30 May Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | +6.6% |
| Nasdaq | +7.1% |
| Aussie All Ords | +0.3% |
Finally! After seven consecutive losing weeks for the S&P 500, the index managed to close higher this week. And it was quite the move with SPY up more than 6% for its best one-week gain since the first week of November 2020 (Election Week).
Looking for further insights into the move, we noticed that the market also traded higher during regular trading hours (from the open to the close) on all five trading days this week as well, which signifies a sentiment-driven rally with FOMO (fear of missing out) buyers rushing into stocks intraday.
In SPY’s history since 1993, there have actually been 50 other weeks where it gained from the open to the close on all five trading days of a week. But this was the first time we’ve seen SPY post intraday gains all five days during the week with four of those gains being 1% or more.
There’s no way to know yet if this week marked a true turning point for the market, so it’s too early to tell if this was “smart money” buying or a “fools rush in” kind of rally.
Big short-term bounces like this occur both at major bottoms but also during bear market rallies. If we do find ourselves sitting on much higher stock prices in the months ahead, what happened this week that historians could point to?
Well, first off were several poor reports from retailers
Abercrombie & Fitch (ANF) lost more than 25%. The specialty retailer reported an unexpected quarterly loss, despite better-than-expected revenue. Analysts had expected a profit. Freight and product costs weighed on results. Abercrombie also cut its sales outlook for fiscal 2022, anticipating that the current economic headwinds will remain at least through the end of the year
Best Buy (BBY) reported better-than-expected quarterly revenue as customers faced high levels of inflation and the company lapped a year-ago period fueled by Covid stimulus. While same-store sales for the quarter fell 8%, that was a smaller drop than expected. Best Buy, however, did miss estimates on per-share profit. It also cut its outlook.
Dick’s Sporting Goods (DKS) shares sank more than 11% , shortly after cutting its financial forecast for the full fiscal year, citing sky-high inflation and ongoing supply chain challenges. The sporting goods chain did beat expectations on quarterly earnings and revenue as shoppers spent money on golf clubs, soccer gear and athletic apparel.
Urban Outfitters (URBN) reported first-quarter results that fell shy of analyst forecasts on both the top and bottom lines. Like other retailers, Urban Outfitters highlighted the negative impact of inflation on its operations including higher costs for raw materials and transportation.
I think you get the picture. Inflation costs are starting to hurt retailers. They haven’t yet been able to pass the cost increases on to their customers.
Around 70% of the US economy is driven by the consumer and these company reports have made traders question how much growth we will see in the economy this year.
In a bizarre twist of fate, stocks rallied on this news.
An economic slowdown means less interest rate rises from the Fed and that positively changes the valuations of growth companies. It was, therefore, no surprise that the stocks that have seen the most selling in the last few weeks were the ones to experience the most buying last week.
Stocks with the most aggressive valuations, the highest short interest, and the highest international revenues flew higher by double-digit percentage points. The stocks with the lowest short interest levels and the ones that had performed the best YTD up until May 11th, have seen some of the smallest gains since then.
Amazingly, the Energy sector continued to surge this week as the average Russell 1,000 stock in the sector was up nearly 9%. While investors were rushing to buy up recent big losers, they continued to put money to work in what’s been working as well.
We have been favouring Energy for some time, but the sector is now sitting at extreme over-bought levels. We recommend taking some profits here and certainly not adding to positions until we have some kind of pull-back to buy into.
With the weak forecasts from the retailers came a more dovish view from Atlanta Fed President Bostic who said “noting that while 25 or 50 bps is on the table in September if inflation is too high, it may make sense to pause in September”.
And then on Friday we had the key inflation number.
The number the Fed looks at, PCE less food and energy, came in at +4.9% for April, less than the +5.2% of March and confirmed the view that inflation is certainly moderating, if not falling.
So, a good week for stocks, full of positive news for stock valuations, all driven by lessening interest rate expectations.
But we doubt this great week marked the end of the 2022 torture chamber.
After seven straight weeks of declines, the S&P500 moved to extreme oversold territory at the bottom of its downtrend channel before finally catching a bid over the last week or two. Even after 6-7% rallies over the past week, SPY would have to gain another 9% or so to get up to overbought territory at the top of its current downtrend channel. That’s obviously a significant move, but it could happen and even then the downtrend would not be broken yet. If you’re looking for helpful entry or exit points in a downtrend like we’re in now, it’s better to use these channels (exit at the top of the channel, enter at the bottom of the channel) than to panic sell in extreme oversold territory or panic buy in extreme overbought territory.
While growth stocks have taken it on the chin in 2022, dividend ’paying stocks as measured by an ETF like DVY continue to trade in solid uptrends. These higher-yielding stocks are the reason why the S&P has outperformed the Nasdaq by so much. As shown below, DVY broke above resistance to close out this week and is getting close to all-time highs!
We run a trading strategy that focuses on just these kinds of stocks, so if you want to get a few ideas of what to buy in this market, take a look at the holdings of our Dividend Growth Strategy
Markets are closed on Monday for Memorial Day.
It will be a quiet week for company earnings and even economic data will be light. The biggest announcement will come Friday with Non-Farm Payrolls, forecasted to show a further increase of 350,000 jobs. Keep an eye on average-hourly earnings to see if the consumer can afford to pay for inflated costs in all goods and services.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.