Weekly Update: 3% Mortgages Are Gone – What Lies Ahead?
Good evening, and welcome to this week’s edition of Stealth Trades!
The days of 3% mortgages are over. And we may never see them again.
Those waiting for interest rates to fall back to 2021 levels are in for a rude awakening.
Humans tend to suffer from recency bias – a tendency to overemphasize recent information when estimating future events.
We have been spoiled by low interest rates for more than a decade. Money has been cheap, allowing Americans to borrow for a fraction of what our parents paid for the same debt.
This has fueled prosperity. Bigger houses, nicer cars, and a host of other luxury goods became “affordable” thanks to low monthly payments.
But this is not the norm.
The average 30-year mortgage rate peaked at 18.6% in 1981. For today’s median home price of $439,000 with 20% down, that would mean a monthly mortgage payment of $6,224. And that’s before taxes and insurance.
It’s no wonder our parents lived in 1,300 square foot houses.
At the beginning of 2021, when rates bottomed at 2.65%, that same house would cost you $1,611 per month – almost 75% less!
Saying today’s rates are high is relative and only true in comparison to recent years.
What we are seeing today is a shift in the tides. The shock we have all experienced during the last 18 months of Fed rate hikes is a temporary one. Most people expect them to go back down. They won’t. At least not to where they once were. 7% interest rates will soon be the new normal, and nothing says they cannot go higher still.
On Wednesday, the Fed chose to keep interest rates at their current level. And what Powell said in the press conference did not instill confidence.
He suggested rates would likely remain high for longer than previously expected. He pulled back on plans to cut rates by 1.00% next year and adjusted that to 0.50%. Who knows… maybe he decides to not cut at all.
From a technical perspective, the 10-year yield is emerging from a breakout pattern that would suggest we go even higher from here.
Bill Ackman is a legend on Wall Street. His hedge fund, Pershing Square Capital, manages $18 billion.
He made a lengthy post on Twitter this morning about the state of the financial markets, and I encourage you to read it (just click the image below).
Ackman is one of the sharpest minds in finance. When he talks, Wall Street listens. And so do I.
As for my view on the stock market, my position has not changed. In my August 25th weekly update, the day after Nvidia’s earnings report, I told you why I believed the high was in for the Nasdaq in 2023.
A month later, my analysis seems to be correct. Stocks continue to roll over, and Wednesday’s Fed meeting only added fuel to the fire.
Things don’t look any better under the hood…
Market participation has plummeted over the last 60 days. I measure this by plotting the number of stocks above their 50- and 200-day moving averages.
As of today, 62% of stocks are in long-term downtrends and 78% of stocks are in short-term downtrends.
Yesterday, 239 stocks had relative strength lines making a new 52-week low. Only 25 made a high.
We saw the same thing with stock prices. 184 made new lows. Only 14 made new highs.
The path of least resistance, at least in the near term, is the short side. Rising interest rates, a hawkish Fed, the United Auto Workers strike (which I expect to see more of in other industries), and a weak technical picture all point to a less-than-ideal environment for investors.
The only areas I am seeing strength right now are driven by rising commodity prices.
Uranium stocks like Uranium Energy Corp (UEC), Cameco (CCJ), and Energy Fuels (UUUU) continue to rip higher.
Oil and gas stocks, specifically pipelines and midstream companies like Energy Transfer (ET), are also making highs.
For those readers open to shorting stocks, here are a few names to look at:
Applied Materials (AMAT)
AMAT has been a strong performer this year, but the stock is showing signs of rolling over.
After failing to find buyers at the previous high, AMAT has collapsed through its 50-day moving average and is now forming a shelf at previous support.
A stock can only hit a level so many times before breaking through. This marks the fifth test of the $135 support area. A lot of people are going to have stop losses here.
If AMAT breaks below this level, watch for the price to fall rapidly.
Dicks Sporting Goods (DKS)
DKS is toast.
After a hideous earnings report, the stock fell 24% in a single day on its highest trading volume in over a year.
This is clear institutional selling.
Even worse, the stock has been unable to rally after the drop. If there was any demand for DKS shares, investors would be buying in this 24% off sale.
They’re not.
In fact, each mini rally is weaker than the last – a sign that it is finding fewer and fewer buyers. Once the value suckers have depleted their capital, DKS is likely to capitulate even further.
On a weekly chart, the picture is even clearer:
The biggest weekly decline on the highest weekly volume almost always leads to a new Stage 4 downtrend.
Nvidia (NVDA)
I realize it may seem controversial to short what has been the leading stock in this year’s bull market. But when the whore house gets raided, even the piano player goes to jail.
As I mentioned earlier in this update, market participation is degrading. This bull market has been driven by big moves by some of the largest stocks which have artificially pushed the market cap-weighted indexes higher.
2/3 of the market has quietly rolled over and now sits in a defined downtrend. Nvidia cannot prop up the market forever.
NVDA peaked on August 24 following its quarterly earnings announcement. It reported huge beats in both sales and earnings as well as higher forward guidance and a $25 billion share buyback.
It wasn’t enough. The stock has been falling ever since.
Institutions are using this final piece of good news to exit their positions and take profits on the trade. Once they are out, the stock has a long way to fall.
Best wishes for your trading,
