Monthly Archives: March 2022

A “Lost Decade” Ahead For Markets?

Is a “lost decade” ahead for markets? We and many others have discussed a topic regarding financial market valuations and forward returns. Now, halfway into 2022, all of a sudden, the “crazy talk” of valuations seems a lot less crazy as bear markets growl.

However, it wasn’t that long ago the mainstream media discounted valuations and forward returns. For example, in December 2021, Ben Carlson recounted a presenter at a 2010-2011 conference who discussed valuations for a 60/40 allocation in the 95th percentile. Historically, that suggested investors were doomed for a low-return environment of roughly 2-3% over the next decade. As he states:

“Instead, this happened.”

Stock market returns last decade

“U.S. growth is up almost 20% per year. The S&P 500 is up more than 16% per year. Small caps are up almost 14% per year. REITs rose more than 11% annually. Everyone has been dancing on the grave of value stocks for years now, yet they’re up nearly 14% per year over the last decade.

A simple 60/40 portfolio of U.S. stocks and bonds is up around 11% per year over the past 10 years.”

Valuation and forward return assumptions were wrong then.

Or were they?

Real Market Returns

Over the last 120-years, valuations have consistently proved to be a strong predictor of future returns with lost decades a common occurrence. However, as we discussed previously in “Rationalizing High Valuations:”

“The mistake investors repeatedly make is dismissing the data in the short-term because there is no immediate impact on price returns. Valuations by their very nature are HORRIBLE predictors of 12-month returns. Investors avoid any investment strategy which has such a focus. In the longer term, however, valuations are strong predictors of expected returns.”

The chart below shows valuations and rolling 10-year total real returns. The obvious conclusion is that overpaying for value leads to lost decades.

S&P 500 rolling returns and valuations.

However, let’s go back to Ben’s comment above. In 2009, valuations had corrected significantly, not only from the “Financial Crisis” peak but also from the preceding “Dot.com” bubble. Therefore, investors should have expected forward returns on equities to be higher over the next decade.

The chart below shows this more clearly. I highlighted the three previous points for reference.

  1. The “Dot.com” bubble peak.
  2. January 2009 (Start of the current bull market cycle)
  3. Ending valuation for 2021.
Forward 10-year returns and valuations.

From 2000 through 2010, a lost decade, annual returns after inflation were indeed negative. Such is what 43x earnings predicted at that time.

An Artificial Support

The Wall Street Journal recently discussed the last decade’s stellar returns.

“Investors’ optimism is easier to understand if one looks at the 10 years through the end of 2021, during which the compound annual return of the benchmark S&P 500 was a very good 16.6%. Not so far from what those surveyed extrapolated. Its components need closer scrutiny, though.”

Source of S&P 500 index market returns.

While the Wall Street Journal then tries to make the case that profit margins were responsible for the bulk of the gains, the reality is most of the excess returns came from just two unique sources.

  1. A decade of monetary interventions and zero interest rate policies; and,
  2. A massive spending spree by corporations on share repurchases.

The chart below via Pavilion Global Markets shows the impact of stock buybacks on the market over the last decade. The decomposition of returns for the S&P 500 breaks down as follows:

  • 21% from multiple expansions,
  • 31.4% from earnings,
  • 7.1% from dividends, and
  • 40.5% from share buybacks.
Stock buyback contributions to market returns.

In other words, in the absence of share repurchases, the stock market would not be pushing record highs of 4700 but instead levels closer to 2800.

Such would mean that stocks returned a total of about 3% annually or 42% in total over those 14 years.

Given the low growth economic environment, low rates, and weak inflation, a market return significantly lower over the last decade is logical. However, given the injections of over $43 Trillion in liquidity, corporate stock buying, and the artificial suppression of rates, the outsized returns were not surprising.

The question is whether those artificial influences can be sustained for another decade?

Lost Decade Ahead?

“As sour as the mood has seemed lately, the S&P 500 would drop by another 45% or so if both margins and price/earnings multiples reverted to their long-run averages. Such would take the benchmark back to a level it first crossed five years ago.

That sounds alarmist, but stocks’ level in 2031 could be the same whether Mr. Grantham is correct or not about a sharp bear market. The alternative could be milder selloffs and recoveries along the lines of what we have experienced recently that lead stocks exactly nowhere.” – WSJ

“Reversions to the mean” is one of the most powerful forces in finance, The importance of which often gets lost during a raging “bull market” that seemingly defies all logic. Such was a point made by David Leonhardt previously:

“The classic 1934 textbook ‘Security Analysis’ – by Benjamin Graham, a mentor to Warren Buffett, and David Dodd – urged investors to compare stock prices to earnings over ‘not less than five years, preferably seven or ten years.’ Ten years is enough time for the economy to go in and out of recession. It’s enough time for faddish theories about new paradigms to come and go.

Market cap to GDP

What does such mean for future equity returns?

Vanguard regularly puts out expected returns for various asset classes using ranges in their estimates. Here are their latest 10 year forward return projections:

With a projected inflation rate of around 2% per year, the real return estimate for U.S. stocks is somewhere in the range of 0-2% real. They have growth stocks going negative after inflation over the next decade.” – Ben Carlson

Vanguard forward returns.

Notably, while such commentary is often cast as “bearish,” such forecasts are a reflection of:

  1. Math; and,
  2. Reversions

The second is critically essential.

The Most Powerful Force In Finance

Throughout history, whether it is valuations, prices, profits, or any other metric, eventually, and always, deviations revert to the mean. Such was a point discussed in “The Market Is Disconnected From Everything.”

Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system, and it is not functioning properly.” – Jeremy Grantham

Cumulative change to price and profits.
Data Through 2021

Markets are not cheap by any measure. If earnings growth fails to achieve high expectations, interest rates rise, or profit margins shrink due to inflation, the bull market thesis will collapse as “expectations” collide with “reality.”

A Lesson To Be Learned

Such is not a dire prediction of doom and gloom, nor is it a “bearish” forecast. It is just a function of how “math works over long periods.” However, during a “raging bull market,” investors always lose sight of long-term realities. As Howard Marks noted in a Bloomberg interview:

“Fear of missing out has taken over from the fear of losing money. If people are risk-tolerant and afraid of being out of the market, they buy aggressively, in which case you can’t find any bargains. That’s where we are now. That’s what the Fed engineered by putting rates at zero.

“We are back to where we were a year ago—uncertainty, prospective returns that are even lower than they were a year ago, and higher asset prices than a year ago. People are back to having to take on more risk to get return. At Oaktree, we are back to a cautious approach. This is not the kind of environment in which you would be buying with both hands.

The prospective returns are low on everything.”

For investors, understanding potential returns from any given valuation point are crucial when considering putting “savings” at risk. Risk is an essential concept as it is the expectation of “loss.” 

The more risk investors take within a portfolio, the greater the destruction of capital when reversions occur.

This time is “not different.” The only difference will be what triggers the subsequent valuation reversion and when it eventually occurs. 

Two previous bear markets taught many this lesson. Unfortunately, a whole generation of investors are learning this lesson the hard way.

Bear Market Expectations

Last Friday, the S&P 500 briefly dipped to 3810, marking a 20.5% decline from its January 3rd record high. Many investors consider a 20% decline to be a bear market. While we can debate whether the market is or isn’t in a bear market, our time is best spent honing in on expectations in case we are in a bear market. We can measure bear market expectations in terms of time and performance. The graph below compares the current “bear market” with other bear markets over the last 100 years. If we are in a bear market, we should have expectations for losses of 30-60%. The time window for said losses might be short, as we recently saw in 2020, or it could extend out 400 trading days.

We are not declaring a bear market has started. However, we advise forming expectations of what a bear market may entail. If we are entering a longer-term bear market with more significant declines, risk management and limiting losses are critical to preserving wealth and prospering when a true bottom occurs.

S&p 500 bear market expectations

What To Watch Today

Economy

  • 9:45 a.m. ET: S&P Global US Manufacturing PMI, May preliminary (57.7 expected, 59.2 during prior month)
  • 9:45 a.m. ET: S&P Global US Services PMI, May preliminary (55.2 expected, 55.6 during prior month)
  • 9:45 a.m. ET: S&P Global US Composite PMI, May preliminary (55.7 expected, 56.0 during prior month)
  • 10:00 a.m. ET: Richmond Fed Manufacturing Index, May (12 expected, 14 during prior month)
  • 10:00 a.m. ET: New Home Sales, April (750,000 expected, 763,000 during prior month)
  • 10:00 a.m. ET: New Home Sales, month-over-month, April (-1.7%, -8.6% during prior month)

Earnings

Pre-market

  • Abercrombie and Fitch (ANF) to report adjusted earnings of 7 cents on revenue of $800.13 million
  • Autozone (AZO) to report adjusted earnings of $26.23 on revenue of $3.73 billion
  • Best Buy (BBY) to report adjusted earnings of $1.60 on revenue of $10.41 billion
  • Ralph Lauren (RL) to report adjusted earnings of 39 cents on revenue of $1.46 billion
  • Petco (WOOF) to report adjusted earnings of 14 cents on revenue of $1.45 billion

‌Post-market

  • Agilent Technologies (A) to report adjusted earnings of $1.12 on revenue of $1.62 billion
  • Nordstrom (JWN) to report adjusted losses of 5 cents on revenue of $3.26 billion
  • Toll Brothers (TOL) to report adjusted earnings of $1.50 on revenue of $2.10 billion

S&P 500 Technical Update

Every Monday, we share a series of technical charts with Simplevisor subscribers. Yesterday we presented technical analysis on the major stock indexes and U.S. Treasuries, Gold, Bitcoin, and Crude oil. As we note in Monday’s SimpleVisor post, the S&P 500 is very oversold, and a rally is entirely possible.

As we begin to manage bear market expectations, the big question many investors harbor is whether this potential rally signifies a bottom like March 2020 or is it a “sellable rally to reduce risk.” For more of our thoughts, see our notes below the graph.

For the entire report, visit us at SimpleVisor and see how it can improve your investment insight with a free 30-day trial.

s&P 500 technical
  • In the last 5-years, the only time the market was 3-standard deviations below the 1-year moving average was at the bottom of the market in 2018 and 2020.
  • Currently, the market is on an intense sell signal (bottom panel) equal to March 2020
  • The market is as oversold (top panel) as any previous market low.
  • Short-Term Positioning: Sellable Rally To Reduce Risk
    • Buy with a target of $430
    • Stop-loss is currently $380
  • Long-Term Positioning: Neutral / Bearish

Market Rallies – Will Friday’s Retest Of Lows Hold?

On Monday, the market rallied following up on Friday’s intraday reversal that held the previous week’s lows. Unfortunately, over the last 2-months, the market has consisted of failed rallies that work to lower levels.

While the bounce off the lows is encouraging, there is strong resistance getting built at the intersection of the downtrend line from the market peak and the recent support lows taken out two weeks ago. Notably, the MACD buy trigger (lower panel) is close to turning positive which could give the markets a bit of lift short-term.

Use rallies from 411 to 425 (SPDR S&P 500 ETF – SPY) to reduce portfolio risk, raise cash and rebalance exposures accordingly.

New Simple Visor Feature

We just released a new update to Simplevisor.com that provides a comprehensive look at individual corporate equities. From a complete corporate overview, shown below, to Key Stats, Technical Gauge, Analyst rankings, Peer Fundamentals, Performance, and more.

Subscribers will see the new feature under the Research Tab (Try the entire platform free for 30-days.)

Retail Exposure and High Valuations

The correlation between equity exposure for retail accounts and equity valuations is robust. Today, retail exposure is the highest on record, possibly portending a peak as valuations begin to normalize.

“The extent to which US households have put their money into equities rather than other financial assets is startlingly high. It implies that equities are at the top of the cycle.” – John Authers – Bloomberg

retail allocations

Inventory Build Up

Last week Walmart, Target, and other retailers warned investors that inventories are starting to accumulate, consumer behaviors are changing, and earnings are getting squeezed by inflation. We share a few key takeaways from Ayesha Tariq from her weekly commentary.

  • The rate of inflation has been surprising. So it’s not just that there is a general level of inflation in the economy but the rate of increase and the persistence is what is causing a real problem.
  • People are buying groceries but not merchandise. So the level of discretionary spending has dropped, and this is exactly what was expected.
  • The problem with a decrease in spending on discretionary items is that it creates pressure on margins. General Merchandise tends to have higher margins vs. staples.
  • While the average basket size has increased, the items per basket have decreased because the per-item cost has gone up. Purchasing power for consumers is decreasing and this doesn’t bode well for retailers as more and more people will move to lower-cost, low-margin items.

Please subscribe to the daily commentary to receive these updates every morning before the opening bell.

If you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.

EPAM – positive

EPAM fell 75% from the last week of December 2021 to the first week of March 2022. EPAM rose above its 3-month downtrend line in early April. Now, EPAM has established a pattern of higher lows and higher highs=uptrend (charts 1 and 2). The zoom chart shows that EPA is proximate to uptrend support. The weekly reveals that EPAM’s current rally is confirmed by its nadir, which was at long-term support from the lows of 2019 and 2020. TPA’s target is +30% from Monday’s close.

This Week’s Top 10 and Bottom 10

Viking Analytics: Weekly Gamma Band Update 5/23/2022

We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.

Gamma Band Update

The S&P 500 (SPX) attempted to rally last week and was rejected at a key resistance level near 4,100.  While we don’t believe that gamma metrics are the only factor in trading, we do believe it is relevant that the last three rally rejections occurred at one of our key gamma levels. This market is “risk off” until both levels are breached to the upside. Our gamma-band model enters the week with a 0% allocation to the SPX and will remain flat as long as the SPX remains below the lower gamma level, which is currently near 3,980.  

