As you can see in the green line in the chart above from zerohedge, 7 rate hikes are now priced in through September. That works out to two 50 point hikes and one 75 point hike and would bring the Fed Funds Rate to 2.5%-2.75%. While the Fed needs to do this to break inflation’s back, I’m suspect that they will actually go through with it because it will crack the stock market in my opinion. As I wrote this morning: “Too much Fed tightening is being priced in.”
If I’m correct then we want to start adding long positions – especially in the beaten down tech sector. Before you stop reading consider this: almost everyone reading that likely had the same reaction which means that nobody is positioned that way. As counterintuitive and even stupid as it may seem after three days like the last three, I’m still convinced that we’re setting up for a nice leg higher. The main piece of the equation is the Fed – even if ever so slightly – letting its foot off the accelerator.
The other piece of the equation is that many high quality stocks have been massively beaten down already and present significant value. Take Oracle (ORCL) which I recommended buying this morning before earnings and is currently +13% in the after hours. The stock is 40% off its highs in six months but its business hasn’t missed a beat as far as I can tell. Revenue in constant currency for the quarter ended May 31, 2022 was +10% and EPS of $1.54 was flat with a year ago. I see ORCL earning $4.65 this fiscal year – down from $4.90 in the one they just completed – for a forward multiple of 14x. You just don’t lose that much money buying great companies at 14x earnings.