Behind The Street - Issue #4

October 17, 2021

October 17, 2021

Behind The Street Newsletter

The market seems to be signaling “all systems go, green light” on the back of very strong earnings in the financial sector. Major investment banks such as J.P. Morgan and Bank of America posted extremely strong results in their investment banking division, generating record fee income and revenue. Most importantly credit is also improving at a rapid pace. Net charge-offs at Bank of America fell to 0.2% in Q3, the lowest the mega bank has seen in almost 50 years. Net charge-offs are loans that are unlikely to be repaid resulting in substantial losses. The positive news resulted in Bank of America releasing $1.1 billion from reserves that the bank had set aside to cover potential loan losses caused by the Covid-19 pandemic. To me, this signals an improving economy as the globe pulls its way out of the pandemic and international travel resumes for many on November 8th.

According to Bank of America earnings call, credit and debit card spending remain very strong with spending shifting towards travel and in person entertainment. This could be a signal that as more companies report earnings, sales and revenue growth will remain strong judging by the spending data we saw during financial earnings reports, this is a bullish sign. Final print on the S&P 500 was $4,471.31, NASDAQ $14,897.34, and Dow Jones Industrial Average $35,294.77. All major indexes closed above their respective 50-day moving average signaling a trend change in the market to confirmed uptrend.

Earnings Outlook:

Get ready for an action-packed week of earnings. Below are the top stocks on my watch list reporting earnings that have the power to move the markets this week. (I expect BIG numbers out of Netflix due to increased sales from their new hit show “Squid Game”)

1) $TSLA – Reporting on October 20, 2021 (Big report after strong deliveries and China sales)

2) $NFLX – Reporting on October 19, 2021 (Potential massive earnings beat!)

3) $JNJ – Reporting on October 19, 2021

4) $ASML – Reporting on October 20, 2021 (Looking for a strong report off the back of increased demand for chips amid a global chip shortage)

5) $SNAP – Reporting on October 21, 2021

6) $SAP – Reporting on October 21, 2021

7) $AXP – Reporting on October 22, 2021

8) $INTC – Reporting on October 21, 2021

Last week we talked about Bitcoin and Ethereum and I shared my view that I expect these two crypto assets to continue higher headed into year end. On Friday Bitcoin closed above $61,000 for the first time since April. As inflation ramps, we are seeing large flows of money into Bitcoin, Ethereum, and Crude Oil. It seems to me that the crypto markets are signaling a second wave of inflation that is set to slam American consumers in Q4. Perhaps Bitcoin and Ethereum will act as the “new” inflation hedge as a substitute for physical Gold and Silver, as Paul Tudor Jones says, “Bitcoin is the fastest horse in the race.”

This does not mean that Gold and Silver are bad investments. As a long-term generational hold, I favor physical Silver over Gold, I have a small allocation to physical Silver but hold no Gold. I continue to be long Bitcoin and Ethereum. Now extended, Bitcoin sits 20% above its 50-day moving average. A correction that holds or bounces off the 50-day moving average should act as an additional buying opportunity. Remember, markets go up AND down. Corrections are bullish. In my view inflation will not be transitory and investors will be looking to preserve their purchasing power. This should reflect positively in the price action of Bitcoin, Ethereum, and Crude Oil. I maintain my $100 Crude Oil price target.

Hot out of the gate:

During market corrections it is important to look for stocks that are showing strong relative strength. These are stocks that are “bucking the trend” and declining less than the average stock on the exchange if not headed higher when there is blood in the streets. $NOW, $MSFT, $NVDA, $ZI, $TEAM, $ZS, $TSLA, and $UPST are just some names that are leading as major indexes close above their 50 day moving averages. Stocks that decline less when markets are correcting tend to be the next leaders when an uptrend resume.

A higher yield on the ten-year treasury note has been a head wind for growth stocks, especially tech companies trading at frothy multiples. It was interesting to see that as yields fell, tech stocks rallied carrying all major indexes within spitting distance of their all-time highs. The Fed has hinted towards tapering in November but as always, it is most important to pay attention to what they do and not what they say. As of now the easy money is flowing as the Fed keeps it foot to the floor with low interest rates and asset purchases. In my view the S&P 500, NASDAQ, and Dow Jones Industrial Average should make new record highs by the end of the year assuming no rate hike and tapering being pushed back due to the “moving of goal posts” by Fed Chair Jerome Powell. It is important that we be fluid when it comes to the markets, but due to strong financial earnings, low interest rates, and asset purchases by the Federal Reserve in addition to a bond market that is not flashing any warning signals, the environment remains “risk on”.

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%

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: Market in Confirmed Uptrend

Leaders up in volume: $GS, $UPST, $INFY

Leaders down in volume: $PSA, $AMN

A major risk to this market continues to be supply chain disruptions and chip shortages. It is rumored that $AAPL may cut iPhone 13 production targets for 2021 by as many as 10 million devices because of chip shortages. Apple will be reporting earnings on October 28, 2021 and it will be interesting to see if we get any updates in regards to iPhone production and their chip shortage problem. Regardless, I believe $AAPL will post a record quarter due to new product launches including the new iMac with M1 chip that many people seem to be upgrading to. (Including myself as I trade in my old mac) $TSLA has done a fantastic job in navigating the global chip shortage and exceeding deliverable expectations. Demand for chips remains high so pay close attention to the semiconductor sector as earnings are expected to be strong and reliable going forward due to advancements in EV’s, AI, Machine Learning, and new mobile devices with 5G capability.

Good luck to all in this busy week ahead as we dive deeper into earnings season. I will see you right back here next week for the fifth edition of the Behind The Street Newsletter!

Your Pal,

Tom

Email: walkswallstreet@gmail.com

Much of the data in this Newsletter can be found here:

Investor’s Business Daily | Stock News and Stock Market Analysis - IBD (investors.com)

Barron’s | Financial and Investment News (barrons.com)

***The Behind The Street Newsletter is for educational purposes only. This is not an endorsement to buy or sell any securities. Please consult with your personal financial adviser. This is a collaborative space where we talk about the financial markets for educational purposes only.***