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Consternation isn’t an investment strategy.

Although I certainly understand that reaction to current stock market moves.

The day to day volatility is that extreme.

But if we focus on that volatility and on how confusing this market is, I think we’re in danger of overlooking the investable trends (up and down) in this market.

So let me try, please remember that this is a work in progress and my thinking is subject to revision, to tease out some of the longer trends that will drive stock prices in the medium term.

Monday, it was sell risk. The economy is heading to a recession. Forget about consumer stocks or airlines or any kind of post-Pandemic economic recovery.

The Standard & Poor’s 500 was down 2.95% and the NASDAQ Composite plunged 3.62%. American Airlines (AAL) was down 11.99%. PayPal (PYPL) was off 6.31%. Shake Shack (SHAK) was lower by 9.33% and Starbucks (SBUX) dropped 6.19%. Technology stocks provided no safety. Nvidia (NVDA) was down 6.91% and Amazon (AMZN) fell 5.62%.

The talk in the markets was the impending recession, out of control energy inflation, and a collapse in global trade and supply chains.

Today, Wednesday (so all of two days later), the S&P 500 was up 2.57% and the NASDAQ Composite gained 3.59%. American Airlines was up 5.85%. PayPal closed higher by 4.58%. Shake Shack gained 5.45% and Starbucks was up 4.29%. Nvidia gained 6.97% and Amazon moved up by 2.40%.

And the talk was that “it’s time to buy value,” the possibility that inflation (with the CPI inflation report due tomorrow) could peak soon (at 8% or 9%), that the Treasury market rally on a flight to safety has been over done, and that hey, it’s okay to buy risk today because, after all, why not?

You’re excused if you feel whiplashed.

Let me try to see if I can reduce your sense of vertigo, at least a little bit. And give you some guidance about how to think about, and navigate through, this market.

Start with the stuff that was true before the Russian invasion of Ukraine and that is still true.

The Federal Reserve is about to start raising interest rates. The wild forecasts of 8 or 11 consecutive quarterly hikes in rates looked to me like an over reaction then and looks even more so now. But the Fed has committed to beginning a cycle of interest rate increases and it will put the first one into effect at its March 16 meeting. Unless the central bank wants to completely blow its own credibility on inflation. Which would carry greater danger than any increase in rates.

Inflation had spiraled to levels high enough to spook the market. The Fed’s “inflation is transitory” mantra had been left to die quietly by the roadside. All the signs say that inflation is still headed higher. The consensus is for an increase to 8% for February in tomorrow’s Consumer Price Index. The trend toward higher prices is just about guaranteed to continue by the disruptive effects of the Russian invasion of Ukraine and the resulting sanctions on Russia (and its exports of energy and other commodities.)

The Pandemic looks like it has stopped surging (at least until the next variant) and that the “recovery economy” will indeed see a recovery in the spring and summer months.

Add the stuff that had reasonably high odds of being true and where the odds are even higher now.

Recession is a real danger in the second half of 2022. (To pick a schedule for that train to pull out of the station.) Supply chain shocks aren’t over. Congress has let economic stimulus measures lapse and there’s no political appetite for spending to help the millions of families in the United States that are still hurting. Inflation is a huge tax, especially on lower and middle income families, and as prices rise many people will respond by buying less. It’s called “demand destruction” and it’s one way to bring prices down.

Inflation isn’t going to respond to the Fed. There are some key parts to this current round of inflation that look unlikely to respond to higher interest rates–or at least unlikely to respond quickly and without significant economic pain. Higher interest rates won’t end the current supply shortage in computer chips the has led to cuts in auto production. They won’t drive down oil prices (until they destroy demand by causing a recession.)

Stagflation is a real possibility. High inflation and slow economic growth. The best of all possible economic worlds. In theory creating a recession is supposed to whack inflation. But that theory doesn’t really apply if higher prices were caused by a lack of supply created by extraneous factors such as a global Pandemic and war and sanctions from a war in Ukraine.

It’s uncertainty over the stuff on this list that is driving the extreme day to day volatility.

No one is sure if there will be a recession. Or how high interest rates will go. Or where the top for inflation might be. Or how high oil prices might run. Or whether damage to the global supply chain will last for a few more months or several more quarters or longer.

So what you have day to day is market swings that trade this uncertainty when the price and risk is right.

On a day like today with its big risk on rally, it’s not that suddenly we know there won’t be a recession. Or that the Fed will get inflation under control more rather than less easily. Or that benchmark shot-term interest rates will peak in 2022 below 2%.

Instead it’s that prices of stocks fell enough to make moving to the other side of the trade attractive. A drop of 12% in the price of shares of American Airlines, for example, makes reversing direction and buying potentially profitable.

I think you can see signs of this kind of risk arbitrage all over the daily moves in the market right now. So on today, March 9, a “let’s buy risk day,” it’s not just that you have American Airlines putting in a very solid 5.85% gain and Shake Shake climbing 5.45%, you also have stocks that traders and investors were buying just a day or two ago in order to position portfolios for a possible recession falling or going flat. Wal-Mart (WMT) and Costco (COST), the retailers that everyone buys before a recession, gained just 0.52% and 0.82%. Utility stocks, dividend plays for a recession, moved lower with Duke Energy (DUK), for example, slipping 0.13%.

(As part of this trend, you’ll notice that no one wants to get too far ahead when a stock shows a gain. Caterpillar (CAT), which gained 6.76% on Tuesday, March 8, dropped 0.10% on March 9. Wind farm developer Orsted (DNNGY) up 9.09% on March 8 was down 3.33% on March 9.

To my mind, whatever trend drove these stocks higher on one day and then lower on the next couldn’t have much fundamental reality to it.

So what do you do?

1. Recognizing just how much we don’t know about the economy and market direction in the short-term, you can use short term swings to generate some cash so that you have money to put to work when everything is a bit clearer.

2. If you have strong beliefs in some aspect of economic or market direction, you can buy low and sell high on day to day volatility. Right now, for example, I think it makes sense to buy some recession names as insurance against a recession that to my mind is increasingly likely. These buys make even more sense if the stock in question has fundamentally positive trends at its back. You buy these, of course, on days when this play is out of favor. You could even dollar cost average into these recession names over a number of days of downward volatility in this theme. I’ll have a couple of picks on this idea in the next few days.

3. You target stocks that you really, really, really want to own because you think the longer term story is so strong that you’re willing to be early. Of course, you buy these names on days when they’re selling off and not on days when everybody is stampeding into the stock. I’ll have a pick or two on this theme over the next few days.

4. You take profits on days when you think the upside volatility in a stock has been excessive. Especially if you’ve had a couple of “excessively” upside days in a row. I’ll be keeping my eye out for situations like this to bring to your attention. In this market, I wouldn’t take a look at anything less than a double digit pop. (And, of course, you’ll then look to see about rebuying, if you still like the stock, when the longer term direction is clearer. Or on the next big down day or days.)

If this sounds somewhat like playing a big of defense right now, it’s because it is.

With this summary of my views on market direction down in pixels, I’m finally ready to move onto Part 3 on income replacement tactics in my current Special Report. I hope to have that posted on Friday.