One of the primary drivers of gamma trading metrics is the hedging and re-hedging patterns of the options market makers. One of them that is relevant for now is this: when investors buy a put to hedge, the market makers sell the index in order to hedge their long put position.  As a result, the phrase “the market won’t stop falling until investors stop buying puts” has merit.

The Gamma Band model[1] can be viewed as a trend following model that is shows the effectiveness of tracking various “gamma” levels. When the daily price closes below Gamma Flip level, the model will reduce exposure to avoid price volatility and sell-off risk. If the market closes below what we call the “lower gamma level,” the model will reduce the SPX allocation to zero.

The main premise of this model is to maintain high allocations to stocks when risk and corresponding volatility are expected to be low.  For investors who have been conditioned to “buy low and sell high,” it is counter-intuitive to increase allocations when the market rises, but this approach has shown to increase risk-adjusted returns in the back-test.  

Risk management tools like this have become more important than ever to manage the next big drawdown. We incorporate many options-based signals into our daily stock market algorithms. Please visit our website to learn more about our trading and investing tools.

The Gamma Band model is one of several indicators that we publish daily in our SPX Report (click here for a sample report). 

The Gamma Flip – Background

Many market analysts have noted that daily volatility in the S&P 500 will change when the value of the SPX moves from one gamma regime to another.   Some analysts call this level the “gamma flip.”  The scatterplot below shows how price volatility (on the y-axis) is increasingly lower as the value of SPX rises higher above the Gamma Neutral level (on the right side of the chart).  When the value of the S&P closes lower than Gamma Neutral (to the left of the chart), volatility increases. 

Gamma Band Model – Background

The purpose of the Gamma Band model is to show how tail risk can be reduced by following a few simple rules.  The daily Gamma Band model has improved risk-adjusted returns by over 60% since 2007.  The graph below demonstrates how this approach can limit drawdowns while maintaining good returns.  A quick video introduction of the Gamma Band model can be seen by following this link

Disclaimer

This is for informational purposes only and is not trading advice.  The information contained in this article is subject to our full disclaimer on our website.

[1] The Gamma Band model in our SPX Market Report adjusts position size DAILY based upon the daily closing levels of SPX value and calculated Gamma Neutral.  The Weekly Gamma Band model is shown for illustrative purposes only.

Authors

Erik Lytikainen, the founder of Viking Analytics, has over twenty-five years of experience as a financial analyst, entrepreneur, business developer, and commodity trader. Erik holds an MBA from the University of Maryland and a BS in Mechanical Engineering from Virginia Tech.

Rob McBride has 15+ years of experience in the systematic investment space and is a former Managing Director at a multi-billion dollar hedge fund. Rob has deep experience with market data, software and model building in financial markets.  Rob has a M.S. in Computer Science from the South Dakota School of Mines and Technology.

 


Major Market Technical Review – May 23, 2022

The major market technical review is something we will regularly produce on alternating weeks, along with a sector review and portfolio stock review. Each report will contain a chartbook of major financial markets, market sectors, or individual equities to review the underlying technical conditions for potential opportunities and risk management. Such helps refine decision-making about what to own and when. Also, what to overweight or underweight to achieve better performance.

HOW TO READ THE CHARTS

Each chart has five primary components if you want to recreate them yourself in the CHARTING application under the RESEARCH tab.

  • The top chart is the Williams %R set at 14-days.
  • The candlestick price chart gets bounded by two Bollinger Band studies set at a 50-dma with 2- and 3-standard deviations.
  • Below the price chart is a Stochastic indicator set at 14 %K periods, 3 %K smoothing, and 3 %D periods.
  • The MACD chart at the bottom is the primary buy/sell signal set at 12/26/9 days.
  • Some charts will also compare to the S&P 500 index itself to measure over/underperformance.

When the indicators are at the TOP of their respective charts, there is typically more risk and less reward. In other words, the best time to BUY is when the majority of the indicators are at the BOTTOM of their respective channels.

With this basic tutorial, let’s get to the sector analysis.

NOTE: This week, I am using a WEEKLY instead of DAILY chart to look at longer-term conditions of the market to help determine if we are near a market bottom or not.

S&P 500 Index

  • In the last 5-years, the only time the market was 3-standard deviations below the 1-year moving average was at the bottom of the market in 2018 and 2020.
  • Currently, the market is on an intense sell signal (bottom panel) equal to March 2020
  • The market is as oversold (top panel) as any previous market low.
  • Short-Term Positioning: Sellable Rally To Reduce Risk
    • Buy with a target of $430
    • Stop-loss is currently $380
  • Long-Term Positioning: Neutral / Bearish

Dow Jones Industrial Average

  • Like the S&P, the Dow is pushing well into 3-standard deviations oversold, last seen in 2018 and 2020.
  • The Dow is also profoundly oversold on a weekly basis (top panel).
  • MACD sell signal has more work to do but is approaching the March 2020 lows.
  • Short-Term Positioning: Sellable Rally To Reduce Risk
    • Buy with a target of $333
    • Stop-loss is currently $300
  • Long-Term Positioning: Neutral / Bearish

Nasdaq

  • This year, Nasdaq has continued to underperform the S&P 500 and is similarly 3-standard deviations below the 1-year moving average.
  • The MACD is now much more oversold than either the 2018 or 2020 lows (bottom panel)
  • And the Nasdaq is deeply oversold and close to a short-term buy signal (top panel).
  • Short-Term Positioning: Sellable Rally To Reduce Risk
    • Buy with a target of $340
    • Stop-loss is currently $280
  • Long-Term Positioning: Bearish

Small Caps

  • Small caps have been a consistent long-term underperformer relative to large caps. However, like its larger-cap brethren, the index is 3-standard deviations below its moving average, as seen last in 2018 and 2020.
  • Previous support lows broke, but the deeply oversold condition may limit the downside.
  • While the MACD (lower panel) has more work to do, the index is due for a rally from current levels.
  • Short-Term Positioning: Bearish / Reflex Rally To Reduce Risk
    • Buy with a target of $92
    • Stop-loss is currently $80
  • Long-Term Positioning: Bearish

Mid-Caps

  • Mid-caps have performed equally as poorly relative to the S&P 500 index as small-cap stocks. The index is also trading well below their 1-year moving average as in 2018 and 2020.
  • The index remains very oversold short-term and due for a rally.
  • The MACD (lower panel) has more work to do to get to a deep oversold.
  • A weak economy will continue to limit the performance of both small and mid-caps.
  • Short-Term Positioning: Bearish
    • Buy with a target of $475
    • Stop-loss is currently $430
  • Long-Term Positioning: Bearish

Emerging Markets

  • Emerging markets have consistently underperformed large-cap stocks to a large degree. Given the global economic weakness, there is no reason to currently add these holdings to portfolios.
  • MACD (lower panel) is now as profoundly oversold as the bottom of the market in 2020.
  • Notably, all of the post-pandemic gains have reversed.
  • Longer-term economic trends will continue to weigh on emerging market stocks.
  • Use the rallies to reduce positions.
  • Short-Term Positioning: Bearish / Sellable Rally
    • Buy with a target of $45
    • Stop-loss is currently $40
  • Long-Term Positioning: Bearish

International

  • International markets, like emerging, have consistently underperformed large-cap stocks to a large degree. Given the global economic weakness, there is no reason to currently add these holdings to portfolios.
  • MACD (lower panel) is approaching levels last seen in 2020.
  • While international stocks could bounce here short-term, investors should use any reflexive rallies to reduce holdings.
  • The selloff has reversed all post-pandemic gains, but the market remains deeply oversold, so a sellable bounce is likely.
  • Short-Term Positioning: Bearish / Sellable Rally
    • Buy with a target of $70
    • Stop-loss is currently $66
  • Long-Term Positioning: Bearish

U.S. Treasuries

  • As opposed to stocks, bonds are already in a deep bear market.
  • Bonds are deeply oversold and at levels that elicited a powerful rally in 2021.
  • The MACD buy signal (bottom panel) has started to turn up, and if bonds continue, their recent rally could signal a reversal in rates.
  • The current setup is still negative, but the longer-term dynamics are becoming more bullish.
  • Short-Term Positioning: Bearish
    • Buy with a target of $130
    • Stop-loss is currently $115 for trading positions.
  • Long-Term Positioning: Neutral To Bullish

Gold

  • Gold has not been the inflation hedge everyone expected this year. Instead, Gold remains in a broad trading range over the last 2-years despite nearly 9% inflation.
  • The MACD sell signal has triggered, suggesting lower gold prices in the intermediate-term.
  • However, in the short-term, Gold is oversold enough to elicit a decent rally from current levels back toward its recent peak.
  • Short-Term Positioning: Bullish
    • Buy with a target of $185
    • Stop-loss is currently $170
  • Long-Term Positioning: Neutral To Bullish

Bitcoin

  • Bitcoin has also not been the inflation hedge everyone expected this year. Instead, it has plunged from its previous peak of nearly $70k to hovering just below $30k as of late.
  • Bitcoin is not significantly deviated from its long-term mean. However, it has been trying to base at current levels over the last couple of weeks. If the market musters a reflexive rally, Bitcoin should rally with it, given its present correlation to risk assets.
  • Bitcoin’s MACD is now more oversold than at any previous point since 2018. However, it remains on a sell signal currently. If Bitcoin can rally, there is a decent amount of upside from current levels.
  • Short-Term Positioning: Bullish
  • Buy with a target of $40K
  • Stop-loss is currently $27.5K
  • Long-Term Positioning: Neutral To Bullish

West Texas Intermediate Crude

  • Unlike every other market covered this week, Oil prices are pushing more extreme overbought levels and are pushing will above long-term moving averages.
  • Notably, the bullish trend line remains intact and is not overbought short-term suggesting oil prices could push higher near-term.
  • However, oil is susceptible to economic downturns, so profit-taking is likely a good idea as we move into the latter part of this year.
  • Hold current positions with a stop at $90 but don’t institute new positions currently.
  • Short-Term Positioning: Bullish
    • Hold at current levels
    • Stop-loss is currently $90
  • Long-Term Positioning: Neutral to Bullish

Exxon and Energy Stocks Are On Fire

It is no secret that Exxon and the energy sector, in general, have been the best place to weather the recent market storm. After hitting an eight-year on Friday, Exxon has risen 45% this year. Exxon is in line with the broad energy ETF XLE, which is up 44% year to date. High energy prices are certainly helping Exxon and others, but it is crucial to provide context for the recent outperformance.

The graph below shows that since 2018, Exxon stock slightly lags the return on the S&P 500, despite the recent surge. Going back further, Exxon is up 68% since 2012, while the S&P 500 is up 220%. While energy may have gotten a little ahead of itself in recent months, there is potentially a lot more relative upside if it continues to catch up to the broader markets on a long-term basis.

exxon energy

What To Watch Today

Economy

• 8:30 a.m. ET: Chicago Fed National Activity Index, April (0.50 expected, 0.44 during the prior month)

Earnings

Pre-market

No notable reports are scheduled for release.

Post-market

  • Zoom Video (ZM) to report adjusted earnings of $0.87 on revenue of $1.07 billion
  • Advance Auto Parts (AAP) to report adjusted earnings of $3.61 on revenue of $3.38 billion
  • Nordson (NDSN) to report adjusted earnings of $2.29 on revenue of $646.90 million

Market Trading Update – Is This A 2008 Redux

The market rally we were hoping for ended abruptly as retail reports showed a recession is coming. However, since the stock market leads the economy, a recession could already be here.

A review of the current market and 2008 is helpful. I am not suggesting a financial crisis is coming, but the market did clearly note a recession was already well in progress.

2008 S&P 500 market topping process

The head and shoulders topping pattern is quite evident. The break of the rising neckline was the first warning of a recessionary bear market. The subsequent rally to, and failure at, the neckline confirmed the topping process was complete.

We see the same market action in 2022.

S&P 500 market topping process analysis.

Again, we see the topping process, the clear break of the neckline, and a failed test of the neckline turning it into resistance. While the market is sitting on critical support, any failure will confirm a recession, and a bear market is in process.

Most importantly, bonds are confirming the same. For the last couple of months, bonds remained highly correlated to equities as fears of inflation reigned. That changed as investors started to adopt the reality that a “hard-landing” is probable, and bonds are “working” as a risk-asset hedge.

Given the large short-position against bonds currently, the short-covering in longer-duration bonds is likely only beginning. Those short positions will remain a significant source of “covering” risk instability as it occurs.

QQQ Very Oversold

“The chart below displays all days when the % of stocks comprising ticker QQQ (Invesco QQQ Trust) that were above their 200-day moving average was below 15% and the table displays the summary of QQQ performance in the ensuing 12 months.

The good news is that a decline in the % of stocks in the indexes represented above has typically portended significantly higher stock prices in the year ahead. The bad news is that such a signal does NOT constitute an “All Clear” signal. Following a signal, things can – and often do – get notably worse before they get better.” – Sentiment Trader

QQQ breadth

The Week Ahead

Of importance this week will be the release of the PCE Price index on Friday. This index, the Fed’s preference for gauging inflation, is expected to rise .3% monthly, down from 0.9% last month. A low monthly reading will add evidence to the case that inflation may have peaked. Further evidence will also be found in the University of Michigan Consumer Inflation Expectations, also due on Friday, and the Richmond Fed Manufacturing Index on Tuesday. We warn it is too early to call a turn in inflation rates, but recent data points have been favorable. Economists will closely follow Thursday’s Jobless Claims data for signs that employment is weakening. As we wrote last week, this data point may not be as prescient as it has been due to the shortage of potential employees and, therefore, a reluctance to lay off workers.

