Behind The Street - Issue #13
February 7, 2022
February 7, 2022
Behind The Street Newsletter
OVERVIEW
If you want to know where the stock market is headed, keep your eyes locked on the bond market. The stock market derives its value from the debt market and with the U.S. 10 Year Treasury yield currently knocking on 2% at 1.919%, high growth stocks continue to sell off despite last Monday’s follow through day. The S&P 500, NASDAQ, and Dow Jones industrial Average are all sitting below their respective 50 day moving averages. Prices have rallied last week but are being met with resistance as key moving averages are starting to roll over and trend lower. Trendlines that have acted as support in the past are now acting as resistance.
LEADERS
It is important to watch the market leaders. Which industry groups are leading the market? What sectors are outperforming? What stocks are sporting the highest RS lines?
The stocks we tend to cover on the channel are not in gear as we notice a rotation away from high beta growth into more cyclical and value names. Enterprise Software and SaaS companies that have demanded premium valuations in the past are seeing P/E multiple contraction as we head into a higher interest rate environment as the market attempts to price in rate hikes from the Federal Reserve.
Looking at the IBD 50 you will notice a heavier concentration towards financials, banks, shipping & cargo, and Energy. This is a clear indicator that the traditional CAN SLIM growth stocks are in a bear market as money managers increase allocation to companies that tend to benefit from a rising rate environment.
NEW BUYS OF TOP – PERFORMING MUTUAL FUNDS
The first of every month, Investors Business Daily posts a list of all the new buys of top performing money managers on wall street. (Please see page A14 issue FEB 7, 2022)
Do you notice something? Almost all the new buys were concentrated towards Oil & Gas, Energy, Financials, and REITS. A tell-tail sign of the rotation that is underway.
The technology stocks that are attracting order flow are concentrated towards mega-cap tech stocks with sustainable earnings and pricing power such as $AAPL, $GOOGL, $NVDA, and $MSFT. Almost none of the high growth SaaS stocks made the list of new buys except for $ZS.
The conclusion is that we are in a risk off environment for growth, but things can change.
SEMICONDUTOR BRIGHT SPOT
$AMD reported a strong quarter last week with EPS of $0.92 vs $0.76 that analysts expected. Revenue came in at $4.83 Billion vs $4.53 billon as expected by analysts.
The catalysts remain strong for the chip sector with almost every major innovative technology requiring semiconductors. From the 5G roll out to EV’s, semiconductors will be in high demand for the foreseeable future.
$AMD also gave positive forward guidance when the company said it expected $21.5 billion in sales in 2022, higher than analyst expectations. This would mark a 31% increase in sales from 2021.
Its no wonder why 18 of the top performing funds on Wall Street scooped up more than $550 million worth of the stock. (Please see page A14 issue FEB 7, 2022)
AMD TECHINCALS
Fundamentals look great but when the market turns bearish, fundamentals go out the window because the trend is lower.
$AMD is sitting solidly below its 50 – day moving average with the key moving average rolling over and trending lower. $AMD’s long term 200 day moving average did in fact act as support as price bounced a full 30 points from the key level. The stock sports a 92 RS rating, 98 EPS rating, with 52% ROE.
A lot of damage has been done and very few sound bases are forming, but a break above $140.67 could serve as an entry point on $AMD as price works its way though overhead supply.
Remember the “M” in CAN SLIM, Market Direction. 7 out of 10 stocks will follow the overall direction of the market so it’s important to limit stock buys when the major indexes are in decline. Follow the overall trend and stick to buying the best merchandise on the market with the strongest EPS and RS ratings in leading industry groups.
LIGHT CRUDE OIL FUTURES $CL1!
Crude oil is providing a big boost to the energy and financial sectors. Crude futures are trading around $92.00, and price is now 18% extended over its 50-day moving average. Historically when price is overextended above this key moving average, we can expect a 5% - 7% correction. The closest support level for Crude sits at $84.91, the breakout point above November 2021’s previous swing high.
A correction in crude would bring down the energy and financial sectors that make up a 2.9% and 11.4% of the weighting in the S&P 500.
One of the reasons why the S&P 500 has held up better than the NASDAQ is due to its exposure to financials and energy.
VIX UPDATE:
The volatility index is coming down from its peak at 38.98 on January 24, 2022 to a close of 22.85 as of Monday February 7. It is interesting to note that the VIX corrected and is finding support at its 50-day moving average. Still elevated, the VIX is signaling fear in the market over tightening from the Federal Reserve and coming rate hikes set for March. You can look at the VIX here: VIX Index (cboe.com)
RISK MANAGEMENT
Last Monday we had a follow through day, but that does not mean we must charge right back into the market.
A follow through day is a signal to investors to start testing the waters. It provides confirmation towards a possible trend change in the market and the start of a possible new uptrend.
Not all follow though days will work, and many will even fail rather quickly, but no new bull market has started without a follow though day.
In a market environment such as this, you can test 1 to 3 percent of equity with a 7% -8% stop on any new buys. The goal is to protect your capital and allow the market to slowly pull you in from the sidelines. Be prepared to experience multiple follow through days that fail resulting in you cutting losses quickly and waiting for the next buy signal.
RECESSION PROOF?
$CHD, Church & Dwight Co has been a market leader over the past few months. This company is a major American manufacturer of household products best known for its Arm & Hammer brand which includes baking soda, laundry detergent, and toothpaste.
Why are institutions piling into these names? Notice the products $CHD makes. These are the absolute essential items that every person needs to buy regardless of economic conditions.
Are large players on Wall Street expecting a recession?
It is hard to be bullish on the overall market when you see these sectors leading the market, but things can change, just be cautious.
As of June 29, the following are the five largest S&P 500 index constituents by weight:
1) $AAPL - 5.89%
2) $MSFT - 5.63%
3) $AMZN - 4.07%
4) $FB - 2.32%
5) $GOOGL - 2.03%
INFLATION
Thursday The Bureau of Labor statistics reports the consumer price index for January. Many economists are calling for a 7.3% year-over-year rise, after a 7% print in November.
As discussed, it is best to own companies with strong brands and pricing power as it will be easier to pass increased costs onto consumers, potentially expanding margins.
DISTRIBUTION DAYS
Days where index sells off in heavier volume than previous day. Signaling institutional selling. 5 - 6 distribution days in the span of 4 weeks signals market weakness: Investor’s Business Daily
Current Distribution Count: Confirmed Uptrend
Leaders up in volume: $LPLA, $WBS, $CLR
Leaders down in volume: $MGY, $MATX
BITCOIN RALLY
Bitcoin has rallied 35% from the lows breaking above the 50 - day moving average. The long term 200 - day moving average stands at $49,270 and should act as a magnet for price.
Thank You