strong resistance level, but it was a level that we tested twice before and failed…….and as it typical – the 3^rd time is always the charm.  Futures had been up on Tuesday morning suggesting that we would blow right thru 4590 on the opening – and we did – surging to 4627 by 9:33…. leaving 4590 in the dust – which now makes it a support zone for the markets.  The breach of 4590 was all clear sign for stocks to continue to advance as it readies to challenge 4800 – the 2022 highs.  We are now above all 3 trendlines (50, 100 and 200 dma’s) and the FED is making sure to get all of their spokespeople to ‘jawbone’ the markets higher – suggesting that the FED has this under control and rising rates will NOT derail the US economy so it’s time to get back in the pool.

But before we go and throw a party – let’s remember – that the bond mkt is flashing warning signs…. the 5’s and 30’s inverted last week but have since corrected with the 5 yr. yielding 2.40% and the 30 yr. yielding 2.47%.  The 2’s and 10’s inverted briefly yesterday morning but managed to rebalance by the afternoon and that is another warning of a coming recession….

Remember – that when the curve inverts –  history shows us that it is typically anywhere between 15 – 20 months before the recession hits and if that is the case – we are talking about mid 2023….which is a long way away from today….so investors are discounting it for now taking advantage of the ‘sale’…..a decision which I think is premature….….I think the recession begins well before that – late 2022 if the FED does in fact get as aggressive as Citi suggests…..Recall that as rates rise, so do rates on revolving credit cards, auto loans, and floating home equity loans and mortgages…and that is a subject I do not think the mkt is recognizing yet….the pressure that those rising rates will put on households cannot be understated – especially if inflation continues to advance the way so many analysts think.

Eco data yesterday showed that mortgage apps declined by another 6% – on top of the 8% decline last week…think surging mortgage rates – now approaching 4.75% for conforming and over 5% for jumbos.  Rates are now UP by more than 50% from early February….3% then vs. 4.75% now….and going higher…. I suspect that we will see lots of housing come on the market this spring as anxious sellers recognize the coming pressure on prices as a result of rising rates.

ADP reported 455k new jobs created and the final revision for 4^th qtr. GDP came in at 6.9%.  Today we get a read on Personal Income and Personal Spending…. exp of 0.5% each….and the FED’s preferred measure of inflation?  The PCE and that is expected to be +0.6% m/m and 6.4% y/y – which is UP from the 6.1% last month and is a LAGGING calculation, but if you annualize the m/m number (current) then you see that the current rate of inflation is really 7.2% (0.6 x 12).  And this will give the FED more ammunition to support the ‘multiple’ 50 bps rate hikes that are now out there in the public square.

I remain in the camp that the immediate future is not all smooth sailing….I think the recent surge higher is more technical in nature and that once we get more out of the FED in the next couple of weeks – the markets will once again hit some potholes….which means – stay the course…do not light your hair on fire….I continue to be in the value camp – Staples, financials, energy and big US industrials – that provide exposure to the markets, pay decent divvy’s and have global footprint. I own big tech, but remain underweighted relative to the benchmark –   But again – I am on the ‘back 9’ (maybe the 14^th hole) so that allocation reflects my age and risk profile….….Younger investors need to be more aggressive and should lean into more tech….40 yrs. of growth is a much longer time frame than say 20 years….

For the quarter – Energy XLE is in way out front up 39%, Utilities – XLU up 4% – every other sector in the S&P are in negative territory with Communications – XLC leading the way lower down 9.75%. Consumer Discretionary – XLY down 7.7% and Tech – XLK down 7.2%.  Real Estate – XLRE is lower by 5.7%, Industrials – XLI, Consumer Staples – XLP, Healthcare – XLV and Basic Materials – XLB all down by about 1.4%.  The Value trade – SPYV is UP 0.8% while the growth trade – SPYG is down 7%.   10 Treasuries ended the day yielding 2.3% up from 1.6% in January – and that is a 45% rise in yields.  At some point – rising yields will be a challenge for investment dollars…. what is that point?  3%, 4%.... There are billons of dollars on the ‘sidelines’ that some think will have to come to stocks – I say if that is so – what is it waiting for?  My sense is that it is waiting to see what happens to yields…. Just a thought.
 
European markets are trading around the flat line….yes, slightly weaker, but nothing to write home about…..The failed Russian cease fire putting some pressure on the mood in Europe…..and while the talks are to continue – no one really expects a solution at least until Vlad succeeds in destroying the eastern part of Ukraine as he refocuses on dividing and conquering the nation….In any event – Zelensky has offered an olive branch, he wants to stop the madness…. At 6 am – European markets are down about 0.2%.   

Oil is under pressure again – down 5.4% at $102/barrel – this as Joey announced that he will release 1 million barrels of oil per day – from the SPR (Strategic Petroleum Reserves) for 6 months….That is about 180 million barrels in total and that is causing traders to hit the SELL button…and while our friends at Goldman do say that it will help to rebalance the oil market now,  it does nothing to resolve the ‘structural deficit’ – never mind what it does to national security.  But that’s a conversation for another day.

Crypto’s continue to trade inline……. Bitcoin is trading at $47k while Ethereum is at $3,425.

The S&P closed at 4602 after testing as low as 4581…. just below the 4590 level before it recovered.  As noted, – it is the final day of the quarter – much of the trading will focus on the end of quarter rebalancing for the marking period.  The official trendline support is 4545 on the S&P – that is the level that HAS to hold if we want to see the market continue to advance.  The tight trading band now is 4545/4800…. A failure at 4545 will see us retest the intermediate trendline at 4480.
Take Good Care

Chief Market Strategist
kpolcari@slatestone.com

Veal Rollatini w/Prosciutto Red Onion, Arugula and Fresh Mozz.

For this you need: Veal cutlets, Prosciutto, sliced fresh mozzarella, arugula, red onion, butter, oil, s&p and some beef broth.

Preheat your oven to 350 degrees.

Begin by seasoning the cutlets… then take one – lay it flat on the cutting board, place a slice of prosciutto, a slice of the mozz, a slice of red onion and some arugula. Roll it and pin it with a toothpick – set aside and repeat.

Place a dollop of butter and a splash of olive oil in a frying pan and turn the heat to high… When it’s almost sizzling – add the rolled cutlets and brown on all sides… this might take all of 5 mins… Place in a baking dish – now add more butter to the pan along with a 1/2 cup of beef broth (you could use a dry white wine if you prefer) and let it come to a boil – deglaze the pan and then add to the baking dish so that the rollatini are just bathing… cover and place in the oven and cook for another 10 mins max.

Remove and place on a serving platter – serve with an herb seasoned rice pilaf and a mixed green salad dressed in oil and fresh lemon juice, s&p and dried oregano.  Simple easy and it takes all of 30 mins start to finish.

Buon Appetito.