Russia Finally Invades Ukraine. Where Do We See The Market Heading.

Thursday, 24 Feb 2022 8:45 AM EST

We will be putting small amounts to work in our big drug stock Eli Lilly (LLY). Drug stocks will do well because of fear of recession. 

Let’s take a look at the proximate cause of the selloff. Stocks are lower because oil is spiking on news of an invasion. However, all of our stocks should not be affected by what is happening in Ukraine.

Of course, all of Nasdaq is falling but we cannot predict how low the high-multiple stocks will go, because unlike Cisco they are still highly valued. Cisco is unique in that they are reasonably priced with teen price-to-earnings multiples and pay good dividends.

We’ll fund some of these purchases with a sale in Chevron (CVX). Now you may ask why sell an oil stock when it is the only group working in the market? The attack was the catalyst we have been waiting for. And what a great opportunity it is to sell a stock that is expected to be up 2% to 3% on Thursday to buy many others that have nothing to do with Russia-Ukraine but are down 2% to 3%.

It is difficult for us to act on more stocks because we want to keep a decent sized cash position, and Thursday and Friday could yield to more weakness, but today is a day to put to work some of the cash we have kept on the sidelines. We will continue to sell Chevron to sell buys as it is too high versus the rest of the market.

We know about Advanced Micro Devices (AMD) or Salesforce (CRM) or Microsoft (MSFT) — but we need to save some buys for later in the day or tomorrow and, of course, next week as we don’t know if Ukraine will and can resist or if it is going to be relatively bloodless.

An invasion occurred and historically when this happens you had to do some buying. We have held powder for this moment, so it’s time to go to work.

Explaining Our $3600 Price Target On The S&P 500

In yesterday's post, towards the end, we slipped in our projected price target for the S&P 500 of $3600 (or $360 on the SPY ETF) based on the technical picture. Today, unless we have a dramatic reversal (open low but closed much, much higher), the head& shoulders formation has completed, and we're entering some doomed time.

The bearish head& shoulders formation has completed. The downside is usually predicted to be the same as the height of the head, which is measured from the neckline (red box) to the head, which we call "magnitude up" and it is 60 points. The "magnitude down" is expected to be the same, also 60 points. Magically, that 60 point downside takes us right to the breakout level back in September 2020, which is expected to serve as support.

Taken together, we believe a final period of capitulation will take the market down to levels we haven't seen since September 2020. We are only allowed to be nimble from here until then.