"Corrections only are considered "natural, normal, and healthy" until they actually happen." - Tony Dwyer, Canaccord Genuity
From the view at 30,000 feet, the recent volatility and pullback are all part of the regular ebb and flow that occurs in the stock market. Yes, we just witnessed a pullback greater than 5%, and it was the first such decline since the COVID lows in 2020. Fear showed up and the pullback morphed into a dip into correction territory for the major indices. For some areas of the market, this re-rating of the stock market has for the time being broken the BULLISH trend. There are plenty of individual stock charts that are now in a BEARISH configuration. The real problem for BULLISH investors is the fact that most of this has occurred in about a month. Many have already forgotten that the S&P 500 posted a new high on January 3rd.
The markets are in search of direction. How long this situation lasts and if weakness will spread to other areas of the market remains to be seen. As if investors didn't have enough to keep a watchful eye on, 2022 brings yet another issue for investors. The midterm elections. History shows that it matters little what occurs during the process, it is the rhetoric, angst, and headlines that cause more stress.
Ryan Detrick, Senior Market Strategist notes:
"Midterm years tend to be a banana peel for markets, as they see the largest pullbacks out of the four-year presidential cycle. However, those who hang on for the ride tend to see a significant bounce over the next year."
Investors may remember that 2018 was a challenging year in that the S&P was very weak in the early part of the year. The index was negative for the year until May. It wasn't until July that the markets gained traction and finished higher.
It's always challenging to say "This time is different" but we do have to acknowledge that the backdrop is far different today than what we were dealing with in 2018. For one thing, the market was looking ahead to the positive effects the corporate tax cuts would have on corporate earnings.
In addition, some of the issues investors have to navigate today haven't been part of the investment scene for quite some time. I'll add that this time around it may matter what party is in control of Congress after the election. Historical market returns show some of the best returns come with a Democratic president presiding over a Republican Congress. Given the present backdrop, one has to wonder if it will matter. Then again that spells gridlock and no matter what party has control of what, gridlock is good.
When the Fed starts raising rates it won't fix the Supply chain and Labor shortage issues. There are roughly 60 unemployed people for every 100 job openings. The Fed can't solve the high cost of Energy. There aren't any proposed "fixes" on the table and therein lies the dilemma for not only the Fed but the markets and the economy. No matter what develops on the political scene, I have to go back to the other issues as being the catalyst to warrant at least saying:
"This time sure looks like it could be different"
A relatively quiet session that kept the S&P 500 in a fairly narrow trading range. A day where investors witnessed how the "technicals" and resistance levels are in control. The morning session saw the S&P 500 rally right to overhead resistance before retreating. Another rally attempt was made in late afternoon trading, and once again the index was turned back at the same level. The index closed down 0.37% in what turned out to be a mixed session.
A two-day rally in ALL of the major indices put near-term resistance in the rearview mirror. A broad rally where the S&P gained 2.3%, while the Russell small caps ran its winning streak to 4 days gaining 4.7% in this span. The much anticipated January CPI Report on Thursday provided the expected knee-jerk reaction. Unfortunately, it was hotter than expected and the indices all opened lower. From there it was a tug of war with the BEARS gaining control as all of the indices gave back their gains for the week.
The BEARS were celebrating like it was 1999 as reports came in that Russia was about to invade Ukraine in a matter of days. Coincidentally that came in around 2 PM with the S&P at a critical support level. This is probably the most advertised invasion in history. No matter, it was SELL now and ask questions later. From the close on Wednesday, the S&P lost 169 points when the closing bell rang on Friday. The index is now down about ~7% on the year.
The 10-year Treasury hit 2.03% this week before closing at 1.92% on Friday. now at 2%. The 2/10 yield curve stands at 42 basis points and is flattening. History says it takes 17 months on average to go negative. Once negative? 15 months on average before a recession starts. Yes, this is a potential warning sign.
Coronavirus: Omicron cases and hospitalizations have peaked and deaths are now starting to roll over. Cases are falling rapidly and are pretty much back down to pre-Omicron levels. Both in the US and around the world, the huge surge in cases from the Omicron variant has burned out much faster than prior waves and with much lower severe disease rates, consistent with the evolution towards an endemic virus. Cases in Europe are also continuing to decline.
