Let's begin this month with a look at...

The False Flag of Fed Rate Cuts

Day after day, we hear how the Fed will embark on a series of rate cuts this year "because inflation has peaked" and is heading lower. The drop in inflation is old news to our followers, as our cycle forecasts predicted lower inflation would begin in late 2022. Back then, the meme of the day was that inflation would destroy the world. Now the meme is it will bring a Fed Cut.

Wall Street warriors were shocked at the Fed's refusal to announce a rate cut at their January meeting. The Street figured that "for sure" there would be a cut, which "for sure" turned into the start of a stock market rout after the announcement.

You will now learn, I think, why they did not cut rates, as well as to expect when they will.

Chart 1 is an update of our inflation cycle forecast (CPI Sticky Index) in black, with the cycle shown in green. The next time we should see any serous uptick in inflation is late 2025-26. That's good news. And yet the Fed has failed to lower rates despite the abatement of inflation.

We all "know," or have been told, that the Fed bases rates on inflation. What's going on here?

Fed Cuts Due to Inflation -- An Old Wives' Tale?

Could it be this is just another Wall Street old wives' tale, that Fed cuts are based on a decline in inflation? The answer comes from a few charts shown this month.

We begin with Chart 2, showing Fed Funds in blue and Inflation in black. Take a look to see what I have marked off from 1987 to 2002... and you can see the Fed cut rates prior to inflation peaking! What's going on here? Lower inflation is supposed to mean lower rates!

Let's now take look at the last two major cycles in rate changes in Chart 3, covering 2005-2021. Inflation topped out in 2006, while rates were not lowered until 18 months later. Hmm... it's not supposed to be that way. The same scenario took place in 2019, when Fed Funds declined while inflation actually went higher! Indeed, it seems we have another Wall Street wives' tale.

Inflation topped in 2023, coming down almost 2% points (almost a 30% decline), yet there were no rate cuts.

These charts got me to wondering if there is something else the Fed uses to make their judgement call on rates. I looked, pondered, tested, and finally think I may have uncovered what data triggers them to cut rates.

The Feds 1970 Dual Mandate

The Federal Reserve System, which, yes, I know is a private corporation, was established by Congress in 1913 as the USA's central bank. In the 1970s, Congress explicitly stated that "the Fed's goals should be 1) maximum employment, 2) stable prices, and 3) moderate long-term interest rates." These goals came to be known as the Fed's "dual mandate." Dual always meant two to me, but in Gummint Speak three can be two.

Well, there it is, I thought! The first goal is not Wall Street, or real estate, or GDP. It is maximum employment. With that in mind, I then looked at rates vs. employment. Below is what I discovered.

The green line in Chart 5 is Fed Funds. Red is Inflation, while in black you see the Employment to Population Ratio.

Going back to 1969, we see that rates most often come down before inflation peaks. Of greater importance to forecast rate cuts seems to be employment.

When the black line turns down (employment numbers), people are losing jobs... which means the first of the Fed's mandates kicks in. When that happens, they go to work and Fed Funds start to decline. There it is... the trigger mechanism for lower rates! Look for yourself. It's the lack of jobs that spur the Fed to change rates, not inflation.

Moving along, we see the same pattern in the next 17 years... rates turn down before inflation. It's the turn down in employment (the black line) that triggers discount cuts.

Chart 7 brings the data up to date. The pattern persists ... rates are more in alignment with employment than inflation.

If inflation really drove rates, they should have dropped. We had our eyes on the wrong ball! It's no wonder rates have stayed high, with a slight rollover here in the employment number.

Another month dip here would usher in a cut, as I see it. This value is released about the first week of each month. You can follow it here.

This fits well with what Chairman Powell said when asked when rates would be cut in a recent 60 Minutes interview. (Emphasis added)

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"POWELL: The kinds of things that would make us want to move sooner would be if we saw weakness in the labor market or if we saw inflation really persuasively coming down. The kind of things that would make us want to move later would be if inflation were to be more persistent, for example.

PELLEY: What's the danger of moving too soon?

POWELL: Danger of moving too soon is that the job's not quite done, and that the really good readings we've had for the last six months somehow turn out not to be a true indicator of where inflation's heading. We don't think that's the case. But the prudent thing to do is to, is to just give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way.

I would say our focus is on the goals Congress has assigned us, which are maximum employment and price stability. And so, what the overall situation, as we see it now, is we've got strong economic growth. We've got healthy labor market with historically low unemployment, and we've got inflation moving down.