The Fed will release the minutes from its last FOMC meeting on Wednesday. The “minutes” provide more description of the previous Fed meeting. Further, they often update the language to reflect more current Fed views. Any hawkish or dovish changes to their outlook will likely significantly affect the markets. As we have seen, there will be numerous Fed speakers this week. Over the last two weeks, there have not been many surprises, nor do we expect any this week.

Biggest Employers Say They Are OVER-Staffed

“There has been a lot of commentary in recent months about how tight the labor market is and how hard it’s been for companies to get enough workers. So it was a bit of a shock this week to hear that Walmart and Amazon — America’s biggest private employers — both reported being overstaffed in the first quarter of this year.” – Chartr

That is not a great sign economically speaking.

Philly Fed Warns About Earnings

We have recently been writing about weakness in a few regional manufacturing surveys. The graph below shows why we should pay attention to their warnings. It shows there is a strong correlation between the Philadelphia Fed Index and S&P 500 operating earnings with a 12-month lag. Based solely on the correlation, a 20-40% decline in S&P 500 EPS should not be a shock.

philly

Retailer Bloodbath Continues

Last week, we highlighted Target’s and Walmart’s poor earnings reports. We also elaborated on how inflation hurts profits and changes the mix of products sold. Add Ross Stores to the list. The stock fell 25% on Friday. The news was similar to the other big retailers; higher inventories, declining margins, and poor earnings. To put last week’s declines for Walmart and Target in context, consider the only time the two stocks fell more in one day was in 1987. Combined, the two companies lost over $100 million in market cap this past week.

retailer bloodbath

Digging Deeper Into Consumer Staples

In SimpleVisor’s weekly Five For Friday report, we screen for stocks that meet a particular theme. This week’s report is a little different. It highlights the broad divergence of technical situations within the consumer staples sector. The table below uses technical scores to assess the ratio of the largest staples stocks to each other and to the XLP sector ETF. The discount retailers, Walmart, Target, and Costco, are the most oversold versus the sector and its larger underlying companies. In the article, we shared the following warning about Clorox, Kellog, and Coca-Cola, which are well overbought versus the discount retailers:

As household names, they benefit from incremental pricing power that the firms above lack and can better pass on rising costs to protect margins. While that has helped them thus far, the problems the retailers are having may spread to their suppliers.

xlp staples sector

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Five For Friday- A Swap Of Consumer Staples

We take a different approach in this week’s Five for Friday and present a swap idea. This year, Consumer Staples has been one of the best sectors to protect wealth. The sector ETF XLP is down about 8% on the year, while the S&P is down about 17%. However, within the sector, there are plenty of winners and losers. This divergence presents an opportunity to sell overbought stocks and buy oversold stocks within the sector.

This edition compares the largest stocks within XLP and looks for three that are oversold and three overbought ones.

The table below is our proprietary model, which uses 13 technical indicators to help assess how overbought or oversold stocks and sectors are relative to each other and to the sector ETF.

To help better explain how to use the table, let’s look at WMT in the first column.

By reading down, you can compare the technical score based on the price of WMT to other Staples stocks. The scores are expressed in standard deviations (sigmas) from recent norms. They are also color-coded to spot relationships outside of the average easily. For example, WMT is 4-5 sigmas cheap versus CLX, K, and KO. But only slightly oversold compared to its direct competitors’ COST and TGT.  

The final color-coded line is the score for each stock versus the sector ETF (XLP). It is this line from which we selected the six companies. The first row below the comparison to XLP is the 20-day excess return versus XLP. As shown, WMT is down 12.65% versus XLP. The following three rows express the correlation between each stock and XLP. The higher the correlation, the more comfortable we are with the models output.


Oversold

Walmart (WMT), Costco (COST), and Target (TGT) – All three companies can be characterized as consumer discount stores. They tend to attract lower-middle-class consumers who are more sensitive to inflation and poor economic conditions. As a result, they struggle to pass on rising costs to their customers. This past week’s earnings report for Target and Walmart triggered an onslaught of selling in discount stores and other retail stocks. Target’s gross margin fell to 25.7% from 30% a year ago due to higher markdowns and rising costs. As a result of the selling pressure, all three companies are deeply oversold versus the sector ETF.

Overbought

Clorox (CLX), Kellogg (K), and Coca-Cola (KO) – These three companies differ in their product offerings but are similar in that they are one step removed from the consumer. They manufacture and sell products to retailers who make the final sale to the consumer. As household names, they benefit from incremental pricing power that the firms above lack and can better pass on rising costs to protect margins. While that has helped them thus far, the problems the retailers are having may spread to their suppliers. All three are overbought versus the sector ETF, with K the most overbought at nearly three sigmas above XLP.

The Right Strategy Is Critical When Investing During A Recession!

Investing during a recession can be a very difficult, and often dangerous, prospect. However, it can be done if approached with a bit of strategy and preparation. Follow these tips to avoid losing it all when a recession hits!

What Is A Recession?

Let’s start with the definition of what a recession is. According to the National Bureau of Economic Research (NBER), the agency responsible for dating recessions, a recession is a period of two, or more, consecutive quarters of negative economic growth. While the “R-Word” gets discussed in the financial media as if it is the “coming apocalypse,” in reality, it is a period of declining economic growth.

The chart below shows the historical length of recessions over time.

historical length of recessions

Notably, the risk to investors during an economic recession is high. Historically, markets tend to correct rather sharply during recessionary periods.

Recessions and market declines

Such is because the markets reprice the excess valuations given to financial assets during the previous expansion. Higher valuations during expansions tend to precede deeper reversions during recessions.

Stock market valuations

As is evident, recessions are coincident with market corrections and bear markets. The problem with trying to avoid a recession, from an investment perspective, is this: by the time a recession is evident, it is often too late.

A Day Late & A Dollar Short

The biggest risk of investing during a recession is putting a “recession investing strategy” into place at the right time. As I wrote in “Recession Risk Rising:”

The problem with making an assessment about the state of the economy today, based on current data points, is that these numbers are only “best guesses.” Economic data is subject to substantive negative revisions as data gets collected and adjusted over the forthcoming 12- and 36-months.

Consider for a minute that in January 2008 Chairman Bernanke stated:

“The Federal Reserve is not currently forecasting a recession.”

In hindsight, the NBER, in December 2008, dated the start of the official recession as December 2007.

If Ben Bernanke didn’t know a recession was underway, how would we?”

Such is the biggest risk to investors. The chart shows the S&P 500 from 1960 to the present. Each of the blue dots is the peak of the market PRIOR to the onset of a recession. The yellow triangles are the official NBER recession announcements.

NBER Recession Dating and Market

The issue to investors is evident. In 9 of 10 instances, the S&P 500 peaked and turned lower prior to the recognition of a recession. 

The decline from the peak was considered “just a correction” as economic growth remained strong. Therefore, investors didn’t adjust their strategy to invest during a recession.

In reality, however, the market was signaling a coming recession in the months ahead. The economic data just didn’t reflect it as of yet. 

The problem is in waiting for the data to catch up.

Recession Risk, Recession Risk: Rising Rapidly (Or, Could We Be In One Already?)

Today, we are once again seeing many of the same early warnings. If you have been paying attention to the trend of the economic data, the stock market, and the yield curve, the warnings are becoming more pronounced.

How To Invest During A Recession

Investing during a recession can be dangerous particularly when valuations across all asset classes are elevated. However, if you choose to invest during a recession, there are some steps to take to make sure you are prepared to weather the increased market volatility.

  • Have excess emergency savings so you are not “forced” to sell during a decline to meet obligations.
  • Extend your time horizon to 5-7 years as buying distressed stocks can get more distressed.
  • Don’t obsessively check your portfolio.
  • Consider tax-loss harvesting (selling stocks at a loss) so those losses can be offset against future gains.
  • Stick to your investing discipline regardless of what happens.

Once you are prepared, what investments do well in a recession?

“A recession is a good time to avoid speculating, especially on stocks that have taken the worst beating. Weaker companies often go bankrupt during recessions, and while stocks that have fallen by 80%, 90%, or even more might seem like bargains, they are usually cheap for a reason. Just remember — a broken business at an excellent price is still a broken business.” – Motley Fool

That is very true, to make money in a recession focus on stocks that:

  • Have consistent earnings growth over time.
  • Focus on dividend-payers and avoid high leverage.
  • Free cash flow and strong operating margins are key.
  • Avoid companies dependent on consumer spending, have high cash burn rates or have negative incomes and earnings.
  • Invest incrementally using lower prices to build positions.
  • Lastly, don’t forget about bonds that offer a safe haven during volatile market environments.

Investing during a recession is not easy due to high volatility, falling prices, and negative media headlines. However, given a well-thought-out strategy, a longer-term timeline, and an ability to stick to your discipline, it can be very profitable.

How To Avoid Losing Money In A Recession

As noted, the biggest problem of investing during a recession is knowing that you are in one. There are certainly many indicators suggesting we could indeed be heading into a recession sooner than later, but unfortunately, we won’t know for sure until after the fact.

Therefore, we must respond to market warnings and take action to prepare for a recession in advance. That said, the most important thing isn’t necessarily what actions to take, but what behaviors to avoid. During market downturns, it is our emotional and behavioral biases that tend to inflict the most damage to our financial outcomes.

“Loss aversion” is one of the leading factors influencing investment decisions according to a recent survey from the CFA Institute.

CFA Institute Survey

“Loss aversion is a tendency in behavioral finance where investors are so fearful of losses that they focus on trying to avoid a loss more so than on making gains. The more one experiences losses, the more likely they are to become prone to loss aversion.” – Corporate Finance Institute

Therefore, to avoid losing money in a recession you must:

  • Avoid trying to time the exact bottom.
  • Don’t try to “day trade” markets
  • Reduce leverage and speculative bets
  • Avoid selling quality companies just because they are down.

I agree with Motley Fool’s conclusion:

“The bottom line is that, during recessions, it’s important to stay the course. It becomes a bit more important to focus on top-quality companies in turbulent times, but, for the most part, you should approach investing in a recession in the same manner you would approach investing any other time. Buy high-quality companies or funds and hold on to them for as long as they stay that way.”

Most importantly, you must know the difference between a “top-quality” company and one that isn’t.

Final Thoughts On How To Invest In A Recession Without Losing It All

There is a high risk of losing a lot of money in a recession if you aren’t strategic about how you invest. We hope that our points about tax-loss harvesting, staying the course, having adequate emergency cash, and avoiding emotional biases such as loss aversion, etc., have been useful.

If you decide not to go it alone, please consider setting up a meeting with one of our financial advisors. We are a wealth management firm in Houston serving clients across the country.


Financial Instability- Junk Bond Spreads Perking Up

The Fed pays a lot of attention to financial stability or market functioning, and they will take action in the event of financial instability. Given the lessons learned in 2008 and the massive leverage within the markets and economy, the Fed’s radar for financial instability is particularly sensitive. It is not necessarily yield levels that alert the Fed but yield spreads.

Spreads are the differences between non-treasury bond yields and Treasury yields. The graph below shows financial instability is potentially starting to occur. Junk bond spreads to Treasuries have increased recently. In historical context, the recent move is minor, but it can change quickly, as we saw in 2008 and 2020. Corporate and municipal yield spreads bear watching closely.

financial instability junk bonds

What To Watch Today

Economy

  • No notable reports are scheduled for release

Earnings

Pre-market

  • Booz Allen (BAH) to report adjusted earnings of 85 cents on revenue of $2.2 billion
  • Deere (DE) to report adjusted earnings of $6.70 on revenue of $13.24 billion
  • Foot Locker (FLto report adjusted earnings of $1.53 on revenue of $2.19 billion

Post-market

  • No notable reports are scheduled for release

Market Trading Update – Holding Lows Is Good News.

Speaking of financial instability, Wednesday was a brutal beating after the previous advance. However, the market held its previous lows and rallied at one point turning positive for the day. There are a lot of “trapped longs” that are getting very frustrated and selling every rally. Eventually, we will exhaust the majority of sellers and a broader reflexive rally will take hold. However, for now, the trend is down, and stocks continue to face stiff resistance on every rally. Use opportunities to raise cash and rebalance risks accordingly.

Market Trading Update

Another Poor Regional Survey

The Philadelphia Fed Manufacturing Index, like the Empire State Index, came in well short of expectations. The index is now 2.6, down from 17.6 and expectations of 16.5. As shown below, the index still signals manufacturing expansion, but just barely so. The index fell to its lowest level in two years. The good news within the survey is that prices paid fell; however, they remain at a very high level. Unlike most other surveys, new orders also rose. The bad news is that employment fell sharply from 41.4 to 25.5.

philadelphia fed regional survey

Initial Jobless Claims

Weekly jobless claims data can be a good indicator of economic activity. Layoffs tend to occur before recessions as employers react to declining sales. In this environment, jobless claims data may be tougher to decipher. For starters, it has been exceedingly difficult for employers to hire over the last year. As such, they may hold onto employees longer than is typical. Second, jobless claims a month ago were at levels last seen 50 years ago and remain well below pre-pandemic averages. An uptick in a good economic environment would not necessarily be a warning but a normalization.