CPI rose 0.6% in January on both the headline and the core measures, on the hotter side of expectations. Those follow the same sized 0.6% December gains for each. The 12-month pace accelerated to 7.5% y/y from 7.0% y/y. These are the highest since 1982.
Supply chains. excess demand, sure they add to the problem BUT the real cause - ENERGY costs. Until something is done on this front, inflation remains high.
The NFIB Small Business Optimism Index decreased slightly in January to 97.1, down 1.8 points from December. Inflation remains a problem for small businesses as 22% of owners reported that inflation was their single most important business problem, unchanged from December when it reached the highest level since 1981. The net percent of owners raising average selling prices increased four points to a net 61%, the highest reading since the fourth quarter of 1974.
Data analytics firm Black Knight updated their monthly mortgage monitor report with data through the end of 2021. The percentage of loans delinquent continued to decline in December falling all the way down to 3.38% which was only 0.1 percentage points higher than the level from February 2020. In other words, the delinquency rate is essentially back to normal. Meanwhile, foreclosures activity remains historically depressed with yet another record low in December. Less than a quarter of one percent of loans were foreclosures in December.
While consumers' balance sheets are in good condition, their sentiment towards the economy and present policies are at lows. The Michigan consumer sentiment survey crashed 5.5 points to 61.7 in the January preliminary read following the 3.4 point drop to 67.2 in January. This is a big miss and is the lowest since October 2011.
Both components declined to decade lows as well. The expectations index paced the slide and plunged 6.7 points to 57.4 from 64.1. The current conditions gauge fell 3.5 ticks to 68.5 from 72.0 previously. The report is the worst combination for the economy, fast eroding sentiment and surging inflation.
The U.S. thinks Russia could start action against Ukraine by Tuesday. Bloomberg News Sr. White House reporter Jennifer Jacobs tweeted: "MORE DETAILS: U.S. officials believe Russia's action could start as soon as TUESDAY and could include a provocation in Ukraine's Donbas region, or an attack on the capital, Kyiv, sources say.
Numerous MACRO events are being tossed at the market now, Russia/Ukraine doesn't come close to the troubles that the U.S. economy is facing now.
Adjusted for seasonal factors, including the Chinese New Year, the headline China Caixin Business Activity Index fell from 53.1 in December to 51.4 in January, to signal a modest increase in services output. Notably, the rate of growth was the slowest seen in the current five-month sequence of expansion. Companies often mentioned that activity rose due to higher amounts of new business. However, others commented that the pandemic, and efforts to contain the virus, had weighed on overall growth.
Although this earnings season has been the least impressive since the pandemic, it is still historically strong, and better than analysts feared given the near-term hit to the economy from the Omicron variant.
We've seen more than 600 reports so far since the season started on January 13th. The current cohort is beating EPS estimates at a 74.5% rate versus a long-term average of 68.0%.
The revenue beat rate is 74.3% versus a long-term average of 59.4% for this cohort. These are very strong numbers.
EPS miss rates have risen slightly but aren't terrible at 21.6% versus a 20.6% average. Revenue miss rates are very acceptable at 25.7% versus 33.6% on average.
Guidance beat rates have started to come back to earth like EPS beat rates. BUT at 13.6% season-to-date, they're slightly improved versus last quarter and well above the 8.5% longer-term average. Only 6.7% of companies reported so far have cut guidance versus 7.4% on average.
At the sector level, despite the recent crash in growth stocks Tech and Communications Services names have both delivered 85%+ EPS beat rates so far this season, with Energy, Materials, and Consumer Staples beating revenues at lower than an 85% rate.
EPS misses have been steepest for Materials and Utilities, while revenue miss rates have been steepest for Financials and Consumer Discretionary.
Guidance raise rates have been strongest from Health Care, but Tech, Consumer Discretionary, Utilities, and Consumer Staples have all raised guidance at over 20% rates.
Communications Services has seen the highest rate of guidance cuts.
Assets in leveraged Rydex fund family inverse funds rose by 10x last week alone and are now the highest in a decade. The boat is loaded on the "short side". A stat like this keeps me grounded and helps to avoid getting caught up in the surrounding negativity.
Another topsy turvy week complete with large intraday swings makes any equity market forecast very difficult now.
