13 Feb Capital 19 Catch-Up
Weekly Index Movement
| S&P500 | -1.1% |
| Nasdaq | -2.1% |
| Aussie All Ords | -1.8% |
Markets pulled back a touch last week which was no surprise given how overbought they had become. Rallies seen in some mega-cap stocks were unsustainable and they just couldn’t keep going on like that.
This pullback hasn’t done anything to hurt the technical picture which still remains positive but it will be interesting to see how traders react over the next couple of weeks and if they continue to buy the dip.
The selling started last week when Fed Chair Powell was interviewed after a university speech. He said the same things he had the week before, that there are positive signs of disinflation but that rates are likely to remain high until they are sure inflation is definitely under control.
For some reason, traders listened to his words this time after ignoring the very same statements the prior week.
Prior to this week, the market was expecting the Fed to cut twice before the end of the year. That’s now gone. Traders are accepting there will be no relief this year.
According to the CME FedWatch tool, there is now a 45% chance rates will be above 5% at year-end. It was just an 11% chance the week before. Rates are presently 4.5%.
That increase has sent the 2yr yield higher, and as we know from last year, when the 2yr moves higher, stocks move lower.
Rates are now back to where they were in October, but stock prices have remained significantly off their lows, which is a good sign.
We all know there will be no economic recession this year. But forecasts are for an earnings recession.
There are a few more reports to come in, but it looks like Q4 earnings will be lower in 2022 than Q4 in 2021. The forecast for Q1 of 2023 is also lower than Q1 of 2022.
That is two consecutive quarters of declining earnings and so I’m going to name it an earnings recession.
The S&P500 is essentially halfway between its January 2022 all-time high and the October 2022 lows. Which does seem too high to me. Given earnings are declining and rates will be higher for longer, you would expect stocks to be a lot weaker.
The next two weeks will be very telling. We will get CPI inflation on Tuesday this week. That is expected to come out at +0.4% because gasoline prices have risen in January. In itself that won’t be too much of a concern as gas prices went up when a couple of refiners went offline and will be factored in already. But what happens to services inflation will be closely watched. A big number here and you can expect stocks to fall again.
Tactics for this year should be to buy lows and sell highs. It is not going to be a straight up recovery year.
You have a few different ways of playing this.
- Just accept returns will be low this year and sit on what you have and do nothing. You’ll probably end where you started and need to write the year off.
- Buy lows and sell highs
- Stick with long-term positions and use a different instrument to trade the swings like a leveraged ETF or futures.
I’m going to run a webinar shortly on the third tactic so watch out for the invite.
Australian markets have also been on a good run and fell in sympathy with the US last week. Tactics for Australia should be the same. Buy dips.
Coal stocks were hit especially hard last week as coal has taken a beating in 2023
Whilst the black gold is taking a breather, the shiny stuff is getting interesting. The Newcrest bid caught my eye. As you know, I think we are seeing something develop with the gold price.
Newmont is a US based gold miner and started Newcrest in Australia almost 60 years ago as its Australian arm. It later sold it off but now it wants it back again.
Newmont has offered 0.38 Newmont shares for every Newcrest share.
It is a clever strategy. Newcrest trades on a PE of 16. Newmont trades on a PE of 40.
Newmont are buying low-value shares by issuing high-value shares. Assuming it goes through, the assets will transfer to Newmont and instantly be rerated higher due to the higher PE ratio that stock trades at. Clever.
There has been some evidence of manufacturing starting up in China. That should be good for the Iron Ore price and the likes of Forescue and BHP.
No one trusts official Chinese numbers. But they publish air quality daily and when you compare today, to the same day last year, for a major city it gives you an idea of how much activity is happening.
For the first time in almost six months, air quality in major cities is significantly worse. ANZ thinks they are going to send us 50,000 students too. Where they will live is another question. These 50,000 students is supposed to add 0.4% to GDP. Probably add to inflation too as they spend Daddy’s money. The poor RBA really has its work cut out.
Tactics for Australia are the same as the US. Buy dips. Don’t get suckered into buying after a rally. Coal stocks look nice here.
Last thing for this week……
I’m a week behind with this as I didn’t notice myself, and am quoting research by Bespoke Premium here.
The prior week, ending 3rd February, was an unusual week where every single session was either up 1%+ or down 1%+. This is a rare event. It has only happened 23 times since 1953.
The red dots here show the weeks it happened.
A visual inspection can tell you that these weeks turned out to be good buying points. In fact, twelve months after these weeks, the market was higher in all but 1 single instance.
A sign of things to come? Maybe. I would not be at all suprised if the market was higher in 12 months time.
The other striking point about this graph is, take a look at the far right and the move down we have had? Is it of any significance? Can you even see it?
This illustrates the benefit of a long-term approach to shares. Even bad years become insignificant.
It is my life goal to get people to treat shares like property and think long term. I seem to be losing on this one. I won’t give up though.
Watch what happens on Tuesday with the US inflation. It could set the tone for the next couple of weeks
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 and might not be suitable for you.