So, the broader situation is that the economy is strong, the labor market is strong, and inflation is coming down. And my colleagues and I are trying to pick the right point at which to begin to dial back our restrictive policy stance."

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The Fed may look at inflation to hike rates. That's a study for another time, but for now I will key off of employment data when looking for lower interest rates.

Wealth is Not Health

The one we all dread ... Alzheimer's disease

Alzheimer's disease is currently ranked as the seventh-leading cause of death in the United States. The time from diagnosis to death may be as little as three or four years, if the person is older than 80 when diagnosed, to as long as 10 or more years, if the person is younger.

Way back in 1906, Dr. Alois Alzheimer noticed changes in the brain tissue of a woman who had died of a strange mental illness. Her symptoms were memory loss, language problems, and unpredictable behavior. After she died, he examined her brain and found many abnormal clumps (now called amyloid plaques) and tangled bundles of fibers (now called neurofibrillary, or tau, tangles).

These plaques and tangles in the brain are still considered some of the main features of Alzheimer's disease. Another feature is the loss of connections between nerve cells (neurons) in the brain. Neurons transmit messages between different parts of the brain, and from the brain to muscles and organs in the body.

Currently, there is no cure for Alzheimer's disease, though there has been significant progress in recent years in developing and testing new treatments. Several medicines have been approved by the FDA to treat folks with Alzheimer's.

People with Alzheimer's disease may:

• Repeat statements and questions over and over.
• Forget conversations, appointments, or events.
• Misplace items, often putting them in places that don't make sense.
• Get lost in places they used to know well.
• Eventually forget the names of family members and everyday objects.
• Have trouble finding the right words for objects, expressing thoughts or taking part in conversations.

Things to Avoid

Antihistamines

This class of medications is commonly prescribed for various conditions such as allergies, overactive bladder, and depression. An example of this would be the common anti-allergy drug, Benadryl. Research suggests that long-term use of anticholinergic drugs may be associated with an increased risk of dementia.

Proton Pump Inhibitors (PPIs)

PPIs are commonly prescribed for acid refluxand stomach ulcers. While PPIs are generally safe for short-term use, long-term use has been associated with an increased risk of cognitive decline and dementia. It is advisable to use PPIs only when necessary and for the shortest period possible.

Sleeping Pills

Medications commonly used to treat insomnia, such as zolpidem and zaleplon, have been linked to an increased risk of dementia.

Being inflicted with this disease is my greatest health fear. Dying seems like nothing compared to lingering with no memory and a messed-up mind.

My attempts to beat this devil have been based on exercise, Hyperbaric Oxygen Treatments (HBOT), and Melatonin.

As always, keep in mind I have no background in medicine. This is just one trader's effort to live better and trade longer. I am not suggesting you take my trades.

Exercise

The New York Times reported three major long-term studies have attempted to characterize the types, intensities, and durations of physical activity that confer the most overall protection against dementia. These studies, which followed thousands, and even hundreds of thousands, of people for years at a time, confirm that regular physical activity, in many forms, plays a substantial role in decreasing the risk of developing dementia.

Vigorous exercise seems to be best, but even non-traditional exercise, such as doing household chores, can offer a significant benefit. And, surprisingly, it's just as effective at reducing the risk in those with a family history of dementia.

As you already know, I think vigorous exercise is wildly helpful for just about everything. Enough said.

HBOT Therapy

Remember Joe Namath, one of the all-time great football players? I had the pleasure of talking to "Broadway Joe" four years ago when he described his battle to recover his brain from all the head injuries he took as the Jets quarterback. SPECT scans were run on his brain. That's a nuclear-imaging test that shows blood flow in the brain. The results were shocking: Red, orange, and yellow images lit up on the right side of his brain, showing normal activity. But the left side was largely dark ... the side of his body and head hit the most often in football games.

Joe took a plunge into the world of HBOT with startling results. There was a dramatic change in Namath's SPECT scans: they looked bright and symmetrical. He underwent 120 treatments, and a year later there was renewed blood flow on both sides of his brain. His cognitive tests improved too, and he felt generally stronger.

"The areas of the brain which had decreased activity on the pre-scan now are actually functioning normally," his doctor reported. Joe has begun an HBOT foundation to help footballers and others suffering from concussions.

HBOT sessions are about an hour in length where you are in pressurized chamber breathing pure or almost pure oxygen. The thinking, which makes sense to me, is this floods the brain with oxygen. So you cleanse the amyloid plaques and tangled bundles of fibers.