On Thursday, jobless claims rose to their highest level (218k) in the past three months. We present the graph below to help put some perspective on the recent increase in jobless claims. As shown, it has upticked, but it’s still much lower than most instances in the last 40 years. That said it is back in line with the pre-pandemic (2018-2019) averages.

initial jobless claims

A Historic Cluster Of Selling Pressure

“This is probably the most brutal market I’ve encountered in 20 years of publishing, 30 years of investing, and 80 years of data history. The 1930s were more consistently and more egregiously difficult, and maybe the 1970s could rival it. But in terms of value destruction and lack of alternative investments holding value, this will rank among the worst several months for investors ever.

The sheer overwhelming selling pressure has been remarkable. When stocks drop, almost everything drops. And volume has been almost entirely one-sided. Wednesday marked the third session in ten days when less than 10% of NYSE volume flowed into advancing securities.” – Sentiment Trader

Sentiment Trader Selling Cluster

How Oversold is the Market

Jeff Marcus from TPA provides SimpleVisor clients with his unique brand of analysis. Today he writes the following about the market’s current oversold condition.

The S&P500 is Oversold on a Long-Term Basis

The S&P500 has hit an oversold milestone on a long-term basis. The 14-week RSI of the S&P500 is now 30.79. The chart below shows that the S&P500 has only had a 14-week RSI of 30 or lower 2 other times in the past 5 years; the end of 2018 and March 2020. Both of those milestones provided buying opportunities for investors.

Chart 2 goes back 20 years to look at the S&P500 and its long-term RSI. 5 of the previous 7 or 71% of the time, those oversold conditions were buy signals. Even when the signal did not work immediately, it signaled proximity to a market low.

S&P 500 oversold
market oversold

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Portfolio Trade Alert – May 19, 2022

Trade Alert For Equity and ETF Models Only

We had previously bought a small starter position in IAU that we intended to add to if gold corrected and held support. That price action occurred as expected so we are now adding again to our position.

  • Increase IAU to 4% of the portfolio in both models

Consumers Are Struggling

Another day and another stern warning that consumers are struggling. Below we provide details on Target’s earnings which drove the stock down about 25%. Like Walmart, inflation increases Target’s costs and limits consumers’ purchasing power. As we have noted, wages have risen but not nearly enough to compensate for higher food and energy costs.

Consumers are being forced to limit purchases of other goods and sharply increase credit card debt. As we share below, credit card debt is growing at the fastest pace in 20 years. In yesterday’s Commentary, we ended with a critical statement that bears repeating: Personal consumption accounts for two-thirds of GDP!If the consumer is in trouble, the economy is as well.

This morning we have several more retailers reporting which could give us more clues about the state of consumers.

What To Watch Today

Economy

  • 8:30 a.m. ET: Philadelphia Fed Business Outlook Index, May (15.0 expected, 17.6 during prior month)
  • 8:30 a.m. ET: Initial jobless claims, week ended May 14 (200,000 expected, 203,000 during prior week)
  • 8:30 a.m. ET: Continuing claims, week ended May 7 (1.320 million expected, 1.343 during prior week)
  • 10:00 a.m. ET: Existing Home Sales, April (5.65 million expected, 5.77 million during prior month)
  • 10:00 a.m. ET: Existing Home Sales, month-over-month, April (-2.1% expected, -2.7% during prior month)
  • 10:00 a.m. ET: Leading Index, April (0.0% expected, 0.3% in during prior month)

Earnings

Pre-market

  • BJ’s Wholesale Club (BJ) to report adjusted earnings of $0.71 on revenue of $4.22 billion
  • Kohl’s (KSS) to report adjusted earnings of $0.71 on revenue of $3.71 billion
  • Eagle Materials (EXP) to report adjusted earnings of $1.77 on revenue of $403.31 billion

‌Post-market

  • Ross Stores (ROST) to report adjusted earnings of $1.00 on revenue of $4.54 billion
  • VF Corp (VFC) to report adjusted earnings of $0.46 on revenue of $2.83 billion
  • Palo Alto Networks (PANW) to report adjusted earnings of $1.68 on revenue of $1.36 billion

Market Trading UpdateA Horrible Reversal

Just when it looked like it might be safe to re-enter the water, Target reports earnings that sends a shockwave through the market as consumers are clearly retrenching. Such suggests the Fed is way too late in hiking rates, and a recession may be much closer than previously expected.

The market rallied right into overhead resistance and then retraced all the gains from the last 3-days in a single day. This is not a great sign and after adding some value-based exposure we closed out our index position to raise some cash and return to a more defensive posture.

While the market remains oversold, sentiment is extremely negative, and stocks are pushing a more extreme deviation, the price action remains unhealthy. We are going to wait for some confirmation before putting any other cash to work.

market trading update

Wall Street Is Losing Faith

“The downgrades are picking up. On Monday, 70 more stocks received target downgrades than upgrades, ranking in the bottom 2.5% of all days since 2010. It was the largest number of net downgrades since April 2020.

By the time a 70-day average of net price target changes fell to the current level, it’s been at about the peak of selling pressure during past corrections.” – Sentiment Trader

Wall Street Losing Faith

Target Is Having a 25% Off Sale

In Wednesday’s Commentary, we led with a discussion of Walmart’s disappointing earnings. In their case, inflation increases its expenses and hurts its customers’ ability to spend. Target followed Walmart with similar news, and its stock fell by over 25%. Target’s EPS was $2.19, well short of estimates for $3.06. Like Walmart, Target’s sales were higher versus estimates. In both cases, sales growth was less than the inflation rate.

We think it is helpful to share a few quotes from Target’s CEO Brian Cornell to highlight the difficulty large retailers are having in the current high inflationary environment.

“Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time,”

“…lower-than-expected sales of discretionary items from TVs to bicycles”

“We never expected the kind of cost increases in freight and transportation that we’re seeing right now,”

The Bottom Line

The bottom line is that consumers are being forced to spend more money on food, gas, and other necessities, leaving less money available for many of the other products stores like Target and Walmart sell. At the same time, wages, transportation, and inventory costs are rising rapidly, and retailers are increasingly struggling to pass on those higher costs to their customers. Equally important, inventories are starting to stack up, as we show below. This will result in fewer new orders, which will weigh on the manufacturers of their goods. Here is what Walmart’s CEO had to say on the topic:

“We like the fact that our inventory is up because so much of it is needed to be in stock on our side counters but a 32% increase is higher than we want. We’ll work through most or all of the excess inventory over the next couple of quarters”

inventories target

When Resistance Becomes Support And Then Resistance

The graph below shows a trend line from 2018 that has both supported the market and later proved to be a level of resistance. As we circle, the trend line acted as resistance twice before the Pandemic and twice on its initial rebound in later 2020. Upon breaking through the resistance, and testing it twice, the market soared. With the recent decline, the price of the S&P 500 went right through the resistance. The rally of the last few days has the price touching the underbelly of the trend. Will it act like resistance as it did, or will the rally continue with the trend line proven to be no longer meaningful?

support resistance

The Fed is Far Behind

The Fed has now hiked rates by 0.75%, yet it remains grossly behind the inflation rate. As we show below, the gap between CPI and the Effective Fed Funds Rate is at its widest level since at least 1960. It also dwarfs the experiences of the double-digit inflation periods of the 70s and 80s.

fed far behind

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Portfolio Trade Alert – May 18, 2022

Trade Alert For Equity Model Only

After adding value-oriented positions to our model over the last couple of weeks, we had increased equity exposure above target levels. We were holding the SPDR S&P 500 Index (SPY) for a rally that started last week.

However, that rally came to an abrupt end this morning following the dismal report by Target (TGT) which reeked of recessionary warnings about the consumer, inventory builds, and supply change issues. To raise cash and reduce equity exposure for the time being we sold our 3% SPY position.

  • Sell 100% of SPY

Walmart Slumps As Inflation Takes Its Toll

Walmart posted earnings per share of $1.30, much weaker than expectations for $1.48. While the bottom line was 23% below the same period last year, Walmart’s revenue grew 2%. Stronger sales and weaker earnings, a common theme in many recent earnings reports, is a consequence of inflation.

“Bottomline results were unexpected and reflect the unusual environment. U.S. inflation levels, particularly in food and fuel”– Walmart CEO Doug McMillon

Walmart’s CEO is not rosy about inflation falling quickly enough to save this year’s earnings. He expects net sales to increase by 4% for the remainder of the year. However, earnings per share are expected to fall by 1%, much lower than original projections in the mid-single digits. As the graph from Statista below highlights, Walmart is the world’s largest retailer. Accordingly, their results are indicative of the challenging climate facing consumers and many retail-oriented businesses. Personal consumption accounts for two-thirds of GDP!

walmart

What To Watch Today

Economy

  • 7:00 a.m. ET: MBA Mortgage Applications, week ended May 13 (2.0% during prior week)
  • 8:30 a.m. ET: Housing starts, April (1.757 million expected, 1.793 million during prior month)
  • 8:30 a.m. ET: Building permits, April (1.817 million expected, 1.870 million during prior month)

Earnings

Pre-market

  • Lowe’s (LOW) to report adjusted earnings of $3.23 on revenue of $23.81 billion
  • Target (TGT) to report adjusted earnings of $3.06 on revenue of $24.34 billion
  • Analog Devices (ADI) to report adjusted earnings of $2.11 on revenue of $2.84 billion
  • TJ Maxx (TJX) to report adjusted earnings of 60 cents on revenue of $11.6 billion

‌Post-market

  • Cisco (CSCO) to report adjusted earnings of 86 cents on revenue of $13.34 billion
  • Bath & Body Works (BBWI) to report adjusted earnings of 53 cents on revenue of $1.44 billion

Market Trading Update – Rally Underway…Finally!

The market finally strung together a few trading days of back-to-back advances which remained a rarity since March. However, while the rally is welcome, it will quickly consume much of the “pent-up” fuel and there are a LOT of “trapped longs” needing an exit. We are still looking to use this rally in stages to reduce some high beta names, raise cash, and rebalance portfolio allocations.

The good news is that the MACD “buy signal” is very close to crossing from an extreme oversold low. So, while an initial rally to the 20-dma (red) may be short-term resistance, there is a reasonable possibility the market could rally to the 50-dma during a short-squeeze retracement.

Market trading update.

Perspective from Callum Thomas

The following two graphs from Callum Thomas provide unique insight into the recent downturn.

The graph below shows that the recent equity downturn has hurt retail investors more than the broader market indexes. Per the estimate below, retail investors are now flat since the Pandemic started. The S&P 500 is up about 30% over the same period.

retail investors

The following graph puts the recent downturn into a historical perspective. If this is a bear market, it is quite possible that despite a 20% decline, it may still be in the early innings.

perspective

VIX Cycle Point to Reflexive Rally

The graph below from Nautilus Investment Research shows how dependable the 50-day cycle in the VIX volatility index has been over the last 1.5 years. Per the cycle, the VIX peaked in early May and will trough on June 9th. A period of rising or consolidating prices would likely bring the VIX down to 20ish. Further, a 2-4 week period of stability is likely, given the recent bout of volatility. This is just another tool that may help as we further rebalance into what we believe will be a reflexive bounce over the coming weeks.

vix volatility

Forward P/E’s Are Cheap, They Say

We have seen numerous pundits screaming that market valuations are cheap. More often than not, they justify said comments with forward P/E valuations. The first graph below shows forward P/Es do appear fair or even cheap relative to the last eight years. The problem with this logic is how they estimate forward earnings.

Currently, S&P Global estimates earnings growth of 15% for the next four quarters. From 2012 through 2019 (pre-pandemic and post-financial crisis) S&P earnings grew by 7%. The current estimate is double the natural run rate. Now consider a distinct possibility of a recession, and inflation is crushing margins and earnings. As we wrote earlier, inflation took a big bite out of Walmart’s earnings. Walmart is the world’s largest retailer. The second graph below from Morgan Stanley shows their reliable proprietary earnings model sees the potential for zero earnings growth. Recalculate forward P/E with zero or even negative earnings growth, and forward-looking valuations are not as cheap as many think.

forward pe
earnings expectations

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Clorox Stock- Anything But A Value Stock

In The Graduate, a young Dustin Hoffman, upon his college graduation, is taken aside by a family friend for career advice. The friend offers Dustin one word; “plastics.” He encourages Hoffman’s character to pursue a career in the explosive growth, up-and-coming plastics industry.  We may want to think of similar advice for our children and their friends with graduation ceremonies upon us. It is also incumbent on us to consider the same advice regarding our portfolios. If we have a longer-term window and can ignore short-term volatility, should we invest in a volatile growth stock like Nvidia or a stable low growth company like Clorox? 

Many investment pundits may rephrase the question as a choice between a value stock and a growth stock. The terms “value” and “growth” have become blurred in recent years. What appears to be a value stock may be in its reputation only.

Valuations Matter

Most readers with long-term investment horizons will answer our earlier question by selecting the semiconductor giant Nvidia.

We confidently state that the semiconductor industry will grow multiples of the bleach industry.

However, the value growth investment question is not which stock is considered growth or value, but which is priced cheaper given their distinctly different growth rates. At the right price, Clorox may be a much better investment than Nvidia, despite Nvidia’s substantial growth potential.

Unfortunately, many passive investors assume companies with long successful histories and mature products in low-growth industries are value stocks. Conversely, a semiconductor company or other high-growth technology must be a growth company in many investors’ eyes. Such assumptions get investors in trouble.

Schedule an appointment now

Nvidia or Clorox: Where is the Value?

To help answer our question, we start with a cursory view of their share prices since 2020.

As the graph below shows, CLX had a nice run during the height of the pandemic as bleach was in high demand. After a 60% surge, it gradually erased the gains and is back to similar levels as two years ago.

