When Wall Street Wants Noise, Seek the Signal

Looking at the Dow Jones Industrial Average and its component stocks, you’d be forgiven for thinking something happened this week to trigger a market crash.

Caterpillar Inc. (NYSE:CAT) and Dow Inc. (NYSE:DOW) have fallen hard. Also hit have been Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), Walgreens Boots Alliance Inc. (NYSE:WBA), and the list of big blue-chip losses goes on and on, pulling the group as a whole all the way into technical oversold territory.

What happened? We would expect interest-rate-dependent banks like JPM and C to retreat if the Federal Reserve had started hinting about rates remaining depressed for a longer period of time. But that’s not actually what the Fed said.

If anything, the rate environment now looks a little hotter than it did a week ago. That’s normally constructive for the banks and for the broader financial sector as well.

Furthermore, DOW’s steep decline suggests a slowdown in commodity inflation, which is not what the Fed anticipates. Instead, our central bankers have left the door open to higher prices ahead.

And the entire commodity group shares DOW’s pain. Copper producer Freeport-McMoRan Inc. (NYSE:FCX) is down 14% this week. Gold miner Newmont Corp. (NYSE:NEM) almost looks defensive with a mere 9% correction.

Then there are the consumer stocks. Giants like Walmart Inc. (NYSE:WMT) are down alongside WBA, even though Main Street seems as eager as ever to bounce back from the pandemic and get back to the normal business of life without lockdowns.

Wall Street doesn’t re-rate what stocks are worth in the long run without a reason. Unless you can create a strong narrative explaining so many simultaneous declines, it’s all just transient noise: part of the infamous “random walk” that moves stocks in circles day by day.

And without a fundamental cause, any random move is likely to reverse itself as easily as it first emerged. In that scenario, this week’s losses for 75% of the S&P 500 are temporary.

This is the kind of dip that we can buy with some degree of confidence that stocks will rebound to at least the level they commanded a week ago. All you need to do is keep listening for the signals that keep pulsing behind the day-to-day noise.

A Month Until Earnings

This afternoon, June 18, got especially noisy because stock and index options, as well as futures, expired, forcing traders to make desperate moves on a very tight time limit. After this, real headlines will be scarce until July 13, when the big banks report their quarterly results.

That leaves us with nothing but noise on the calendar for the next three weeks, putting signal-oriented investors at a temporary disadvantage.

People who like noise, on the other hand, will do their best to amplify it. They’d love it if we got distracted or nervous and discarded great stocks in a moment of weakness.

Have inflationary expectations receded? The Fed thinks the economy is moving in the opposite direction. The same logic that drove DOW and the commodity stocks higher remains unchanged.

Are the banks going to starve? My earnings target on C has wobbled a little around the Fed but is now back to where it was a month ago, when this stock was on the way to $78.

And I am not seeing anyone lowering their targets on JPM after the Fed announcement. These are the exact same earnings projections that made this a $166 stock a few weeks ago. Arguably, Wall Street is slightly more bullish here than ever.

When nobody can point to a worsening fundamental picture, dips are buying opportunities. Go across the market, and you’ll see similar entry points emerging all over the map.

Of course, exploiting these entry points requires you to remember the fundamental picture. That’s what I do in longer-term portfolios like Value Authority and IPO Edge.

Maybe next month the signal will return. For now, ignore the noise as other investors use this lull in the headlines as an excuse to take a little money off the table.

They’ll be back. And if you just want a thrill, we trade around the noise as well. Triple-Digit Trader is where we see the fastest annualized returns now.