Wall Street is on a rampage…

Lowest CPI since 2021…why didn’t Wall Street like it? … the historical data behind rate cuts … Luke Lango’s Great Tech Reversal event tonight

The headline consumer price index (CPI) figure came in cold this morning, giving us a win in the fight against inflation.

Month-on-month CPI rose 0.2 percent, in line with the Dow Jones consensus. That brought the year-over-year rate to 2.5 percent, significantly lower than last month’s 2.9 percent increase.

Core inflation threw us a bit, climbing 0.3% on the month. This was higher than the forecast of 0.2%. However, the 3.2% year-on-year figure was in line with forecasts.

The most difficult part of this morning’s reading came from housing costs. The housing component of the CPI rose 0.5% month-on-month and 5.2% year-on-year.

Shares have sold off massively this morning, although they are rising as I write around lunchtime. The Nasdaq even turned positive.

Wall Street appears to have spent the morning focusing on the rise in monthly core inflation. The hotter-than-expected reading throws cold water on the market’s hope for a jumbo 50 basis point interest rate cut next week.

Frankly, this market fury is silly and reveals a lack of awareness of market history

Barring a surprise that would shock every Wall Street investor and roil the markets, we will get a rate cut next week. What was not clear is “what size?” and “what clues will the Fed give about the pace of rate cuts going forward?”

As evidenced by today’s selloff, Wall Street clearly wanted a 50 basis point cut. At first glance, this is understandable. After all, if rate cuts are good for stocks (which they are), then logic would suggest “more is better.”

But a study of market history throws cold water on this.

Lucas Downey, one of the lead analysts at our corporate partner TradeSmith, as well as the co-founder of MAPSignals, recently ran the numbers and the conclusion is overwhelming…

Investors should root for only 25 basis points of discounts.

To illustrate, below we look at the difference in the S&P’s 12-month (and 24-month) performance between “slow rate cuts” and “rapid rate cuts” after the start of a new rate cut cycle. We can think of this as a proxy for a single quarter point cut next week versus a jumbo 50 basis point cut (though clearly the pace of further cuts this fall is critical).

In short, 25 basis points and “slow cuts” win by a landslide.

Source: MAPSignals / Lucas Downey

This makes sense when we think of rate cuts from a “correlation” rather than a “causation” perspective.

Under what conditions would the Fed cut interest rates by 50 basis points?

Well, when the economy crashes and big cuts are needed as a kind of defibrillation shock to pull us out of the brink. From this angle, a 50 basis point cut correlates with more dire economic/market conditions.

Conversely, a 25 basis point cut aligns with our “soft landing” narrative. The Fed is gradually easing off the brakes without frantically stepping on the gas.

So we’re only rooting for a quarter-point cut. Our concern in recent weeks has been that a jumbo rate cut would spook Wall Street, leading to speculation that the Fed is more worried about our economy than it’s letting on. This morning’s data confirms that such a jumbo cut would have an eyebrow-raising effect.

So, ignore Wall Street’s whining. A quarter point is the correct move.

How you can profit even if we’re wrong about the size of the rate cuts…or wrong about anything else, for that matter

Let’s switch gears for a moment…

Most investors approach the markets with an implicit assumption so ingrained that they no longer see it or challenge it.

The hypothesis boils down to a simple equation…

“If… then…”

This may be different for each investor and their preferred approach to the market, but the general formula never changes…

• “If I invest in stocks with a low price-earnings (PE) ratio that grow their earnings, then I will make a lot of money.”
• “If I invest in top AI stocks, then My portfolio will explode as this megatrend changes our world.”
• “If I limit my investments to companies that generate huge free cash flow with massive returns on invested capital, then I will outperform the market.”

Regardless of the specifics, the general plan is always the same. “If” you follow your preferred investment style, “then” you will eventually enjoy the financial return.

But how many times have you followed your favorite market strategy perfectly, yet the stock you picked went down?

Maybe the stock with the low PE ratio continued to fall…the hot AI stock reported disappointing earnings and heavy after-hours selling left you sitting on a 30% haircut at the opening bell…or the company with lots of free cash flow lost a key customer and that cash flow evaporated overnight causing prices to crash….

Unfortunately, our if/then assumptions are not certain. But this brings us to the one steadfast truth of investing, which is without fail…

The only thing that matters to your wealth is if the price of a stock goes up during the time you own the stock.

That’s it.

Your analysis may be 100% right or 100% wrong, but if the stock price isn’t higher when you sell than when you bought, you’ve lost money.

If we follow the chain one step further, this means that the ultimate approach to the market is not focused on a low PE ratio, or hot trend, or operational excellence – or even accurately predicting what the Fed will do…

It focuses on the price itself. This is the basis for the old market phrase, “price is truth.”

So here is a revolutionary idea…

How about focusing on price?

When price growth momentum is the cornerstone of your market approach, many gray area investing issues become quite simple

If your stock goes up in an established, well-defined trend, stick with it and make money. On the other hand, if your stock is down or trading sideways in a clear, established pattern, you avoid it – no matter what other indicators tell you.

The price is the truth.

The reality is that price alone will make or break your retirement nest egg…or your child’s college savings…or the down payment on that lake house…

So why not ditch your personal if/then hypothesis and instead just focus on price action?

This is what our hypergrowth expert Luke Lango does is trading service Breakout Trader

Luke uses a market framework called “Stage Analysis”. The basic idea is simple…

At any given time, an asset is either up, down, or sideways.

To this end, it is always in one of four unique stages: 1) going sideways down, 2) going up, 3) going sideways into a peak, or 4) going down.

Stage analysis is the science behind determining which of these four stages a stock is in at any given point in time and then investing in a stock only when it is rising in Stage 2.

Clearly, this puts the emphasis on price, which is the only variable that directly affects your wealth.

Here’s Luke’s interpretation:

…The only thing that will make a difference to your portfolio is if the stocks you own go up in value while you own them.

Let’s say you’ve found a truly atrocious company – the opposite of a blue chip. It’s hemorrhaging cash, has terrible management, and is in a dying industry.

But what if its stock price had just exploded and, hypothetically, was about to double from $5 to $10? Would any of these negative characteristics matter to you?

If what you care about is your personal wealth, they shouldn’t. Why would they?

All that would matter is that the stock doubles while you are invested…

When it comes to building wealth, the only thing that really matters is whether the stock price moves in the direction you want it to during the time you own the stock.

The focus on price means we don’t have to anticipate how big rate cuts will be next week…and frees us from our personal “if/then” guesswork.

We simply assess the “truth” of a stock (or market) – evidenced only by price action – and respond accordingly.

Now, there are a lot of details that we had to go over today because of our space limitations here in Digest…

How do you really know if you are in Stage 2 or another stage? … what time frame is best, so use yourself to make such an assessment? … what are the specific indicators that illuminate the different stages? … how do you protect yourself if you misdiagnose a stage? … and many others.

But tonight at 8:00 PM EST, Luke is hosting an event called “The Great Technical Reversal of 2024.” While focusing on a massive shift in the economy/investment markets that Luke believes is about to generate a large wave of opportunities, his preferred way to play them is through Stage Analysis. So he’s going to go into some of these additional questions/details that we didn’t touch on today.

It will be a great evening full of market commentary and portfolio strategy as well as more on stage analysis.

Click here to reserve your spot instantly and see you tonight at 8pm EST.

Have a good evening,

Jeff Remsburg