NVDA initially fell by 35% in March 2020 but stormed back, growing from $50 to a peak of $333. Since hitting a record high in November 2021, it has fallen nearly 50%, although still trading at a reasonable premium to its pre-pandemic levels. 

value clorox nvdia

Fundamentals

While most investors stare at stock prices all day, fundamentals are what matter. Simply, what are you getting for the price? This is where the Nvidia and Clorox valuations and recent performance get interesting. Further, it is where the line between value and growth gets hazy.

Since 2020, NVDA has grown its revenue by 146%, while CLX has grown revenue by 15%. Sales are a significant consideration in stock analysis, but how well sales revenue translates into bottom-line growth is more important. NVDA has grown EBITDA by 242%, while CLX has seen a 23% decline in EBITDA over the same period. Earnings are a function of sales and margins. Operating margins at NVDA are up nearly 11 points since 2020, while CLX has dropped 7.5.

NVDA’s Price to Earnings ratio (P/E) has fallen by 14 since 2020. At the same time, CLX has risen by 13.5.

Current Valuations

The above data certainly points to NVDA as the higher growth company with more robust fundamentals. However, we want to stress that price and fundamentals matter, but only in the context of valuations.

A company can have poor growth rates and weakening margins, but it may be an excellent investment at a low enough valuation. Conversely, a company like Tesla is experiencing tremendous growth, but its market cap equals that of the entire auto industry.

With that background, let’s compare NVDA and CLX valuations.

valuations clx

If you only looked at the table above and didn’t know which companies they were, you would likely struggle to pick the value stock. NVDA has a higher P/E but a lower forward P/E. NVDA also has a much lower price to book value but a much higher price to sales ratio.

To help break the tie, let’s compare their PEG ratios. The PEG ratio or price to earnings growth is the price to earnings ratio divided by earnings growth. This ratio helps make sense of P/E within the context of expected growth. A P/E of 100 may be cheap, for instance, if earnings are growing at 200%. Conversely, a P/E of five may be expensive if earnings are shrinking.

A PEG ratio of one typically defines the border between over and undervaluation. By this metric, both companies are overvalued, with ratios well above one. However, NVDA’s PEG ratio is decently lower than CLX.

We believe that NVDA is trading at a lower valuation than Clorox based on the data above. 

SimpleVisor Models

To add to the analysis, we share our internal model. The model helps assess if stocks are rich or cheap to their long-running normalized valuations. The model assigns a fair value price based on its normalized P/E ratio. It then tracks how the stock price trades around that ratio.

In the Clorox graph below, the stock price (black line) tended to gravitate around the gray fair value line from 2012 to 2019. When it was above the gray line, we would say Clorox stock is overvalued and vice versa for when it is below. Currently, Clorox is over two standard deviations or 60% above the model’s fair value.   

clorox valuation fundamental

The following graph shows a similar analysis for NVDA. From 2012 to 2019, it also bounced around its fair value level. However, once the pandemic struck, it traded well above fair value. Until November 2021, Nvidia stock, like Clorox, was over two standard deviations above its fair value. Since then, it has fallen back much closer to fair value, currently trading at a 19% premium.

nvda fundamental valuation

Neither stock is cheap using this model, but the model asserts Nvidia, not Clorox is the more reasonable of the two companies. Dare we say if we must pick a value stock from the two choices, it would be Nvidia, not Clorox.

Summary

NVDA is growing earnings and revenues much faster than Clorox. That in and of itself is not a surprise. The real revelation is that these two companies trade at similar valuations despite vastly different growth trajectories.

Given that NVDA is proliferating and CLX growth appears limited, our analysis questions why hold a “value” stock in CLX versus a “growth” stock in NVDA. This article is not a prompt to buy Nvidia or sell Clorox stock, but it highlights that some stocks are perceived as value stocks despite valuations that are on par with growth stocks offering significantly greater growth potential.

Investors tend to lump certain stocks within broad classifications. Clorox, for example, is widely touted as a value stock. NVDA is known as a high-growth stock. The problem with these classifications is that it is not the underlying business that matters; it is the price you pay for their earnings potential.

Empire State Survey Warns of Economic Contraction

The May New York Fed Empire State Manufacturing Survey fell sharply into economic contraction levels at -11.6. Last month the Empire index stood at +24.6. Leading the Empire index lower are New Orders, Unfilled Orders, Inventories, and Shipments. All four sub-indexes point to a normalization of supply lines and reduction of shortages. These readings should bode well for inflation in the coming months. The prices paid and received indexes fell but remained grossly elevated from historical norms. Employment increased despite a broad weakening of activity, and the average workweek held steady.

While the survey is regional and covers a relatively small area, these surveys have a high correlation to national economic activity. Further, they are as close to real-time data as is available. This Empire survey occurred between May 2 and May 9.

empire index

What To Watch Today

Economy

  • 8:30 a.m. ET: Retail Sales Advance, month-over-month, April (1.0% expected, 0.5% during prior month, upwardly revised to 0.7%)
  • 8:30 a.m. ET: Retail Sales excluding autos, month-over-month, April (0.4% expected, 1.1% during prior month, upwardly revised 1.4%)
  • 8:30 a.m. ET: Retail Sales excluding autos and gas, month-over-month, April (0.7% expected, 0.2% during prior month, upwardly revised to 0.7%)
  • 8:30 a.m. ET: Retail Sales Control Group, April (0.8% expected, -0.1% during prior month, upwardly revised to 0.7%)
  • 9:15 a.m. ET: Industrial Production, month-over-month, April (0.5% expected, 0.9% during prior month)
  • 9:15 a.m. ET: Capacity Utilization, April (78.6% expected, 78.3% during prior month)
  • 9:15 a.m. ET: Manufacturing (SIC) Production, April (0.4% expected, 0.9% during prior month)
  • 10:00 a.m. ET: Business Inventories, March (1.9% expected, 1.5% during prior month)
  • 10:00 a.m. ET: NAHB Housing Market Index, May (75 expected, 77 during prior month)

Earnings

Pre-market

  • Walmart (WMT) to report adjusted earnings of $1.48 on revenue of $139.09 billion
  • Home Depot (HD) to report adjusted earnings of $3.71 on revenue of $36.83 billion
  • JD.com (JD) to report adjusted earnings of 1.35 yuan on revenue of 236.73 billion yuan
  • Vodafone (VOD) to report adjusted earnings of €1.01 on revenue of €45.39 billion
  • Trip.com (TCOM) to report adjusted earnings of $0.26 on revenue of $390 million

‌Post-market

  • No notable reports are scheduled for release

Market Trading Update – Timid Buying Keeps Rally Alive

While the Empire Index came in weak, there was still some buying action coming into the market yesterday to build on Friday’s rally. If the market can rally enough to begin to squeeze investors who are short the market, we could see this rally follow through. If not, we will likely retest lows.

For now, the market remains well oversold, and as discussed this morning a rally to the 20-dma seems the most obvious. Any rally to previous resistance should be used as an opportunity to increase cash, reduce risk, and rebalance allocations accordingly.

Market Trading Update 051722

Everybody Is Bearish – Near Record Options Betting AGAINST A Rally

“Small traders are getting awfully nervous. And now they’re willing to pay up for the right to protect against a crash.

For only the 7th time in 22 years, last week, the smallest options traders spent 30% or more of their volume buying put options to open. Between that spike in put buying and an increase in implied volatility, the premiums that small traders paid for protection were more than 10% higher than the premiums they paid for call options.

It’s extremely rare for retail traders to pay more in premiums for put protection than for speculating on rallies. The data shows that the S&P 500 rallied over the next year after every time they did so, averaging a healthy return of 21%. The only precedents are all-out market crashes, so there was a lot of volatility in the short term.” – Sentiment Trader

Sentiment Trader Call Option Premiums

Did the Equity Market Finally Capitulate

Traders and investors often witness a “capitulation” trade at significant bottoms. Capitulation events are sharp declines fueled by panic. Capitulation can be defined using many quantitative and sentiment gauges. Below, we present a popular technical capitulation indicator. The put-call ratio measures the volume of put options versus call options. The dots represent the ratio for each day, and the blue line smooths them into a five-day moving average. Prior capitulation events, as circled, occurred when the moving average approached 1.00. As shown, the ratio is not quite there yet, which doubts whether a sizable bounce has started.

It’s worth considering the 2008/09 experiences. It shows numerous times the ratio neared 1.00 before the market put the final low in place. Bear markets tend to have strong countertrend rallies and periods of sharp declines. If this is a bear market, this indicator can help us assess if a sharp decline is finished and a reflexive bounce is in store.

put call ratio market bottom capitulate

There Is Still Risk In Tech Stocks

While there are plenty of indications suggesting a short-term rally, there is still risk in Technology stocks as noted this weekend by Chartr. To wit:

“We’ve combed through 50 years of daily data on the NASDAQ Composite Index, a tech-heavy index comprised of more than 2,500 companies, to get some perspective on how bad this crash has been… and how bad it could get.

So far the NASDAQ is down 29% from its previous peak. That puts it in bear market territory, but it isn’t even close to the 75-80% drop that was seen during the bursting of the dotcom bubble in 2000 or the depths of the Global Financial Crisis of 2008/09. Things could get a lot worse before they get better as inflation, slowing growth and geopolitical uncertainty take their toll or this could turn out to be one of the many 20-30% drops that markets have lived through over the last 50 years, without turning into a complete capitulation.”

How bad can it get for tech stocks.

No Worries in Corporate Bond Markets

The yield spreads between junk and investment-grade corporate bonds and Treasury bonds remain at relatively low levels. Such tells us that there is not much financial stress in the system. Simply, companies are not having much trouble accessing the capital markets. The graph below compares yield spreads of Junk B-rated corporate bonds to Investment Grade BBB-rated bonds. The orange dots are the 2022 comparisons.

The first takeaway is that yield spreads remain extremely low based on data covering the last 25+ years. Second, given recession odds are increasing, as in the Empire index, we should expect higher spreads and junk spreads to feel the pressure more than investment grade. Most of the orange dots are below the trend line signifying little stress within the corporate bond market.

corporate bond spreads

China’s Economy is Slumping Rapidly

The series of charts below from Pictet Asset Management shows a rapid decline in China’s economic activity. Some of the weaknesses are attributable to a good percentage of the country re-entering Covid lockdown protocols over the last two months. China has a zero Covid policy, and lockdowns are tough on the economy. From an American perspective, the slumping activity is crimping China’s exports which introduces an inflationary bias. Further, China is the second-largest economy in the world. Accordingly, their weakness will negatively affect the U.S. and the global economy.

china industrial production
china retail and care sales
floor space

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The Disinflationary Impact Of Fed Policy On Equities

The disinflationary impact of Fed policy on equities is coming. There is currently much debate in the mainstream media suggesting investors should ignore Fed rate hikes. To wit:

History suggests U.S. stocks are poised to experience more volatility following the rise in rates. But that doesn’t mean the bull run is over. In fact, in the previous eight hiking cycles the S&P 500 was higher a year after the first increase every single time, according to LPL Financial.” – Bloomberg

Fed rate hikes and equity market performance.

Such is a pretty compelling argument on the surface to stay the course with portfolios. However, as is always the case, every market cycle is different. Let’s look at a chart of Fed rate hiking cycles from 1980 to the present.

Equity market vs fed funds vs 2-year treasury rate and crisis

Historically, Fed rate hikes have consistently led to poor outcomes for investors. However, since the Fed policy takes about 9-months to impact the economy, LPL’s chart doesn’t show you “what happened next.”

Furthermore, out of the last 8-rate hike cycle, 80% of them occurred during the secular bull market cycle that started in 1980. During that 20-year cycle, the deregulation of the financial industry led to a massive debt-driven consumption boom, combined with consistently falling inflation and interest rates.

Even with those tailwinds, the Fed managed to create crisis after crisis by hiking rates.

QE Is Disinflationary For Stocks

Here is another problem for the “don’t fear Fed rate hikes” thesis.

For the last decade, the primary bullish thesis for chasing equity markets remains “Don’t fight the Fed.” While the “bulls” are adamant that you shouldn’t “fight the Fed” when monetary policy is loose, as evidenced by LPL, they say the same when it reverses. 

However, logic would dictate that outcomes can not be different UNLESS the changes to monetary policy have NO impact on equity pricing. That was a point previously made by Minneapolis Fed President Neel Kashkari once stated that the Fed’s QE program does not affect the financial markets.

“QE conspiracists can say this is all about balance sheet growth. Someone explain how swapping one short-term risk-free instrument (reserves) for another short-term risk-free instrument (t-bills) leads to equity repricing. I don’t see it.”

While he may be “technically correct,” as noted, there is ample evidence of a direct impact on financial markets. As discussed in “Past Performance Is A Guarantee:”

Given the high correlation between the financial markets and the Federal Reserve interventions, there is credence to Minsky’s theory. With an R-Square of nearly 85%, the Fed is impacting financial markets.

Cumulative growth of Fed balance sheet vs equity market.

The inflation of assets was not isolated in the U.S. but globally.

“If you run a simple regression since June 2009, the starting point of the biggest monetary experiment ever, you will find that the G4 Central Banks balance sheet explains 90%(!) of the MSCI AC World Index level.”@TheMarketEar

global central bank balance sheets vs global equity markets.

Given the high correlation to asset prices, logic suggests any contraction of the Fed’s balance sheet is disinflationary.

Fed balance sheet tapering schedule

That contraction is coming, and if correlations hold, the disinflationary impact on equity assets should logically follow.

Selling Rallies

As noted, monetary policy has a lag effect of about 9-months before it becomes evident in the markets and economy. As shown, with market sentiment so extremely negative, a market rally is certainly possible.

