'Threading The Needle' Stock Market (And Sentiment Results)...

May 05, 2022 3:49 PM ETBABA, XBI
Thomas J. Hayes profile picture
Thomas J. Hayes


  • The forward 12-month P/E ratio for the S&P 500 is 18.1. This P/E ratio is below the 5-year average (18.6).
  • Two weeks ago, AAII sentiment survey dropped to a 30-year low at 15.8% bullish. Last week it ticked up modestly to 16.4%.
  • While the rest of the world is tightening, China is the only large economy aggressively stimulating with fiscal policy and loosening monetary policy.

Fed Chair Jerome Powell Speaks At The National Association for Business Economics

Samuel Corum/Getty Images News

On Wednesday afternoon the Federal Reserve issued their FOMC statement and plans for reducing the size of the balance sheet. I have underlined the key points here:

Updates and key notes


adjustments to stamtement


In the Press Conference Chair Powell made the following points that set the market afire:

  • A 75bps hike is not something the committee is actively considering.
  • 50bps hikes on the table for the next couple of meetings.
  • Expects a soft/softish landing.
  • Households and businesses are still in good shape.
  • There is still excess savings.
  • Labor market still strong.
  • Expects that inflation has peaked or is at least flattening out.
  • Core CPE may have peaked.

And with that, we were off to the races:

spx index


And while the S&P 500 is now up ~5.5% off the lows, there is still a lot of wood to chop to make it back to new highs (as I have been a lone voice calling for in recent podcast|videocast(S).

Fox business

Late last week I was on Fox Business - The Claman Countdown - with Cheryl Casone. Thanks to Ellie Terrett, Liz Claman and Cheryl Casone for having me on. In this segment, I laid out the case to separate emotions from the data. Sentiment was completely washed out, but the data did not justify all of the gloom and doom (particularly earnings data). I closed with a handful of "out of favor" picks that are now catching a nice bid.

Here were my show notes ahead of the segment:

Q1 Negative GDP print not as bad as it seems

-Fear: Two consecutive quarters of negative GDP growth (technical definition of recession)


  • 1st print, may be revised upward.
  • Most of the decline was tied to 1) a record U.S. trade deficit 2) shrinking inventories 3) reduced government spending. (these three subtracted 5% from GDP).


  • Consumer spending rose at a healthy 7% pace after inflation - the highest in three quarters.
  • Business investment jumped 3%. That was the biggest increase in a year.

Better Measure:

  • Look at final sales to U.S. customers. This measure strips out exports and inventories and focuses on how much Americans are buying from U.S. and foreign sellers. At over 2.6% this was UP from 2H 2021.

Earnings tell the whole story:

The Generals held up (MSFT, GOOGL, FB)

-Earnings Estimates still going UP S&P 500: Up from $225 to $230.09 for 2022 in last two months.

-For CY 2022, analysts are projecting earnings growth of 10.9% and revenue growth of 9.5%. S&P was over 4800 in 2021. Imp: 5100-5200 high.

-For Q1 2022 (with 20% of S&P 500 companies reporting actual results), 79% of S&P 500 companies have reported a positive EPS surprise and 69% of S&P 500 companies have reported a positive revenue surprise. For Q1 2022, the blended earnings growth rate for the S&P 500 is 6.6%.

P/E Multiple


The forward 12-month P/E ratio for the S&P 500 is 18.1. This P/E ratio is below the 5-year average (18.6)

- CITI Economic Surprise Index ~70 in its most recent read. Highest Levels in over a year.

-US Factory Activity Growth Highest in seven Months: Manufacturing PMI 59.7

-Unemployment rate still at 3.6%.

Sentiment WASHED OUT:

Two weeks ago, AAII sentiment survey dropped to a 30-year low at 15.8% bullish. Last week it ticked up modestly to 16.4%.

When sentiment gets this low, over the last 25 years, 30 out of 31 times the S&P 500 is up six and 12 months later.

6mo later avg = +12.6% 12mo later avg = +19.8%

What to Buy (if time)?

Time to ease back into value tech (low multiple, cash generative companies that have sold off). Managers puked out of tech and into commodities in Q1. This will reverse as yields begin to stabilize. FB, INTC, TSM, GOOGL

Common misconceptions

We've laid out the case for our two largest positions - Alibaba and Biotech - in recent podcasts. Key components of the bear thesis are that:

  • Tech/Biotech will not work in a tightening cycle/rising rate environment.
  • Emerging Markets ((China)) can't work when rates are rising and the dollar is strong.

I always aim to burden myself with the facts, and in these cases the facts simply don't support the exodus. The last tightening cycle (from 2016-2018+) was one of the BEST performing periods for BOTH Biotech (XBI) and Alibaba. The under-performance of both assets came leading UP TO the tightening. A classic case of "sell the rumor, buy the news."

XBI chart


Balance Sheet trend

Fed Reserve

first wind down


During the last Fed hike/balance sheet roll-off period (2016-2019 period), not only did XBI appreciate ~140% (trough to peak), but Alibaba appreciated ~263% (trough to peak) over the same tightening cycle.

BABA Chart


The two black lines on the bottom of the charts are the Fed Funds Rate and the US Dollar. We can see - by the vertical blue lines - exactly where we are in the tightening process and what happened next…

I also want to point out another key factor that China bears are pointing to at present:

China currency devaluation


This Bloomberg note points out that the last time the yuan weakened this much in five days was August 2015 and it "sparked months of 'near crisis conditions' in world markets."

What is not highlighted in this piece is that the yuan devaluation sparked one of the biggest multi-year rallies in the history of China Tech - with Alibaba rallying ~270% from August 2015 - July 2018. If that is "near crisis conditions" SIGN ME UP!

Here's a clip from last week's videocast regarding China Tech:

The good news is that stimulus has been pouring into the Chinese economy since November. While the rest of the world is tightening, China is the only large economy aggressively stimulating with fiscal policy and loosening monetary policy. The bad news is it will not be felt in the economy until the lockdowns end.

There is a light at the end of this tunnel as cases are now rolling over just like they did during the first wave over two years ago:

Daily new cases


Now onto the shorter term view for the General Market:

In this week's AAII Sentiment Survey result, Bullish Percent jumped to 26.9% from 16.4% last week. Bearish Percent declined to 52.9% from 59.4%. Retail sentiment is thawing, but investors are still fearful.

Sentiment results

AAII Survey

Chart of Bull


The CNN "Fear and Greed" Index flat-lined from 39 last week to 39 this week. Sentiment is still fearful in the market.

Fear and greed


And finally, the NAAIM (National Association of Active Investment Managers Index) collapsed to 46.25% this week from 74.05% equity exposure last week. Managers got caught flat-footed yesterday and will have to "panic buy" strength in coming weeks.

Chart of data


Author and/or clients may have beneficial holdings in any or all investments mentioned above.

This article was written by

Thomas J. Hayes profile picture
Tom Hayes is Founder, Chairman and Managing Member of Great Hill Capital, LLC (a long/short equity manager based in New York City). He started Hedge Fund Tips as a platform to share actionable insights, tips and research for investors/traders to benefit from – based on what he has learned in his years of experience in the Hedge Fund industry.Read Tom's bio here: https://www.hedgefundtips.com/about-tj-hayes/ To get our Free Newsletter go to: https://www.hedgefundtips.com/free

Disclosure: I/we have a beneficial long position in the shares of BABA 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. I have no business relationship with any company whose stock is mentioned in this article.

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