Get ready for a technical rally

Why Luke Lango is buying tech stocks … historic returns after the Fed break … what history tells us about recent market weakness … which sectors are poised for excess

“Time to buy tech stocks.”

This is a clear action step from our hypergrowth expert Luke Lango.

Yes, we’re probably not done with the banking chaos yet… sure, the power that lifted the market at the beginning of the year has slowed down… and no, we’re not weird when it comes to the potential recession…

But Luke thinks we’re on the cusp of a 30% gain for the Chosen technology stocks in the next 12 months.

Luke’s analysis is not based on feelings; instead, it bases its research on historical market data. And the data tells him it’s time to buy top tech stocks.

There is one big reason behind this…

It appears that the Fed’s “pause” has finally arrived.

Don’t fight the Fed

A study of historical markets shows that trying to make money betting against the Fed is a daunting challenge.

When the Fed looks to tighten the economy by raising interest rates, stocks tend to react poorly. When the Fed wants to stimulate the economy by cutting interest rates, stocks usually respond positively.

While it is possible to make money with an investment thesis that goes against what the Fed is doing, profits are much easier if you swim with the Fed’s currents, not against them.

Since March 2022, the Fed has raised interest rates 10 times in a row. This may have been the most aggressive and fastest rate hike campaign ever.

It was not a friendly market environment to say the least.

But for months now, Luke has been pointing to a potential Fed “pause” — the point when rate hikes finally stop and the focus shifts to lowering rates.

It seems we have finally reached that point.

Here is Luke:

[On Wednesday]the Fed raised interest rates by 25 basis points, continuing the trend it established in December 2022.

However, in the press release announcing the rate hike, the Fed omitted certain words and phrases that have been in every rate hike press release since March 2022. They signaled to the market that more rate hikes are coming. meas.

By leaving them out of this month’s announcement, the Fed is implicitly signaling that there will be no more rate hikes.

In fact, Fed Chairman Jerome Powell confirmed this in his press conference yesterday. He specifically said the omission of those sentences “makes sense.”

Take from that what you will. To me the implication is obvious.

The Federal Reserve is done raising interest rates.

What history tells us about stock returns and the Fed pause

Facts over feelings.

Investors who maintain a fact-based market approach tend to generate much better results than investors who rely on feelings and hunches to dictate their decisions.

While today’s market hasn’t felt resoundingly bullish in recent weeks, what are the historical facts surrounding yields following the Fed’s rate cut? Especially as they relate to tech stocks.

Let’s jump to Luke’s daily notes from Investor in innovation:

We will take a look at the most important chart on the stock market right now.

With inflation collapsing, the labor market collapsing and fears of financial contagion spreading, a Fed break by June seems inevitable.

Prior to this hiatus, we consistently emphasized buying any dips in the stock market, and here’s why. This chart shows the Nasdaq Composite curve over the 12 months after each Fed pause going back to 1980 (excluding 2000 due to obvious valuation discrepancies).

Whenever the Fed halts the rate hike cycle, tech stocks rally.

Average 12-Month Futures Returns for Tech Stocks After the Fed Pause? About 26%. Average maximum returns are over 30%.

Either this time is different—spoiler alert: it isn’t—or tech stocks are poised for a big rally through the summer of 2024 due to the impending Fed pause.

But does the market’s shaky performance on Wednesday and Thursday suggest that “this time is different”?

yesterday, MarketWatch published an interesting piece of research by Kevin Muir of the trade store Macro Tourist.

Muir evaluated market data between 1984 and 2018, looking at total returns since the day of the Fed’s last rate hike, showing subsequent average returns.

Here’s what Muir found about market weakness in the immediate days after the Fed’s latest hike:

On average, the stock markets fall on the first day after the last rally. The next day it gets worse. And on the third day it declines a little more.

According to Muir, on the fourth day, markets find support (based on today’s rally, we seem to be reaching this point early). And two weeks later they show profits.

His research finds that in the 90 days after the Fed pauses, all major stock indexes show gains. And which index leads the pack?

You guessed it – the tech-heavy Nasdaq 100 with an average return of 12.17%.

Muir’s research then estimated S&P sector returns 90 days after the Fed’s pause.

Once again, technology wins the day, posting an average sector return of 14.61%.

The second-ranked sector is quite interesting – it is financial data with 12.18%.

Achieving this average return this time around is a bit like flipping a coin. On the one hand, if the regional bank contagion continues to spread, it’s unlikely we’ll see anything even remotely close to the sector’s 12% gain over the next 90 days.

On the other hand, if investors feel the sector has stabilized and the sell-off is overdone, we could be in for a big bargain hunt that sends prices soaring (in this case, Western Alliance is up 51 today as I write %).

Finally, what is the third best performing sector after the Fed’s rate cut, as reported by Muir?

Real estate, 10.4%.

It’s also a huge wildcard in today’s macroeconomic climate. Here is Muir’s view of these two sectors, which matches ours:

A look at the following winners [beyond tech]we have finance and real estate.

Gosh, talk about a terrible duo you could have right now – but maybe that’s why they work?

Sentiment in these two sectors is so depressed that we could see a huge short-covering rally.

The upcoming tech rally

As we wrap up, let’s get back to “facts vs. feelings.”

One of my favorite investment quotes comes from Rob Arnott, founder of the investment store Research Affiliates:

Investments are rarely profitable, which is comfortable.

I wouldn’t call today’s market environment “comfortable”. But this is where historical facts come into play.

With that in mind, let’s go back to Luke’s simple plan to get us out:

First, the Fed has just indicated that it will end its rate hike campaign next month.

Second, every “Fed pause” since 1980 has triggered a stock market rally.

Third, in these “Fed Pause” hikes, tech stocks tend to be the biggest winners, posting average returns of around 30% over a year.

Consequences? It’s time to buy tech stocks.

I see a big tech-driven stock market rally just around the corner. I believe it too some tech stocks will jump 100% in that rally.

have a nice evening

Jeff Remsburg