A bullish sign is flashing for some as stocks cross the chasm

(Bloomberg) – Despite all the bank failures, falling bond yields, hammering in oil and mining stocks and daily volatility, Adam Sarhan is betting on the earnings column this week.

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“The stock market had every chance to hit, but it didn’t,” said Sarhan, author of Psychological Analysis: How to Make Money, Outsmart the Market, and Join the Smart Money Circle and founder of 50 Park Investments. “That’s bullish.”

Sustained resilience rests largely in the hands of the Federal Reserve, whose stance on interest rates is at the root of all the turmoil – and could calm it down.

The S&P 500 index rose 1.4% and the tech-heavy Nasdaq 100 index rose 5.8% in its best week since November, despite a crucial Fed meeting looming and a ninth straight rate hike expected. But after a year of bemoaning the central bank’s tightening of monetary policy, investors now see further rate hikes as a sign of confidence in the economy and the financial system.

“Some people think that if the Fed didn’t hike rates, the stock market would take it very poorly,” said Mimi Duff, managing director at GenTrust. “In order to land the plane, there will be some turbulence.”

While a growing crisis of confidence in the US banking system rocked investors, movements in the Cboe volatility index did not necessarily reflect it. The VIX, Wall Street’s leading fear gauge, closed at 25.5 on Friday, below its average level for the past year. And a look at the so-called skew of the VIX shows that fear is easing.

The cost of protecting against gains in the VIX next month has fallen since March 10, when the crisis in the banking system became apparent. The implied volatility in contracts that bet on a drop in the fear gauge over the next month has risen.

long tech

Sarhan of 50 Park is short-term long US stocks, including struggling technology and growth stocks like Chip shares and some brokerage firms like Charles Schwab Corp. Investors have turned to classic technology growth companies like Microsoft Corp., Alphabet Inc, and Apple Inc., which are known for their stability and strong cash flow. The Russell 1000 Growth Index is up 4.1% this week while its value counterpart is down 1.7%, the widest gap between the two since 2001.

Despite all the turmoil in the banking sector, markets do not expect the Fed to suddenly turn dovish. Traders expect a quarter point rise next week to a 4.75% to 5% range. They also expect the policy rate to peak in May.

The catch for growth stocks is that inflation remains an obstacle, meaning the Fed will likely be under pressure to rise well beyond Wednesday’s meeting, said Brian Frank, portfolio manager at the Frank Value Fund. He suggests buying struggling energy stocks – usually seen as a hedge against inflation – after the group fell 7% this week as US oil prices plummeted.

A key focus for investors will be the Fed’s outlook for the coming months. In particular, they will be looking for changes in the latest quarterly rate forecasts, known as the dot plot, after some officials have suggested it may be appropriate to slow the pace of rate hikes if wage growth is showing signs of cooling.

Economists at Barclays Plc, led by Marc Giannoni, estimate that the median of the dot chart will peak at 5.1% in 2023. That aligns with what officials projected at their December meeting.

“The market rallied at a couple of points this week, acting like SVB and Credit Suisse are one-offs and the banking system can tolerate that, but I don’t agree,” Frank said. “I lost a bit of sleep because of it. I’m still not convinced that everything is fine. I haven’t bought any bank stocks since 2008.”

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