AAII INVI Investor sentiment composite
NAAIM equity bulls

However, as my colleague Albert Edwards recently noted:

“Surely all of us working in finance realize by now that something is likely to snap in the financial system and probably quite soon. The rapidity of current market moves and the polarisation of the now extreme Fed (hawkish) and BoJ (dovish) policies almost guarantees that outcome.

Notably, while discussing the disinflationary impact on equities (lower returns), such does not necessarily mean a “bear market.” There is certainly a possibility the U.S. could avoid a major bear market as long as global inflows continue at the current unprecedented pace.

Global equity inflows

Unfortunately, history suggests that such an optimistic outcome is rarely the case, given higher rates, less monetary accommodation, and slower economic growth.

QT Now, QE Later

While many believe the Fed will hike rates in their quest to battle inflation, that fight will end quickly when “financial instability” arises. As Former Dallas Fed President Richard Fisher noted:

“Let’s face it, Joe…the market has worn beer goggles for the longest possible time. They just believe the Fed’s going to bail them out.

I think the strike price on the Fed put has moved significantly [lower]. Unless we have a dramatic turn in the markets, it can infect the real economy.

How would such a dramatic turn occur?

  • At 20%, margin calls will begin to rise, putting pressure on asset and high-yield credit markets. (Such may have already started as witnessed by recent actions.)
  • Yield curves will fully invert as the market declines by 25% and economic growth crashes.
  • At 30%, corporations will lay off workers and move to protect profitability.

I suspect, as noted above that somewhere between a 20-30% decline, we will see the Fed return its focus to “market stability.”

Selling rallies certainly seems to be the prudent course of action at this stage of the equity cycle.

Portfolio Trade Alert – May 16, 2022

Trade Alert For Equity & ETF Model

This morning we added 0.5% to our position in Costco (COST) after its recent decline to oversold conditions. With a Price/Sales ratio of 1, and a steady cash flow stream from membership fees, we like this company long-term and continue to accumulate it on declines.

We also added 1% to our SPDR Healthcare ETF (XLV) increasing that position from 8-9% due to the demographic trends in the U.S. that will continue to support profitability in that sector.

Equity Model

  • Add 0.5% of the portfolio to Costco (COST)

ETF Model

  • Add 1% to XLV increasing the portfolio weight from 8% to 9%.

Viking Analytics: Weekly Gamma Band Update 5/16/2022

We share the Weekly Gamma Bands Update by Viking Analytics. The report uses options gamma to help you better manage risk and your equity allocations.

 

The S&P 500 (SPX) fell all week until the final hour of trading on Thursday, then saw a meaningful recovery rally over the next day.  Our gamma-band model enters the week with a 0% allocation to the SPX and will remain flat as long as the SPX remains below the lower gamma level, which is currently near 4,100.  With monthly options expiration on Friday, we expect to see high volatility during the week.

The Gamma Band model[1] can be viewed as a trend following model that is shows the effectiveness of tracking various “gamma” levels. When the daily price closes below Gamma Flip level, the model will reduce exposure to avoid price volatility and sell-off risk. If the market closes below what we call the “lower gamma level,” the model will reduce the SPX allocation to zero.

The main premise of this model is to maintain high allocations to stocks when risk and corresponding volatility are expected to be low.  For investors who have been conditioned to “buy low and sell high,” it is counter-intuitive to increase allocations when the market rises, but this approach has shown to increase risk-adjusted returns in the back-test.  

Risk management tools like this have become more important than ever to manage the next big drawdown. We incorporate many options-based signals into our daily stock market algorithms. Please visit our website to learn more about our trading and investing tools.

The Gamma Band model is one of several indicators that we publish daily in our SPX Report (click here for a sample report). 

The Gamma Flip – Background

Many market analysts have noted that daily volatility in the S&P 500 will change when the value of the SPX moves from one gamma regime to another.   Some analysts call this level the “gamma flip.”  The scatterplot below shows how price volatility (on the y-axis) is increasingly lower as the value of SPX rises higher above the Gamma Neutral level (on the right side of the chart).  When the value of the S&P closes lower than Gamma Neutral (to the left of the chart), volatility increases. 

Gamma Band Model – Background

The purpose of the Gamma Band model is to show how tail risk can be reduced by following a few simple rules.  The daily Gamma Band model has improved risk-adjusted returns by over 60% since 2007.  The graph below demonstrates how this approach can limit drawdowns while maintaining good returns.  A quick video introduction of the Gamma Band model can be seen by following this link

[1] The Gamma Band model in our SPX Market Report adjusts position size DAILY based upon the daily closing levels of SPX value and calculated Gamma Neutral.  The Weekly Gamma Band model is shown for illustrative purposes only.

Disclaimer

This is for informational purposes only and is not trading advice.  The information contained in this article is subject to our full disclaimer on our website.

[1] The Gamma Band model in our SPX Market Report adjusts position size DAILY based upon the daily closing levels of SPX value and calculated Gamma Neutral.  The Weekly Gamma Band model is shown for illustrative purposes only.

Authors

Erik Lytikainen, the founder of Viking Analytics, has over twenty-five years of experience as a financial analyst, entrepreneur, business developer, and commodity trader. Erik holds an MBA from the University of Maryland and a BS in Mechanical Engineering from Virginia Tech.

Rob McBride has 15+ years of experience in the systematic investment space and is a former Managing Director at a multi-billion dollar hedge fund. Rob has deep experience with market data, software and model building in financial markets.  Rob has a M.S. in Computer Science from the South Dakota School of Mines and Technology.

 


TPA-RRG Report – Relative Rotation Graph scores and rankings

Relative Rotation Graph for Top 20 and Bottom 20 is provided below.

Also, use the following link that shows RRG over time – how stocks move in and out of favor over time: https://vimeo.com/manage/videos/710138044

Sectors:

Social Media and Communication has made a real positive move in the past few weeks. This is a nod to risk coming back into the market and how oversold certain sectors had become. If this relative performance continues, watch for other beaten up areas like TECH and SEMIs to follow.

Top 20 & Bottom 20:

Although the Top 20 still contains a healthy does of Materials and defensive (Utilities and Staples) stocks, Social Media and Retail have crept into the mix.

The Bottom 20 is still predominated with Financial stocks. Russia will continue to weigh on the sector.

Relative Rotation Graph for 27 major sector & subsector ETFs provided below.

Also, use the following link that shows RRG over time – how sectors & subsectors move in and out of favor over time: https://vimeo.com/manage/videos/710132687

TPA-RRG SCORES FOR THE ENTIRE RUSSELL 1000

Click HERE for the entire Russell 1000 TPA-RRG Score and Rank Report.

This Week’s Top 10 and Bottom 10

Strong Finish to a Volatile Week for Stocks

The S&P 500 capped off last week on a positive note with a rally to close above 4000. The index managed to hold on to its gains Friday after failing to do so several times during the volatile week. Friday could be the beginning of a short-term relief rally considering the poor investor sentiment and deeply oversold conditions.

If so, the index may face resistance near 4150, providing a decent opportunity to sell into the rally and reduce risk. Given the low levels of liquidity lately, we could be in store for another volatile week.

Intraday SPY Chart

What To Watch Today

Economy

  • 8:30 a.m. ET: Empire Manufacturing, May (15.0 expected, 24.6 during prior month)
  • 4:00 p.m. ET: Net Long-Term TIC Outflows, March ($141.7 billion during prior month)
  • 4:00 p.m. ET: Total Net TIC Outflows, March (162.6 billion during prior month)

Earnings

Before Market Open:

  • • Warby Parker (WRBY) to report adjusted earnings of $0.00 on revenue of $154.5 million
  • Weber (WEBR) to report adjusted earnings of $0.19 on revenue of $660.25 million

After Market Close

  • Take-Two Interactive (TTWO) to report adjusted earnings of $1.04 on revenue of $870.05 million

Market Trading Update

Are we near the bottom? That is the question we will explore this week. However, the market is as oversold, deviated, and negatively biased from a technical viewpoint since both the 2018 and 2020 lows.

Market update weekly chart

With the market pushing 3-standard deviations below the 1-year moving average, and all technical indicators testing weekly lows, such is historically consistent with reflexive rallies. While such was what we said last week, the selling pressure continued this week as investors panicked over the latest inflation print.

With inflation, earnings, and the Fed behind us temporarily, maybe the “lack of news” will be enough to allow for the bulls to reenter the market.

Technically Speaking

Our composite technical gauge which is a weekly measure of Williams %R, Stochastics, RSI, and several other measures combined has now reached its lowest level since March 2020. While technical measures can stay extremely oversold for quite some time, it is rare for all technical measures to be at these levels. Historical, such extremes don’t last long.

Technical gauge

If you are a SimpleVisor.com subscriber (try FREE for 30-days) you can find a live version of all of our sentiment gauges here.

Earnings Season in the Rearview

Earnings season is almost behind us, with 91% of companies in the S&P 500 having reported results. The table below, via Refinitiv, shows that 78% of reported companies beat earnings estimates. Consumer discretionary had the worst beat rate (56%) while industrials had the highest beat rate (90%). As measured by the return from 1 day before to 1 day after reporting, on average, companies were punished for missing earnings estimates but were not rewarded for beating them.

Earnings season

Is a Freight Recession Looming?

The Cass Transportation Index Report for April points to a possible weakening in the freight cycle going forward. We have included a few of the key points below:

  • “While truckload rates have had an extraordinary cycle, the key leading indicators have fallen sharply over the past few months, which we expect to limit further upside in the Cass Truckload Linehaul Index and change its trajectory over the course of the year.”
  • “Normal contract timing would suggest there’s room for this index to continue to rise for a little longer after the peak in spot rates, but the clock is ticking.”
  • “The combination of inflation, Fed monetary tightening, war in Europe, and substitution back to services from goods are all leading to a downshift in the freight cycle. And consistent with the fundamental reason for cyclicality in the freight sector, the capacity response is occurring just as the surge in demand is ebbing.”

The last bullet refers to the chart below. Shipping capacity tends to lag freight rates as new entrants come when times are good and exit when rates fade. If we enter a freight recession, freight rates will decrease until either enough capacity leaves the market or freight demand picks up meaningfully enough. On the bright side, deflation in freight rates would ease inflationary pressures on consumers and shippers alike.

Freight Supply-Demand

The Week Ahead

Investors face another light week of economic data this week with several appearances by Fed speakers. Retail sales data for April will be released tomorrow. Expectations are for an increase of 0.8% MoM after gaining 0.5% MoM in March. The industrial production index will also be released tomorrow. On Wednesday, we will be watching April’s housing starts and permits data for indications of whether homebuilders are shifting course amid rising mortgage rates and record prices. Existing home sales for April will be released on Thursday. Expectations are for another decrease from 5.77M in March to 5.62M in April as rising mortgage rates crimp demand. We may face another volatile period in the markets this week unless we see an improvement in liquidity.

Factor Performance Update

Through Thursday’s close the S&P 500 has given up 17% YTD as investors sort out rising rates, inflation, and geopolitical uncertainty. The table below shows how relative factor performance trends have evolved over the last 245 trading days. Value-oriented factors are still outperforming YTD, with high dividend yield in the lead. The low volatility factor is picking up steam as volatile trading increases, however. It has gained 8.4% on SPY since March 10th versus 5.5% for high dividend yield. Aside from the ARKK “disruptive tech” basket, the areas underperforming most YTD are small-cap growth, semiconductors, and mega-cap growth.

Factor Performance

Consumer Sentiment Reaches its Lowest Point Since 2011

The University of Michigan Consumer Sentiment Index reached its lowest point since 2011 in the preliminary results for May. The reading of 59.1 came in well below estimates of 63.7 and last month’s 65.2. It’s no secret that skyrocketing food and energy prices are negatively impacting the consumer. The correction in asset prices YTD has further worked to reduce the “wealth effect” felt by consumers, which also is likely dragging on sentiment. We are creeping on levels of sentiment that existed during the GFC. Notably, the message from this survey is quite contradictory to the Fed’s messaging on the strength of the economy.

Consumer sentiment

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Selected Portfolio Position Review – May 16, 2022

The selected portfolio position review is something we will produce regularly on alternating weeks along with a sector review and major market review. Each report will contain a chartbook of either major financial markets, market sectors, or individual equities to review the underlying technical conditions for potential opportunities and risk management. This helps refine not only decision making about what to own and when, but what to overweight or underweight to achieve better performance.

HOW TO READ THE CHARTS

There are five primary components to each chart if you want to recreate them yourself in the CHARTING application under the RESEARCH tab.

  • The candlestick price chart is bounded by two Bollinger Band studies set at a 50-dma with 2- and 3-standard deviations. The 200-dma is also shown for support and resistance levels.
  • Below the price chart is a Williams %R indicator set at 14 periods.
  • The Stochastic indicator at the bottom is set at 14 %K periods, 3 %K smoothing, and 3 %D periods.

When the indicators are at the TOP of their respective charts, there is typically more risk and less reward available. In other words, the best time to BUY is when the majority of the indicators are at the BOTTOM of their respective channels.

With this basic tutorial let’s get to the portfolio position review analysis.