I have been going in a chamber about once a week for several years now after talking with Joe about his experience.

Does it make a difference? Hard to know, but research indicates it can be helpful. Read this:

"Furthermore, HBOT reduced amyloid burden by reducing the volume of pre-existing plaques and attenuating the formation of new ones. This was associated with changes in amyloid precursor protein processing, elevated degradation and clearance of Aß protein and improved behavior of 5XFAD mice. Hence, our findings are consistent with the effects of HBOT being mediated partially through a persistent structural change in blood vessels that reduces brain hypoxia. Motivated by these findings, we exposed elderly patients with significant memory loss at baseline to HBOT and observed an increase in CBF and improvement in cognitive performances. This study demonstrates HBOT efficacy in hypoxia-related neurological conditions, particularly in AD and aging."

Other studies back this up (go google it). So I continue my HBOT sessions.

Melatonin?

I have been taking this one for many years... Melatonin is a hormone naturally produced by the brain in response to darkness. It plays a crucial role in regulating the body's circadian rhythm, which is responsible for the sleep-wake cycle.

It is usually used to treat sleep disorders such as insomnia and jet lag. However, in recent years there has been research suggesting it may help in warding off Alzheimer's Disease (AD).

Lack of sleep plays a strong role. Researchers at the Centre for Discovery Brain Sciences in Edinburgh followed almost 8,000 people in their 50s and 60s for 25 years. After eliminating other health factors, they discovered that those individuals who slept six hours a night or less had a 30% increased risk of developing Alzheimer's disease by age 70.

Melatonin helps most people fall to sleep faster, promoting a better circadian rhythm, which means better sleep.

Here is just one of many studies with a specific conclusion:

Results

This systematic literature search showed that disruptions in melatonin levels occur with age, but also in AD when compared to age-matched controls. Night-time melatonin levels were found to be lower in AD patients as compared to controls. Literature was not conclusive regarding alterations in blood daytime melatonin levels or regarding saliva melatonin in AD patients. Decreased total and nighttime melatonin production has been described in urine of AD patients.

Conclusion

Our systematic review shows evidence for disruptions in (night-time) melatonin levels in AD as compared to age-matched controls. Although more studies are needed to understand the contribution of disruption of the melatonergic system to the pathophysiology of AD, the potential anti-AD effects that have been attributed to melatonin, renders research on this topic relevant for the discovery of potential future treatment effects of melatonin for AD. The use of melatonin as potential blood biomarker for disease progression should also be further investigated.

I also watch, and this is very hard for me, my sugar intake. People with diabetes have a greater chance of getting Alzheimer's disease. One famous study from Rotterdam showed that type 2 diabetes almost doubled the risk of dementia and Alzheimer's.

It was found that patients taking insulin had more than a four-fold risk of AD. That's why some call Alzheimer's "Type 3 Diabetes" or "diabetes of the brain."

Coming Next Month

Heart disease is the #1 killer of Americans. The focus has been on diet, but when I noticed people with very different diets still had high levels of heart disease, I began looking for a commonality of the disease. Did I find it? I think so... this is the most interesting health data I have ever come across.

Fellow traders, this is what I am doing to try to stay ahead of the ultimate margin call. Now back to the markets.

It's Not Easy to Beat the Market

Is that ever an understatement! Capital IQ has a series of charts that show how difficult beating the averages is. The next chart just might give us a clue how to do it.

Let's start with this clip of how funds do vs. the S&P Equal Weight Average over a recent 20-year time span.

Don't miss the key point here... performance is compared to the EQUAL-WEIGHTED AVERAGE. That's where there is a balance of growth, value, large-cap, and small-cap stocks in the index. What a showing of failure... 99% of large-cap funds did not better the equal-weighted fund. That's just staggering.

It also gives us a great insight into what type of fund to invest in for the long term... one with equal distribution of groups, not a fund dominated by just one style of equities.

I really like this bell curve of fund performance (Chart 9), as it shows that the average performance comes in the 9-10% area. I am perpetually asked what return can one expect. There it is.

Keep in mind these fund managers went to Wharton, LSE, and Harvard. They have friends in high places, unlike most of us. This may indicate the value of all those trimmings, because a lot of common, ordinary people beat the pleated pants off these guys.

This drive homes the point of Warren Buffet's $1,000,000 bet that people, or at least fund managers, have a hard time of exceeding the average return. So just invest in a broad-based fund and you will do as well as more than 50% of the funds!