The S&P 500 is now at the lower end of the trading range that is forming. The index is 7.6% from the old high and 4.1% from the intraday low set on January 24th. The chart pattern displays a directionless market, as a search for what comes next continues.
The recent action in the stock market serves as a lesson in paying attention to the risk/reward setup. Remember there is little certainty in an inherently uncertain market backdrop. There are no signals at the intermediate tops of bottoms. We can only see them in hindsight. Investors have to learn to be flexible and adjust to what is happening. That determines the short/intermediate-term risk/reward profile in the equity market.
For those that wish to try and identify every short-term top or bottom, you're going to find yourself being whipsawed around by the market's mind games. A primary goal of mine is to inform all clients and members of my service when it's generally a good time to get aggressive and when it's a good time to pump on the brakes.
The one issue that remains very obvious to me is how support and resistance trend lines are being respected. While market participants are digesting the fundamental outlook, the technicals are driving the bus now. I mentioned last week that investors are nervous. The wild swings that at times occur in a matter of an hour confirm that view. One slight noise or a whiff of the Fed and many are sent scurrying in different directions. An investor has to be positioned correctly, and those that are caught standing around by not paying attention are going to pay the price.
Large caps take the market up and they also can take it down. A major drag on the S&P 500 index was Meta Platforms (FB) which alone accounted for 29% of the S&P 500's losses after its historic drop on earnings. While FB has by far been the biggest drag on the index, other mega caps (other than Amazon (AMZN) which has gone against the tide) are also acting as a headwind. Combined, the ten largest stocks in the S&P 500 have accounted for nearly half of the S&P 500's decline during the recent selling stampede.
Just over a month into the new year, but 2022 is shaping up to be a year where it's Energy and everyone else. Year to date, the sector is up over 25%, and besides Financials, which is up about 3%, every other sector is staring at losses. Every stock in the S&P 500 Energy sector is up YTD, but for the S&P 500 as a whole, barely 1 in 3 are positive. I believe over time we will start to see this divergence rectified, meaning the ramp in energy will slow at some point while the other sectors play catch up. Exactly when that occurs is anyone's guess. At the moment I'm staying with the "inflation" trade. Energy, metals, and materials names were all strong this week on the back of the HOT inflation report.
It is a very "select" backdrop now making it difficult for the average investor. Before this week, the price action told investors there was no interest in buying the stocks, ETFs that were beaten up. This week there was a bounce in many of those stocks. It remains to be seen how long that mindset remains. Money rotation and volatility are also frustrating market participants.
During a broad rally on Wednesday, every sector was up, during Thursday's selloff every sector was down. Energy and Financials work together when rates are rising. On the low end, Technology and Consumer Discretionary work together but not usually with Utilities. Health Care and Communication Services. This inconsistent constant activity reveals markets can go without true leadership for quite some time.
An investor either has to sit tight and make modest adjustments or tap dance through the raindrops and see if they can stay dry.
Believe it or not, the Russell 2000 (IWM) is sporting the best performance of all the indices in February as it is the only index with a gain. However, all it managed to do was climb back up to challenge its major resistance zone. It was once again turned away during the Friday selloff. That's also not saying much about the other indices, but it is an indication that investor sentiment could be slowly changing. Whether this move has any staying power remains to be seen. The small caps now sit 17% off their November '20 highs.
The sector (XLY) has been frustrating investors in what should be favorable conditions for a healthy consumer (plentiful jobs). Performance has followed the weakness in the general market, but the sector looks oversold enough for a bounce in the short term. While near-term fundamental and technical trends are likely to remain choppy, full-year earnings growth may surprise on the upside as the economy fully reopens. I continue to add to a favorite sub-sector now - Specialty Retail.
Communication Services is an interesting sector for long-term investors to take a look at. The "growth" positions are oversold enough for a bounce in the short-term, while the value-oriented positions have held up relatively well through the market volatility. Valuation as a whole is relatively inexpensive. The sector is trading at its lowest relative P/E in over 10 years.
Crude Oil entered the week on a seven-week winning streak. The energy ETF (XLE) posted gains in seven of the last eight weeks. Make that 8 straight weeks of gains and eight out the last nine have been positive. While it looked like a pause was near, the geopolitical tensions kept the price of WTI elevated hitting $95 on Friday. Oil stocks followed and rallied hard on Friday with XLE up 2.9% on the day while the rest of the market sold off.
