05 Oct Capital 19 Catch-Up
US markets had a weak end to September with the S&P500 falling 3.3% in the week, bringing the monthly loss to 4.8%, and the prospect of a real “correction,” defined as a -10% decline from a high — looked plausible for the first time since the Spring of 2020.
However, the index surged Friday to close at 4,357, a gain of 1.15%. Better still, gains were paced by industrial, financial and energy stocks, the cyclical triumvirate.
Bulls still need to reclaim the 50-day moving average at 4,445 for the benchmark S&P 500. Getting above that key resistance point will set the tone for the rest of the year. In the interim, there is still critical support at 4,310.
We still expect bulls to come through here with positive seasonality, a promising earnings report calendar, waning pandemic fears and over-abundant pessimism all on their side.
Big Tech was the weak point for the week. Apple (AAPL) for example, fell 7% in September. It all came about on the back of rising 10yr yields.
The 10yr yield is a great predictor of future Fed moves. That yield moved up to 1.5% early in the week as traders started to factor in more economic growth and less covid hindrance.
“As interest rates rise, the importance of nearer-term cash flows for valuations rises, resulting in relative underperformance for longer duration stocks, like Tech, at least in the near term,” Chris Hussey from Goldman Sachs said in a note on Tuesday.
“Looking further out, this dynamic is unlikely to be sustained, however, as technological disruption and adaption should continue to generate new growth opportunities for investors,” he noted.
We agree with his analysis. The digital transformation story is too powerful for a mere rise in rates to derail.
Use any weakness here to add to your positions.
Netflix (NFLX) is one stock we like and are patiently waiting for a dip to buy. Investors need to stop thinking about Netflix as a streaming media company and start viewing it as a complete entertainment system. They already have a huge subscriber base and are starting to find alternative ways to monetise that base.
Last week Netflix announced that it bought videogame maker Night School Studio in a move to diversify its revenue sources. Night School Studio is best known for the supernatural-themed video game “Oxenfree.”
Before long you will be seeing Netflix release its own gaming content. Just think what having 20% of its base add on a second monthly subscription will do for revenues. That is why the stock price is rising higher and we want to buy more of it.
Energy is another second catching a significant bid lately. Crude Oil is up over $78 a barrel now. Some names to consider here at Chevron (CVX) where you can get over 5% dividend yield and stock price growth at the same time and Schlumberger (SLB), the largest global oil service company. We like Schlumberger because its management continually invested, through good times and bad, to extend its technological lead in oil servicing. Its latest moves include improving its data analytics platform to enable customers to leverage their data for greater efficiencies and embarking on new clean energy ventures. It is a company that is jumping on board the digital transformation story in a sector where values have been beaten down by sentiment. But the Oil price spike is changing that sentiment and we think the stocks have a long way to go to get back to fair valuations.
Looking forward, Friday’s jobs report will be a key signal and one of the triggers for the Fed’s decision on when to taper its $120billion-a-month bond buying program.
October may have a bad reputation, but the fourth quarter has mostly been a positive time for stocks. Despite worries about central bank tightening, the debt ceiling, Chinese developer Evergrande and Covid-19, many strategists expect stocks to eclipse recent highs after a rocky period in October.
The S&P 500 has averaged outsized gains of 3.9% in the fourth quarter and was up four out of every five years since World War II, according to CFRA. The next best quarter is the first, with an average gain of 2.3%.
So this is the time to position for what is traditionally a very good six months in the market