A February Air Pocket

Tech shares have swung violently as the China re-open trade went from a false start in December 2022 to taking off in microseconds in 2023.

That lit a fire under tech shares and we’ve experienced epic gains, just look at Tesla’s 35% rise in just one month.

Bear market rallies genuinely provide those “rip your face off” up moves and the key is to get out of the way and try to hop on the bandwagon.

Now after a 10% gain in the tech-weighted Nasdaq index, investors are scratching their heads as to what comes next.

Could we hit a sudden air pocket and retrace performance?

There is still a 35.4% probability that the Fed will hike .25% at the March meeting which would represent .75% more of Fed hikes.

Right now tech shares are only pricing in .50% of interest rate hikes and any type of confirmation of that this week by Chairman Jerome Powell will trigger another leg up in the tech rally.

A .75% rise in the Fed Funds rate means that a higher chance of a “hard landing” increases and stock will sell off rapidly.

Tech shares are poised for a choppy start to the year as investors rely on incoming economic data and eyeball historical trends for clues

The problem is the scope of last year’s selloff makes historical comparisons difficult to use. In fact, last year’s big losers — like growth-obsessed tech and communications services stocks — are among the best performers this year, leaving investors wondering if the worst of the bear market decline is behind them.

Tech forecasts include a small earnings decline, higher borrowing costs, and persistent economic uncertainty, and the reason why stocks could do well through the year is because the bar is set so low.

However, after the great first month of 2023, positioning now has swung dramatically the other way with consensus building and assuming a soft landing.

As the soft landing consensus begins to spread, the individual company news begins to worsen.

Tech firms like Microsoft have issued weak guidance and brutal job cuts.

There hasn’t been another industry that has adopted the pace of job cuts like the technology sector which gives support to the nostrum that tech companies overshoot on the way up and overshoot on the way down.

Apple is about the only big tech company that avoided thrashing the number of jobs in Cupertino, and I believe that is a highly positive sign for the rest of the year.

Another substantial tailwind to the first month of the year has been the tanking of the US dollar.

It has cratered again the most prominent Western currencies and a weak dollar promotes global growth.

Bear in mind that many foreign firms borrow in US dollars and pay back using their own currencies.

I do expect the U.S. Central Bank to downplay the strength in the stock market to poo poo an earlier-than-expected Fed pivot.

The Fed is mostly all bark and no bite which is why dip buyers are so aggressive with their tactical decisions.

I believe after a transitory dip in tech shares, we are most likely off to the races unless the Fed can give us something believably hawkish.

The most important concept to understand is that this current iteration of the Fed is gladly tolerating minus real interest rates as gross interest rates don’t go parabolic.

Although on a personal level, I don’t think this is the right thing to do, at an economic level, this prevents a stock market crash and encourages dip buyers to come in and save the market because they know the Fed won’t pull the rug from underneath them.

Tactical active trading will continue to be the most prominent strategy in the equity market and tech shares moving forward.