Unless something abruptly changes in OPEC's thinking, production will get back to pre-COVID levels over the next six months. But will it matter?
Crude stockpiles are their lowest in 20 years and the Russia/Ukraine border crisis is a wild card because it could lead to a major supply disruption. Russia produces ~10% of the global oil supply, the same as the U.S. and Saudi Arabia. It's a major global supplier of oil (50% of total) and natural gas (75%of total), which goes to Europe.
European natural gas prices are already at record levels: in fact, the equivalent of $150/barrel oil. In the event of war, Europe would need emergency shipments of oil and liquefied natural gas. Alongside other members of the International Energy Agency, the US would participate by releasing strategic stockpiles: the mirror image of how Europe helped in the aftermath of Hurricane Katrina.
So, just about every road appears to lead to higher energy prices. An energy crisis through shortages and spiking prices leaves two possible long-term outcomes. Either the West puts aside differences and embraces Russia - or, at least, Europe does. Therein lies THE issue with Europe. Germany is at the mercy of Russia's oil and natural gas.
If negotiations can't produce a diplomatic settlement additional energy production would have to be found beyond the Middle East. That would be a problem for the U.S. because the oil industry has been under attack and faces uncertainty with the growing focus on alternative energy sources that may take decades to develop. Either way, it seems we're in the early innings of a major shift in Energy, with the bias on prices higher. On top of all that, there are reports that China may be ready to replenish its oil stockpiles.
The 10-year rose to 2% and the Banks rallied. Like the entire market, that rally was snuffed out and the Financial ETF (XLF) pulled back after taking a run at a new high. With the interest rate backdrop in place, nothing has changed in my positive outlook for the sector. However, the reversal seen this week poses short-term problems for the group.
Another group that looks interesting, especially the AgriBusiness sub-sector. In this weak market backdrop, fertilizer stocks are at or near highs. After breaking out in mid-2020, the Materials ETF (XLB) pushed to new highs in January and has a long-term chart that is very BULLISH. The ETF bucked the selling trend and posted a gain for the week.
The Biotechnology sector is of some interest to me now in the sense that it has been destroyed and may now offer long-term value. There are over 100 biotech stocks that are trading below a Price-to-Cash ratio of 1. In this high growth sector that represents quality.
The S&P Biotech ETF (IBB) has been cut in half from its early 2021 all-time high, is oversold, and may now be in the process of finding its footing. This ETF is made up of some of the largest and most well-established Biotech companies that are traded and is selling at a trailing PE of 24.
Since the 2009 bottom, it has been a great buying opportunity whenever it's been so oversold on the weekly and monthly charts I'm currently looking at.
Biotech is an area that holds plenty of individual stock risk, so a broad approach using an ETF can yield good results when the tide does turn. The reason I mentioned the group is "of some interest" instead of "BUY, BUY, BUY" is because we have to weigh the dueling technical picture. Yes, I can see a pattern that shows a pattern suggesting a bottom, BUT the sector is currently in a BEAR market trend.
When faced with this situation in the past, I defer to the chart presented that possesses a multi-year time horizon for LONG TERM investors. Over a while, these ETFs will head back to the upper channel of their long-term trading ranges and back to highs.
The innovation and technological advances in healthcare will always be in demand and this sector isn't going to disappear. The fact that no one wants them today means a long-term investor needs to consider adding BIOTECH to their holdings.
Given investor sentiment towards technology now, it is hard to view the group taking a leadership role in the near term. Some believed the Meta Platforms collapse was going to spread to the other mega-caps, but that hasn't occurred, As mentioned last week. FB's issues are FB-related and have little to do with what is happening in technology.
The conundrum for investors; Tech earnings remain solid with 95% of companies beating estimates in Q4 by an aggregate 7.8%. Additionally, strong demand trends continue to increase order backlog and visibility into forward-looking earnings. The accelerated nature of tech spending brought on by Covid remains a tailwind, along with pricing power in today's environment.
That sounds great but this ongoing fear about rising interest rates is the headwind. That's fine with me, I see nothing but select opportunities being presented due to the perceived interest rate risk to the sector.
