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Rally Interrupted - Three Charts That Define Last Week And One That's a Killer Hedge

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The Federal Reserve's confirmation that they'll be taking an aggressive stance with their monetary policy to fight inflation, halted an emerging downtrend reversal in the markets. Prior to comments from Fed Governor Brainard on Tuesday, The S&P 500 and Nasdaq were both trending higher with the Tech-heavy Nasdaq eyeing a break back above its last area of possible upside resistance - its 200-day moving average.

DAILY CHART OF NASDAQ COMPOSITE

As you can see in the chart above, the Nasdaq is now in search of possible downside support following its break below each of its moving averages. I've highlighted this Index's February low as the next area of possible support and at this time, it's 4.5% away.

Last week's sharp drop in the Nasdaq was amid a decline in each of the heavyweight FANMG stocks which lost an average of 4%. Semiconductor stocks suffered even more with a 7.7% decline which also put downward pressure on the Nasdaq.

DAILY CHART OF SEMICONDUCTOR INDUSTRY (SOXX)

This was the 2nd week of sharp declines in Semiconductor stocks which began the prior week amid Wall Street downgrades to the group.

Analysts were citing a possible downturn in chip demand next year as their corporate customers face slowing earnings and sales. In other words, fears of an economic slowdown next year are hitting this historically cyclical industry now.

The increased conflict in Ukraine is also weighing on the group as this country produces over 50% of the world's Neon supply. This gas is a key component in the production of Semiconductor chips.

DAILY CHART OF 10-YEAR TREASURY YIELD

One of the most impactful events for Growth stocks last week was the sharp rise in Treasury yields. Rising interest rates are a negative for these stocks as they reduce the value of future growth rates. The negative response to this rising rate environment was amplified by the drop in heavyweight Growth FANMG stocks which we highlighted above.

DAILY CHART OF REAL ESTATE SECTOR (XLRE)

Not all stocks suffered last week however as REIT stocks posted a gain after the sector reversed its downtrend the prior week. REITs are companies that own or finance income-producing real estate and their lease structures allow frequent rent hikes that are linked to the consumer price index (CPI). 

With high gas and food prices expected to keep CPI elevated, this makes REITs a great way to hedge against high inflation. Their requirement to pay out at least 90% of their taxable profits as dividends, is another as many of these stocks offer attractive yields.

Subscribers to my MEM Edge Report were alerted to a top performing REIT in last week's report, and the stock has since far outpaced its peers. This stock is poised to trade much higher, and if you'd like immediate access to it, use this link here

You'll find other suggested stocks in my MEM Edge Report that are trending higher while acting as a wonderful hedge to the currently weak markets. This twice weekly report also highlights sector rotation as it's taking shape. Last week, we discussed the move away from Semiconductor stocks while also reviewing the bullish move into REIT stocks.

In fact, paying attention to sector rotation was how I was able to have a 75% win rate among the 140 stocks I suggested as buys last year. If you'd like to hear more about ways to outperform the markets during periods of heightened volatility, I urge you to attend my live webinar next Wednesday evening.  You can use this link here to sign up! In case you're unable to attend, if you sign up now, you'll have access to the recording.

Warmly,

Mary Ellen McGonagle MEM Investment Research


Mary Ellen McGonagle
About the author: is a professional investing consultant and the president of MEM Investment Research. After eight years of working on Wall Street, Ms. McGonagle left to become a skilled stock analyst, working with William O’Neill in identifying healthy stocks with potential to take off. She has worked with clients that span the globe, including big names like Fidelity Asset Management, Morgan Stanley, Merrill Lynch and Oppenheimer. Learn More
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