Abbott Laboratories (ABT)

ABT Abbott Labs
  • ABT has come under a lot of price pressure as of late over baby formula disruptions. The company should have production back up by the end of July.
  • Currently, ABT is on a very deep sell signal (bottom panels)
  • ABT recently traded well into 3-standard deviation territory giving us a reasonable entry point.
  • Short-Term Positioning: Added to the portfolio.
    • Buy with a target of $118
    • Stop-loss is currently $105
  • Long-Term Positioning: Neutral

AbbVie (ABBV)

Abbvie ABBV
  • ABBV sold off very quickly with the market. However, this has been a very strong stock over the last several years.
  • ABBV bounced off the 2-standard deviation zone and the oversold condition is getting reversed.
  • The position is heading back into short-term overbought conditions and the 50-dma may provide short-term resistance.
  • Short-Term Positioning: Holding our position in the portfolio.
    • Hold with a target of $155
    • Stop-loss is currently $143
  • Long-Term Positioning: Neutral

Apple (AAPL)

Apple AAPL
  • With the Nasdaq under tremendous pressure, AAPL finally gave way to the selling. The company remains fundamentally very strong, however, it is no longer the growth company it once was.
  • The 50-dma will likely cross below the 200-dma which will provide additional downside pressure.
  • Apple is very oversold currently and 3-standard deviations below the mean. A reflexive rally in the next few days would not be surprising.
  • Short-Term Positioning: Holding our position in the portfolio.
    • Hold with a target of $160
    • Stop-loss is currently $140
  • Long-Term Positioning: Neutral

AMD (AMD)

AMD
  • AMD had terrific earnings and rallied but gave up those gains last week before bouncing on Friday.
  • Support is holding at the May lows for now. However, the stock is not nearly as oversold as it was previously.
  • We are looking to reduce the position further (weight-wise) in the portfolio on a rally.
  • Short-Term Positioning: Hold And Reflex Rally To Reduce Risk
    • Hold with a target of $102
    • Stop-loss is currently $84
  • Long-Term Positioning: Neutral / Bearish

CostCo (COST)

Costco Stores
  • One of my favorite long-term stocks is Costco. This company literally prints money with its membership fees.
  • The recent selling pressure in the whole market has pulled Costco back to a very oversold level.
  • Both lower indicators are very oversold and COST is trading 3-standard deviations below its mean.
  • We are looking to increase the current weighting in our portfolio.
  • Short-Term Positioning: Bullish – Look to add.
    • Buy with a target of $550
    • Stop-loss is currently $490
  • Long-Term Positioning: Bullish

United Health Care (UNH)

United healthcare UNH
  • UNH has a great demographic story. Millions of “baby boomers” aging in retirement guarantee UNH a long runway of profitability.
  • The long-term trends remains very positive.
  • UNH remains deeply oversold and is sitting just above support at the 200-dma.
  • Short-Term Positioning: Added to the portfolio
    • Buy with a target of $520
    • Stop-loss is currently $480
  • Long-Term Positioning: Bullish

Verizon (VZ)

Verizon VZ
  • With a 5% yield and strong fundamentals, I could resist adding VZ to our portfolio for a bit of defensive hedge in a volatile market.
  • Both oversold signals are starting to improve after the recent plunge to 3-standard deviations below the 50-dma just recently.
  • The sharp plunge lower gives VZ a decent risk/reward profile for a trade.
  • Short-Term Positioning: Added to the portfolio.
    • Buy with a target of $51
    • Stop-loss is currently $46
  • Long-Term Positioning: Neutrol

Exxon Mobil (XOM)

Exxon Mobil XOM
  • I would be remiss not to cover one of our energy holdings given the sharp advance in these companies over the last year.
  • The trend is very positive and the 50-dma is trading well above the 200-dma.
  • Short-term overbought and oversold conditions are not extreme and XOM has some room to retest recent highs.
  • The current setup is still very positive but an entry point to add exposure is not evident.
  • Short-Term Positioning: Holding a slightly reduced position in the portfolio.
    • Hold with a target of $92
    • Stop-loss is currently $78
  • Long-Term Positioning: Bullish

Five Energy Stocks to Sell

If we presented you with a year-to-date chart of the S&P 500 with no other context and asked which sector has defied gravity and is up over 30%, what would you say? Maybe, traditionally conservate sectors like Utilities, Staples, or Health care? If you picked one of those you may be surprised to learn that Energy has significantly outperformed the S&P 500 this year.

Supply chain challenges and geopolitical conflict sparked a substantial increase in energy prices giving way to massive capital flows into Energy companies as investors chase returns. As shown below, most sectors are deeply oversold but XLE still remains nearly 1.5 standard deviations above its 200dma.

With the U.S. Dollar at its strongest point in decades and energy prices well above historical norms, we question whether the energy trade has become too crowded. Relief on the geopolitical front and or signs of demand destruction could send shares of energy companies lower towards long term norms. Such is why we are screening for five energy stocks that remain vulnerable to a pullback.

Screening Criteria

We used the following screening criteria:

  • Energy Sector
  • Market Cap >$300M
  • YTD Performance >30%
  • Price 20%+ above 200dma
  • RSI not oversold (>50)
  • % Insider ownership decreased by >15% in last 6 months. (Insider selling occurred)

Company Summaries (all summaries courtesy of Zacks)

ConocoPhillips (COP)

ConocoPhillips is primarily involved in the exploration and production of oil and natural gas. Considering proved reserves and production, the company is the largest explorer and producer in the world. The company, founded in 1875, has strong presence across conventional and unconventional plays in 16 countries. ConocoPhillips low risk and cost-effective operations spread across North America, Asia, Australia and Europe. The upstream energy player also has foothold in Canadas oil sand resources and has exposure to developments related to liquefied natural gas (LNG).

Like most of the stocks in the scan COP is up over 30% year to date. It sits 25% above its 200dma. Some of its technical measures are back close to fair value but the stock price remains extremely elevated.

Chevron Corporation (CVX)

Chevron Corporation is one of the worlds leading integrated energy companies. Through its subsidiaries that conduct business worldwide, the company is involved in virtually every facet of the energy industry. Chevron explores for, produces and transports crude oil and natural gas; refines, markets and distributes transportation fuels and lubricants; manufactures and sells petrochemicals and additives; generates power; and develops and deploys technologies that enhance business value in every aspect of the company s operations.

CVX is up nearly 40% year to date and well above its 200dma. Like COP, its technical measures are moderating but the stock price has yet to weaken. This has been a function of some price consolidation, not declining prices.

Hess Corporation (HES)

Hess Corporation is a global integrated energy company. The company engages in exploration, production, development, transportation, purchase and sale of crude oil, natural gas liquids, and natural gas. It has gathering, compressing and processing operations of natural gas as well as fractionating natural gas liquids (NGLs). Additionally, Hess provides gathering, terminaling, loading and transporting operations for both crude oil and NGLs. The company also provides water handling services mainly in the Bakken and Three Forks Shale plays in North Dakota s Williston Basin area. Currently, the company has two operating segments, Exploration and Production (E&P) and Midstream.

HES is trading at its 50dma which has been good support. Like the other stocks in this screen, it is well above its 200dma. HES is up over 40% for the year but as shown below, it is showing some bearish signals.

Dorian LPG (LPG)

Dorian LPG Ltd is a liquefied petroleum gas shipping company. It is primarily focused on owning and operating Very Large Gas Carriers (VLGCs). The Company offers its services worldwide. Dorian LPG Ltd is headquartered in the United States.

LPG has the highest RSI on this screen at 70 and is the most bullish of the group. LPG is trading over 50% above its 200dma and 20% above its 50dma. The stock is up 20% in the last five trading days. Thus, most technical measures are extremely overbought as shown below. 

Exxon Mobil Corporation (XOM)

Exxon Mobil Corporation is the largest publicly traded international energy company, uses technology and innovation to help meet the worlds growing energy needs. Its principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacturing of petroleum products and transportation and sale of crude oil and natural gas, natural gas and petroleum products. Exxon Mobil is a major manufacturer and marketer of basic petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a wide variety of specialty products. ExxonMobil holds an industry leading inventory of resources, is one of the largest refiners and marketers of petroleum products and its chemical company is one of the largest in the world.

XOM is trading over 30% above its 200dma and has risen 37% year to date. It is sitting near its 50dma which has proven good support this year. A break of said support could result in a break toward its 200dma.   

We currently hold a 2% stake of XOM in our 60/40 equity model. While we are very cognizant it is overbought, its has proven a good hedge against the broader market. We have trimmed our holdings on numerous occasions to lock profits in.

Disclosure

This report is not a recommendation to buy or sell the named securities. We intend to elicit ideas about stocks meeting specific criteria and investment themes. Please read our disclosures carefully and do your own research before investing.

Portfolio Trade Alert – May 13, 2022

Trade Alert For Equity Model Only

While we are waiting on a reflexive rally to take hold so that we can reduce high beta volatility and adjust weightings, we are continuing with our process of a “runnng rebalance.” Our goal, as we head toward a recession, remains to tilt the portfolio more heavily towards value and defense as the economy slows. As such we have been taking advantage of beaten-down prices in companies like Verizon (VZ), Public Storage (PSA), and United Healthcare (UNH.)

Today we are rebalancing our holding of Abbott Laboratories (ABT) back to target model weights of 2% of the portfolio following the sell-off over baby formula concerns.

  • Rebalance ABT to 2% of the portfolio.

PPI and CPI: Are They Peaking?

Producer prices (PPI) for April met expectations rising .5%. While .5% is a big monthly increase, it pales compared to March’s +1.6% PPI. Core PPI, excluding food and energy, rose 0.4%, well below expectations for +0.8%. Inflation is still running hot, but PPI and CPI show the momentum of price changes might have peaked.

PPI data was generally lower than expectations, while CPI was higher. Forming expectations given the wild volatility in prices and supply line problems is challenging. Given the circumstances, beating or missing expectations by .1 or .2% is meaningless. What really matters is the trend. Is the trend for CPI and PPI starting to decline? One month does not make a trend, but this week’s inflation data, combined with weakening economic activity and much higher interest rates, leaves us hopeful.

ppi cpi inflation

What To Watch Today

Economy

  • 8:30 a.m. ET: Import Price Index, month-over-month, April (0.6% expected, 2.6% in March)
  • 8:30 a.m. ET: Import Price Index, year-over-year, April (12.2% expected, 12.5% in March)
  • 8:30 a.m. ET: Export Price Index, month-over-month, April (0.7% expected, 4.5% in March)
  • 8:30 a.m. ET: Export Price Index, year-over-year, April (18.8% in March)
  • 10:00 a.m. ET: University of Michigan sentiment, May preliminary (64.0 expected, 65.2 in April)

Earnings

  • No notable reports are scheduled for release

Market Trading Update – The Selling Continues

No relief for traders through Thursday as the selling continued unabated. As noted yesterday, the market did bounce off the extreme of 3-standard deviations below the 50-dma and closed about where the market finished yesterday at the 138% Fibonacci retracement level. With inflation data, earnings, and the Fed behind us for now, I would not be surprised to finally see a bit of a relief rally. However, even if we do, there are MANY investors caught on the wrong side of this market, so any rally will likely be met with more selling. We continue to suggest using any rally to reduce risk and rebalance portfolios.

Panic Button Getting Pressed

“This week, investors truly started to panic. In March, despite losses in stocks, credit conditions were relatively calm. The biggest panics – not grinding bear markets, but actual panics – always see wholesale selling pressure in credit markets.

That is starting to change, and the Panic Button has been pressed. It has risen above 1.0 for the first time in almost two years.” – Sentiment Trader

Seasonality Argues Bond Yields Might Have Peaked

The graph below from Sentimentrader shows that bond prices typically perform poorly until the 90th trading day of the year. May 10th was the 90th trading day. After the 90th day, they tend to rise. This year has been no exception, with bond prices plummeting from January to April. Recently bond prices have ticked up right on schedule. Might the graph below accurately portray the trend of bonds for the year? Also of interest, if the direction does turn up, was it Wednesday’s CPI report that might have shown a peak in inflation that is the culprit?

bond seasonality yields

ARKK vs. Energy

The ARKK Innovation ETF, managed by Cathie Wood, has been in the financial media limelight. Shares of ARKK have gotten crushed, down over 60% year to date. At the same time, the energy sector has been on fire, up over 40% year to date. One would think that investors would follow the returns and move from funds like ARKK to the energy sector. The graph below shows that is not happening. The two lines show the stunning differential in 2022 performance. The box shows XLE has experienced a slight outflow of funds, while over $1.1 billion has moved into ARKK.

arkk xle

What Are Homebuilders Drinking?

Sharply higher mortgage rates have radically changed the purchasing power of many potential homebuyers. For example, the first graph below from Redfin shows the average mortgage payment on a median-priced house has risen from approximately $1,650 to $2,400 in just four months. At the same time, house prices continue higher, making the plight of the homebuyer even more difficult.

The second graph below shows these concerns are weighing on homebuyer sentiment. Homebuyer sentiment is now way below any level seen since at least 1990, including 2007/08. Despite the horrendous sentiment, homebuilders’ sentiment is at 30-year highs. Something has to give, and barring a sharp drop in mortgage rates, it appears homebuilder sentiment is due for a steep decline. If so, reduced home construction will weigh on the economy. We will closely follow Housing Starts and Building Permits over the next few months to see if homebuilders start to slow their activity.

homebuilders homebuyers sentiment
homebuilder mortgage

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The Biggest Crash In History Is Coming? Kiyosaki Says So.

Robert Kiyosaki recently tweeted, “The best time to prepare for a crash is before the crash. The biggest crash in world history is coming. The good news is the best time to get rich is during a crash. The bad news is the next crash will be a long one.”

Is Kiyosaki just being hyperbolic, or should investors prepare for the worst?

Importantly, I received Kiyosaki’s comment in an email that I could find out more by just clicking on the link to get a “free” report.