Our next chart shows why it is so dang hard to beat the average return. This one is a real eye opener.

Capital IQ summed it up thusly: "The wild swings in the percentage of members outperforming the S&P 500 index continue, with the indicator falling to a historically low level for the second time in less than a year. According to our calculation, only 30.22% of S&P 500 stocks outperformed the Index on a rolling 21-day basis as of 6/28/21".

Let me explain what is shown here. Chart 10 illustrates performance on a yearly basis for how many stocks in the S&P 500 actually did better than the average did that year. For example, in 1995, only 40% of the 500 stocks bettered the average return. In a perfect world of math, 50% should do better than the average and 50% fall below. In market reality of 28 years, only 8 times did more than 50% of the stocks do substantially better than the averages.

This drives home the importance of selection, finding stocks that will outperform the overall market. From what we have seen, fund managers are about as good as dart throwers. It also shows they have their best performance in bull markets. It also drives home the point made in my stock investing course that, instead of looking for winners, we define the stocks that are most certain to not rally, buy the rest in an average... and you beat the average!

Moral of the Story

If you are a passive investor, be in a broad-based fund. If you are a more active investor trying to beat the averages, pay a great deal of attention to the specific stocks you choose.

Trading Tips for March

As months go, March has been more favorable to the bullish side, in that, in the last 50 years, the month has closed higher 65% of the time. Of more importance this year is that it is election time. Digging into what happens in March of these years gives insight into who is most likely to be our next president.

To begin, in election years, the strongest rally months have been March, June, and October. March has closed higher in 80% of presidential election years, showing the strong bias. June, the best month in these years, has been up 90% of the time. So let's keep that in mind.

Where it gets interesting is that when March has closed down for the month, half the time the incumbent president was voted out of office. Even more telling has been September; it has been down 60% of the time before a shift in power. When October was down, 70% of the time we had a new president.

How March Usually Trades

Chart 11 is my True Seasonal forecast for the Dow Jones. Expect a bounce the first few days of the month... then down until the 25th-27th, when a rally has usually begun. This is the path the Dow has traversed in March, be it an up or down month. You now know when to expect the turns.

Best Trading Days for March

The next two tabulations are done using the S&P 500 E-mini Futures contract. The Stop Loss for longs is $2,600. For shorts, it is $2,200.

The same trades can be taken on a stock market ETF, like QQQ's, etc. For a Stop Loss, use the lowest low/highest high of the last three days if you can't figure out what your dollar stop would be on your own.

The trades are held for 4 days, then exited any time a following opening session shows a profit.

The entry is on the trading day, not calendar day, of the month. In the first tab, selling on the first trading day of March has lost $9,362, etc.

The best Trading Day of The Month (TDOM) sells have been the 5th day, with TDOM 4 also very good.

When it comes to buying, the best Trading Day of The Month (TDOM) has been the 17th day. Also pay attention to TDOM 16, 18, and 21 for short-term opportunities on the long side. I will also focus on March 21st for a rally to begin.

If AI Leads the Way

The world has watched in fascination with first the FAANG stocks, then Magnificent Seven falling back in the race for quick profits as Artificial Intelligent Stocks put on a Usain Bolt sprint for first place. These stocks have led the market. While NVIDIA has been the most public, our selection, ASML, has also done remarkably well, going from $600 a share to over $900.

I think - right or wrong - this group sparked the overall rally. The broader averages followed their action. With that in mind, I'd like to share our next chart.

The red line in the chart was a cycle forecast made last September, while the blue line is the most recent forecast. Both are alerting us to at least a pause and, most likely, a decline. March 15th is the peak in the blue line.

The bottom line is pretty simple; cycles say this group is about to decline until the middle of May. It is not a massive leap of logic to expect the market averages to follow.

Beating Buffet at His Own Game

Buffett began buying more Liberty Media (Nasdaq LSXMA) this year. He's holding close to 50 million shares. The Oracle just plunked down another $74 million to add to his position. If it's good enough for Warren, it's good enough for us.

Liberty SiriusXM Group, through its subsidiary SiriusXM Holdings, is a subscription-based satellite radio material in the United States and Canada. Since its IPO on April 18, 2016, the company has seen a 50.6% increase in its stock price, with a year-to-date growth of 6.06%.

The stock's PE ratio is 12.25, suggesting a company with earnings at a reasonable valuation. Despite being labeled as modestly overvalued, the company's stock performance and Buffett's recent investment could indicate underlying value not fully recognized by the market.