This sub-sector of tech resumed its leadership role this week with the Semiconductor ETF (SOXX) rallying ~5% until that rally was also a victim of the late week selling event. So it's back to the drawing board as the entire group is now looking for support. The ETF closed the week with a 2.5% loss, but many individual stocks were crushed on Thursday and Friday.
Investors have fled the scene, causing the ETF to lose 60% of its value in less than one year as the entire growth sector was re-rated. This HIGH PE growth segment of the market (ARKK) finally caught a bid this week. Like everything else that was a short-lived event.
This poster child for HIGH PE growth is likely to remain volatile. Without the ability to more clearly define risk, it is still hard to set up a risk vs reward case for it in the short term. The 2021 high represented a bubble that has now burst.
There is big upside potential, but since it is in a BEAR market trend, the probabilities favor more downside ahead UNLESS the recent lows are tested and they HOLD.
The fundamental backdrop also suggests short-term headwinds. It is no secret that higher rates are contributing to the market's mass exodus of anything highly speculative and relying on far-future profits to justify a valuation.
The past few months have seen Bitcoin trade in a steep downtrend off of the November all-time high. With Bitcoin posting a big rally over last weekend, the world's largest cryptocurrency has now rallied back over $40,000. That rally has broken the downtrend that was present during the past few months.
The price action this week also brought to an end a more than one-month-long streak that Bitcoin traded at extreme oversold levels. For the moment, the action in BTC has lifted the caution flag. With ever-present volatility, it's anyone's guess as to what comes next.
A rebound rally that is snuffed out by interest rate concerns is telling investors not much has been resolved regarding near-term market direction. The real "test" and answers will come IF and when the indices get closer to their old highs OR they drop further to test the recent lows. Volatility will continue as it's all about headlines regarding Inflation and the Fed. I've already put that aside and as mentioned in past reports concentrate on the earnings scene. Listening to "Fedspeak" or analysts offering interest rate opinions is short-term noise.
In a while, other than the knee-jerk computer-generated sell programs that are following the headlines, the market will become de-sensitized to the inflation and Fed issues. Inflation is running at 7+% and the market realizes the Fed is raising rates. All of that is priced in. What comes next is what the market sees past the initial set of rate increases and inflation reports, and that will determine the next major market move.
Interestingly, no one is talking about the "R" word. Yet some signs are popping up now that are pre-cursors to an economic downturn. Perhaps analysts are buying into the agenda their stories are promoting. If so that is unfortunate, FACTS and DATA should trump bias and opinion.
I am not, nor do I have to be smarter than the army of investors I'm competing with. I just have to be more disciplined than the crowd.
It's the key to success and every investor has the opportunity to follow that script.
Best of Luck to Everyone!
Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.
In different circumstances, I can determine each client's situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.
THANKS to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Everyone is looking at the investment scene and asking the same question; What comes next? Investors are nervous and they should be. This market is following the script of how stocks behave during midterm election years. What comes next is going to surprise you.
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This article was written by
INDEPENDENT Financial Adviser / Professional Investor- with over 35 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice, and Experience to produce Portfolios focused on achieving positive returns. Last year I launched my Marketplace Service, "The SAVVY Investor", and it's been well received with positive reviews. I've been part of the SA family since 2013 and correctly called the bull market for over 8+ years now.
MORE IMPORTANTLY, I recognized the change to the BEAR MARKET trend in February '22.
Since then investors that followed my NEW ERA investment strategy have been able to survive and profit in this BEAR market. Winning advice that is well documented, helping investors to avoid the pitfalls and traps that wreak havoc on a portfolio with a focus on Income and Capital Preservation.
I manage the capital of only a handful of families and I see it as my number one job to protect their financial security. They don’t pay me to sell them investment products, beat an index, abandon true investing for mindless diversification or follow the Wall Street lemmings down the primrose path. I manage their money exactly as I manage my own so I don’t take any risk at all unless I strongly believe it is worth taking. I invite you to join the family of satisfied members and join the "SAVVY Investor".
Disclosure: I/we have a beneficial long position in the shares of EVERY STOCK/ETF IN THE SAVVY PLAYBOOK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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My Playbook is positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.
IT IS NOT A BUY-AND-HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.
Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.
Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.
The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can't expect to capture each and every short-term move.