I can save you time, and future spam emails, by telling you that Kiyosaki will be correct.

Eventually.

However, the problem, as always, is “timing.”

As discussed previously, going to cash too early can be as detrimental to your financial outcome as the crash itself.

Over the past decade, I have met with numerous individuals who “went to cash” in 2008 before the crash. They felt confident in their actions at the time. However, that “confidence” gave way to “confirmation bias” after the market bottomed in 2009. They remained convinced the “bear market” was not yet over, and sought out confirming information.

As a consequence, they remained in cash. The cost of “sitting out” on a market advance is evident.

As the market turned from “bearish” to “bullish,” many individuals remained in cash worrying they had missed the opportunity to get in. Even when there were decent pullbacks, the “fear of being wrong” outweighed the necessity of getting capital invested.

Analysis showing the cost of "sitting out" on a market advance

The email I received noted:

“If such a disaster could be in the making, your assets are at risk and this requires your immediate attention! And if you believe that now isn’t the time to protect yourself and your family, when will it be?”

Let’s start with that last sentence.

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The Biggest Crash In History Is Coming

As I stated, Kiyosaki is right. The biggest crash in world history is coming, and it will be due to the most powerful financial force in the financial markets – mean reversions. The chart below shows the deviation of the inflation-adjusted S&P 500 index (using Shiller data) from its exponential growth trend.

Note that the market reverted to or beyond its exponential growth trend in every case, without exception.

Market deviation from long-term exponential growth trend.

(Usually, when charting long-term stock market prices, I would use a log-scale to minimize the impact of large numbers on the whole. However, in this instance, such is not appropriate as we examine the historical deviations from the underlying growth trend.)

Importantly, this time is not different. There has always been some “new thing” that elicited speculative interest. Over the last 500 years, there have been speculative bubbles involving everything from Tulip Bulbs to Railways, Real Estate to Technology, Emerging Markets (5 times) to Automobiles, Commodities, and Bitcoin.

List of speculative bubbles

Jeremy Grantham posted the following chart of 40-years of price bubbles in the markets. During the inflation phase, each period got rationalized as “this time is different.” 

Grantham 40-years of market bubbles

Again, every financial bubble, regardless of the underlying drivers, had several things in common:

  1. Tremendous amounts of speculative interest by retail investors.
  2. A sincere belief “this time was different:” and,
  3. A tragic ending that devastated financial fortunes.

This time is likely no different.

Timing Is Everything

So, yes, a crash is coming.

However, the problem is the “when.”

A crash could come at any time, next month, next year, or another decade.

In the meantime, as noted, sitting in cash or some other asset that vastly underperforms either inflation or the market impedes the progress in achieving your financial goals.

Notably, crashes require an event that changes investor psychology from the “Fear Of Missing Out” to the “Fear Of Being In.” As noted previously, this is where the current lack of liquidity becomes extremely problematic.

The stock market is a function of buyers and sellers agreeing to a transaction at a specific price. Or rather, “for every seller, there must be a buyer.”

Such is an important point. Every transaction in the market requires both a buyer and a seller, with the only differentiating factor being at what PRICE the transaction occurs. When the selling begins in earnest, buyers will vanish, and prices will fall lower. Such is why the correction in March 2020 was so swift. There were indeed people willing to buy from panicking sellers. They were just 35% lower than the previous peak.

What could cause such a shift in psychology?

No one knows. However, historically speaking, crashes have always resulted from just a few issues.

  1. An unexpected, exogencous event that changes economic outlooks (Geopolitical Crisis, War, Pandemic)
  2. A rapid increase in interest rates.
  3. A sudden surge in inflation.
  4. Credit-related events that impact the financial system (Bankruptcies, Real Estate foreclosures, defaults)
  5. Monetary event (currency crisis)

Almost every financial crisis in history boils down ultimately to one of those five factors and mainly a credit-related event. Importantly, the event is always unexpected. Such is what causes the rapid change in sentiment from “greed” to “fear.”

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Preparing For The Crash

As investors, we should never discount “risk” under the assumption some force, such as the Fed, has eliminated it.

Every era of speculation brings forth a crop of theories designed to justify the speculation, and the speculative slogans are easily seized upon. The term ‘new era’ was the slogan for the 1927-1929 period. We were in a new era in which old economic laws were suspended.” –Dr. Benjamin Anderson – Economics and the Public Welfare

So, we know two things with certainty:

  1. Robert Kiosaki will be correct about the next crash; and,
  2. We have no idea when it will happen.

Fortunately, we can take certain actions to protect portfolios from a crash without sacrificing financial goals. However, such actions are not “free” of cost.

  1. Properly sizing portfolio positions to mitigate the risk of concentrated positions.
  2. Rebalancing portfolio alllocations
  3. Take profits from extremely overbought and extended positions.
  4. Sell laggards
  5. When you are not sure what to do, do nothing. Cash is a great hedge against risk.
  6. Don’t dismiss the value of bonds in a portfolio.
  7. Look for non-correlated assets to mitigate risk.

As noted, there is a “cost.” Adding any strategy to a portfolio to mitigate or diversify risk will create underperformance relative to an all-equity benchmark index.

However, as investors, our job is not to beat some random benchmark index but to make sure our investments meet just two goals:

  1. Exceed the rate of inflation
  2. Meet the rate of return required to meet our long-term financial goals.

Any objective that exceeds those two goals requires an undertaking of increased risk and ultimately increases losses.

So, if you are afraid of the next crash, click here for a FREE REPORT.

Okay, I don’t actually have one.

However, you can certainly take some actions today to mitigate the risk of catastrophic losses tomorrow.

Bill Dudley Bashes The Fed

Ex-New York Fed President Bill Dudley seems to have it out for the Fed. Despite spending a decade at the Fed, Bill Dudley has some strong words about what his ex-colleagues are doing. As he claims:

“…..Worse, the Fed’s sugarcoating could undermine its credibility, and hence its ability to do its job.

While most Fed members think that inflation will slowly fall, Bill Dudley is raising his forecast. Per the interview:

I think it’s 4%-5% or higher. I was at 3%-4% maybe six months ago… Wouldn’t shock me if I’m 5%-6% a few months from now.”

Click on the picture below for a snippet from Bill Dudley’s interview on Bloomberg.

bill dudley fed

What To Watch Today

Economy

  • 8:30 a.m. ET: Producer Price Index, month-over-month, April (0.5% expected, 1.4% in March)
  • 8:30 a.m. ET: Producer Price Index excluding food and energy, month-over-month, April (0.6% expected, 1.0% in March)
  • 8:30 a.m. ET: Producer Price Index excluding food, energy, trade, month-over-month, April (0.6% expected, 1.0% in March)
  • 8:30 a.m. ET: Producer Price Index, year-over-year, April (10.7% expected, 11.2% in March)
  • 8:30 a.m. ET: Producer Price Index excluding food and energy, year-over-year, April (8.9% expected, 9.2% in March)
  • 8:30 a.m. ET: Producer Price Index excluding food, energy, trade, year-over-year, April (6.5% expected, 7.0% in March)
  • 8:30 a.m. ET: Initial jobless claims, week ended May 7 (192,000 expected, 200,000 during prior week)
  • 8:30 a.m. ET: Continuing claims, week ended April 30 (1.368 million expected, 1.384 million during prior week)

Earnings

Pre-market

  • WeWork (WE) to report an adjusted loss of $0.72 on revenue of $768 million
  • Six Flags Entertainment (SIX) to report an adjusted loss of $1.04 on revenue of $122.54 million

Post-market

  • Affirm (AFRM) to report an adjusted loss of $0.48 on revenue of $344.33 million
  • Figs Inc. (FIGS) to report adjusted earnings of $0.06 on revenue of $117.33 million
  • Toast Inc. (TOST) to report an adjusted loss of $0.16 on revenue of $491.94 million

Market Trading Update – Selling Continues

Bill Dudley’s hawkish commentary, and a higher than expected inflation print, kept selling pressure on the market pushing it well into 3-standard deviation territory below the 50-dma. Furthermore, all measures of overbought/oversold conditions are at extremes. While we have been suggesting a tradeable bounce is likely, that hasn’t happened yet which is frustrating. However, current conditions are rare and markets don’t stay at such oversold conditions for long.

The chart below is a WEEKLY chart of the S&P 500 index ETF (SPY). As noted, SPY is pushing levels of oversold not seen since the March 2020 lows. Also, SPY is near a 38.2% Fibonacci retracement level of the entire rally and is 3-standard deviations below the 1-year moving average. That only happened in 2018 and 2020 near the lows.

CPI Inflation Report

The good news in the CPI report is that the upward trend in prices may have peaked. The monthly inflation rate was +0.3%, equating to +3.6% on an annualized basis. +0.3% compares favorably to +1.2% last month. But the bad news is the market was hoping it would only be up +0.2%. The same story holds for all aspects of the report. All indicators were lower than last month which is positive as it possibly points to a change in momentum. However, they were all higher than expectations.

The year-over-year CPI rate fell from 8.5% to 8.3%. That was the first decline since August 2021. The data does not warrant the Fed to take a step back from its aggressive Fed Funds or QT forecasts. Of importance to the Fed, the monthly core rate (excluding food and energy) rose 0.6%. That was greater than all 67 economic forecasts in a Bloomberg survey.

cpi inflation

The Rise And Fall Of Ipod

It’s the end of an era and Apple pulls the plug on iPod. From Chartr:

“The iPod, and other MP3 players, offered an alternative to the mostly-linear way that albums used to be listened to on CD or vinyl — and they were just so much more convenient. ‘1,000 songs in your pocket’ was a powerful slogan that quickly became 2,000, then 4,000, and 16,000 as storage capacity expanded. The fact that most people only had a few hundred songs to fill their iPods with was irrelevant.

Of course, nothing lasts forever in tech, and this week Apple announced it was going to discontinue the product line, marking the official end of the iPod era. iPod sales peaked with Apple selling more than 50 million units every year. Indeed, before the rise of the iPhone, the iPod was the company’s crown jewel alongside the Mac — in 2006 the iPod was roughly 40% of Apple’s revenue.”

TPA Calls For a Rally

The following market call is from Jeffery Marcus of Turning Point Analytics (TPA). His excellent research can be found on SimpleVisor for those interested to learn more about what Jeff offers subscribers.

The TPA Marketscope has identified an intermediate-term extreme for stocks. The percent of stocks in the Russell 1000 that are trading above their 50DMA hit 13% yesterday. Since TPA was founded in 2009, 13 years ago, we have found that this signal has marked a low extreme for the market. This signal has been correct on a consistent basis, although not 100% of the time. When the percent of stocks trading above their 50DMA goes below 15%, the market is oversold and there has been a very consistent move higher for the intermediate-term.

Clients should expect stocks to be more positive for the intermediate-term. TPA defines the intermediate-term as 50 trading days or approximately 2.3 months.

tpa market rally

Investor Psychology

Over the past six to nine months, we have seen many SPACs, meme stocks, high-growth technology stocks, and cryptocurrencies form a traditional bubble/bubble popping pattern. The “A” shape in the graph below shows this pattern. Further, it shows the typical investor feelings that appear at various stages in the bubble and its downfall. The critical takeaway as we see many examples of the pattern is to realize where we are in the cycle. There are many stocks now entering the “Anger” phase. As shown, the Anger phase is near the lows of the process but, it takes a long time for trust to return to the stock. As such, there are a series of fits and starts before it starts rising. The bottom line is that prices may seem cheap, but they can stay cheap for much longer than you think.

market investor psychology

New Risks In Crypto

Coinbase (COIN) released its earnings yesterday. COIN fell over 10% on Wednesday after reporting a first-quarter loss of $429 million. In addition to a much larger than expected loss, its revenue fell well short of expectations. COIN stock is down nearly 90% since peaking in November.

Buried within their SEC 10-Q filing is some new legal language worth considering if you have a Coinbase account or possibly a cryptocurrency account at another custodian. Essentially, the new legalese states that if COIN goes bankrupt, its clients could see some or all of their assets lost to the company’s creditors. SPIC insurance, which covers stock investors at firms like Fidelity, TD, and Charles Schwab, does not apply to cryptocurrency custodians.

“Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”

coinbase crypto

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Portfolio Trade Alert – May 11, 2022

Trade Alert For Equity Model Only

In our process of shifting to a bit more defensive posture in our portfolio, we are adding a “start position” in United Healthcare (UNH.) The demographic story bolds well fundamentally, and healthcare will continue to be a defensive trade in a slowing economic environment. We will look to add to our position opportunistically.

UNH has shown good stability and tends to trade with the value grouping. Our intention is to add some value, lower beta now, and assuming we get the bounce we expect, shed some of the higher growth, higher beta names as the market peaks. Call it a running rebalance.  

Technically the stock is very oversold and near the bottom of its bullish uptrend channel.

  • Initiate a 1.5% weighting of UNH to the portfolio.

STOCKS HIT AN INTERMEDIATE-TERM EXTREME LOW

STOCKS HIT AN INTERMEDIATE-TERM EXTREME LOW

The TPA Marketscope has identified an intermediate-term extreme for stocks. The percent of stocks in the Russell 1000 that are trading above their 50DMA hit 13% yesterday. Since TPA was founded in 2009, 13 years ago, we have found that this signal has marked a low extreme for the market. This signal has been correct on a consistent basis, although not 100% of the time. When the percent of stocks trading above their 50DMA goes below 15%, the market is oversold and there has been a very consistent move higher for the intermediate-term.

Clients should expect stocks to be more positive for the intermediate-term. TPA defines the intermediate-term as 50 trading days or approximately 2.3 months.