What's more, while his average cost is about $30.50 a share, I think we can do better. I say that because my cycle work says it's time for a pullback as seen in Chart 13. Let's have limit buy orders in the 27/28 area. If not elected, look to get aboard at the middle of May.

Looks to me like there is a storm coming...

"There's a storm a-comin', you'd better run

There's a storm coming, goodbye to the sun

There's a storm a-comin', you'd better run boy run"

It's been just too easy to make money in what is a very complex business. What bothers me is a combination of things. This AI stuff looks like a bubble; seasonally speaking, we usually turn down about now, as you saw in the above charts. Additionally, the Commercials in the Dow Jones Futures contract have a large short position, while my cycle studies say it's selloff time. Sure smells like a storm is headed our way.

A Look at Commercial Selling

At the end of each week, the Commodity Futures Trading Commission issues what we call the "COT Report", a listing of the long and short positions held by the Commercials (users and producers), Large Traders (the funds), and finally the Non-Reportables (the public). Chart 14 compares the Commercials position to total open interest to give us a view of just how short/bearish they are vs the entire market, which is what Open Interest represents. Clearly, it is not a perfect indicator (still looking for that on the sell side). When they have a large short position vs. all other players in the game (see the ellipses in the chart), the market most often goes down.

That bearishness is backed up by my Money Flow Index featured in StockCharts. This index is a measure of professional buying that can be applied to individual stocks or indices. Let's look at what the professionals have been doing in the QQQs, the Dow, and the number one hot stock, NVIDIA.

The NASDAQ market is well represented by the QQQs. I have marked off the last 6 times the professionals have been this negative. Again, it's not perfect, but when there has been this much selling on their part, the odds are for a decline to begin.

In the Dow, you see the last nine times we have seen the pros this negative. Note that once (2018) it was early and, in 2020, we got the expected decline, but not for long. The majority of the time the index dipped to this level, prices broke down.

Finally, we see the index on an individual stock where the record of telling us what to expect has been very good. What a beautiful buy setup at the first of 2021, the 2022 lows, and then again last October. Dipping below the red line, showing heavy selling, has also heralded important declines.

What are cycles trying to tell us?

The world of cycles continues to amaze me; I am still learning. One "for sure" lesson is they are not as precise as we want or are told they are by Cycle Sellers. Do not expect that the market will precisely follow the cycle path. The cycle projection is a general road map. I use them as a setup tool, a tool that helps identify when -- and for how long -- a move should last. Cycles do not tell us, sadly, how big the up or down move will be.

Chart 18 is a cycle forecast made last July for the S&P 500. Was it perfect? No way. Did price generally follow the path and would this have been helpful? I sure think so.

Chart 19 is an update based on current data. You will note that, as we get more data, the projection line changes a bit. However, the major turning point in March is still there, an implication that this is a reliable area for trend reversal.

The early March peak has been in the data for a long time, and stayed there even after the massive rally that bewildered Wall Street.

In the following forecasts, I have projected the most probable path for the QQQs, the Dow, and then NVIDIA. They all do a different dance, but to the same music, suggesting storm clouds are gathering.

What to Do Now

At our February online meeting, we discussed a rally in Tesla (TSLA). That is still intact. Expect a dip about 3/11, then back to the upside into early April. I also showed the seasonal pattern for Apple (AAPL); we should follow it this year until the end of March.

Long term investors looking for an entry into Berkshire should find that spot in early April.

I still have my eyes on Occidental Petroleum (OXY). The ideal entry is a long way off. Looks like a short-term rally into April, then back down to a late August buy.

Gold bugs are about to be rewarded for their patience, as I expect a rally to start any day now. It will carry into June.

I remain on the sidelines. That has some pain, but none like the pain of buying at a market I expect to unfold. All of those AI stocks are great ones, but with prices too great.

Be very careful here. Let's postpone buying until we get through March. Nimble traders can sell short with a focus on stocks that have been weaker than the averages.

Our final chart this month uses the price of Crude Oil pushed forward as an indication on what the stock market will do. Subscribers may recall last November, when we showed this relationship to be forecasting the strong up move that followed. The relationship now suggests a decline.

FAMILY MEETING WILL HELD MARCH 19TH: WITH HIGH HOPES, FORECASTING A Buy POINT

See you then!

Good Luck and Good Trading,

Larry Williams

If you have questions for Larry that you'd like addressed in future postings, please email familygathering@stockcharts.com.