Good Friday evening to all of you here on r/stocks! I hope everyone on this sub made out pretty nicely in the market this past week, and are ready for the new trading week ahead. 🙂
Here is everything you need to know to get you ready for the trading week beginning December 19th, 2022.
Stocks dropped Friday, building on their year-end sell-off, as fears grow over a recession taking place as the Federal Reserve continues raising rates.
The Dow Jones Industrial Average lost 281.76 points, or 0.85%, to 32,920.46. The S&P 500 fell 1.11% to 3,852.36. Meanwhile, the tech-heavy Nasdaq Composite declined 0.97% to 10,705.41.
The indexes notched a second consecutive week of losses. The S&P 500 fell 2.08% for the week, and putting its December losses at 5.58%, as hopes for a year-end rally fizzle. The Dow and Nasdaq slid 1.7% and 2.7%, respectively.
Trading was especially volatile Friday with a large amount of options expiring. There were $2.6 trillion worth of index options expiring, the highest amount “relative to the size of the equity market in nearly two years,” according to Goldman Sachs. At session lows, the Dow was down as much as 547.63 points, before paring back some of those losses.
The sell-off was broad-based, with three stocks falling for every advancer at the New York Stock Exchange. At one point, there were only 10 S&P 500 names in positive territory. The real estate and consumer discretionary sectors were the biggest laggards, down nearly 3% and 1.7%, respectively.
Stocks fell this week in the wake of the Fed’s 50 basis point interest rate hike on Wednesday — the highest rate in 15 years. The central bank said it would continue hiking rates through 2023 to 5.1%, a larger figure than previously expected.
Following the policy update, the Dow dropped 142 points on Wednesday, plunged 764 points Thursday, and declined further on Friday.
“At the beginning of the week, we had the hope, given the very soft CPI number, that we could expect the Fed, and maybe the other central banks of the world, to be less hawkish,” Bokeh Capital founder Kim Forrest said.
“But because they didn’t, and they had some stern words for investors and consumers alike that they were really focused on getting inflation down quickly, that has taken away a lot of our hope for a soft landing,” Forrest added.
This past week saw the following moves in the S&P:
S&P Sectors for this past week:
Major Indices for this past week:
Major Futures Markets as of Friday’s close:
Economic Calendar for the Week Ahead:
Percentage Changes for the Major Indices, WTD, MTD, QTD, YTD as of Friday’s close:
S&P Sectors for the Past Week:
Major Indices Pullback/Correction Levels as of Friday’s close:
Major Indices Rally Levels as of Friday’s close:
Most Anticipated Earnings Releases for this week:
(CLICK HERE FOR THE CHART!)
(T.B.A. THIS WEEKEND.)
Here are the upcoming IPO’s for this week:
Friday’s Stock Analyst Upgrades & Downgrades:
Santa Claus Rally, Mid-December Low & January Indicator Trifecta
Wall Street, MSM and social are abuzz with Santa Claus Rally chatter and hype this week, but everyone has it all wrong. I can see Yale’s big grin shining down on us as his famous indicator and catchphrase reverberate on The Street.
They argue their case for why the “Santa Claus Rally” will or won’t come to town this year. But they miss the point. Yale Hirsch invented and named the Santa Claus Rally in 1972, published in the 1973 Almanac. Oh lord, it is still misunderstood. It’s not a trading strategy, it’s an indicator!
SCR is the short, sweet rally that runs from the last 5 trading days of the year to the first two trading days of the New Year. S&P 500 posts an average gain of 1.3%. Failure to rally tends to precede bear markets or times when stocks could be purchased at lower prices later in the year.
To wit Yale’s famous line: “If Santa Claus Should Fail To Call, Bears May Come To Broad And Wall.” (Stock Trader’s Almanac 2023 p 118).
The current situation is reminiscent of 1974. Midterm October low, December retest. Lots of dire news and conditions. The Fed is clearly done taking orders from Wall Street and Washington and is bent on halting inflation. Their quarterly dot plot ticked up and it looks like at least one more 50bps hike. It’s working, inflation is decelerating. Reality is we will have higher inflation and rates for a while.
But we have already been in a bear and likely a recession. Bear markets bottom before recessions end and bull markets start when The Street least expects and practically everyone is a bear right now. While it sure looks ugly out there, we contend the worst is behind and a nascent bull is trying to emerge.
Stocks tend to bottom here in mid-December ahead of the seasonally strong last half of the month, especially small caps – what used to be the “January Effect.”
The results of the Santa Claus Rally along with the other two components of our “January Indicator Trifecta,” the first five days of January and the full month January Barometer (also created by Yale Hirsch in 1972) will help solidify our outlook for next year.
When all three are up the S&P 500 has been up 90% of the time, 28 of 31 years, with an average gain of 17.5%. When any of them are down the year’s results are reduced and when all three are down the S&P was down 3 of 8 years with an average loss of -3.6% with bear markets in 1969 (-11.4%), 2000 (-10.1%) and 2008 (-38.5%), flat years in 1956 (2.6%), 1978 (1.1%) and 2005 (3.0%). Down Trifecta’s were followed by gains in 1982 (14.8%) and 2016 (9.5%).
Keep your eye on the SCR for signs of a new bull or continuing bear. Then watch for the rest of our “January Indicator Trifecta” FFD and JB. When all 3 agree the market generally follows suit.
We are anticipating a SCR this year. Inflation is easing, the Fed is likely to be done with rate increases in Q1 and we also see supply chain constraints fading now that China is loosening its Covid-19 restrictions. Seasonally speaking, we are also in the middle of the historically strongest period for stocks, the “Sweet Spot of the 4-Year Cycle,” Q4 of midterm years through Q2 of pre-election year.
5 Things To Know About Recessions And Bear Markets
“I am an optimist because I don’t see the point in being anything else.” Abraham Lincoln
With all the talk about a pending recession and stocks in a bear market, today, I wanted to share some more thoughts and stats on recessions and bear markets.
First things first, we do not currently anticipate a recession in 2023, which is quite opposite of the general consensus. You can read more about that here and here.
What exactly is a bear market? For the definition of a bear market, we are using the traditional definition, which is an index down 20% or more from the recent peak. Yes, there isn’t much difference between 19.8% and 20.0%, so we will also include some near bear markets as well, but when we say bear market, that is what we mean.
First, do all bear markets take place in a recession? Turns out they don’t, as stocks, indeed can have a bear market without a recession. The worst ever was the 34% bear during the Crash of 1987, which all took place without a recession.
Second, taking things a step further, here we broke down the performance based on if the bear market took place in a recession or not. Take note; we did include some ‘near bear markets’ this time to get more instances. Plus, a near bear feels like a bear market if you are in it. What still amazes us about the table below is that the average bear market without a recession was 24%, and this recent bear was 25%. Assuming we avoid a recession and October was indeed low, this was right on the bullseye.
Now take another look at the table above. The last few bear markets recovered quite quickly. In fact, the last three bear markets that didn’t have a recession recovered in four, four, and three months. Something to think about here, as stocks are two months off the October lows.
Third, this has been making the rounds lately and has been adding to some of the worries. Looking at all the bear markets that took place around a recession, not once did the bear market end before the recession started. In other words, if we are indeed headed for a recession in 2023, this could suggest that new lows may also be quite likely. Incredibly, bears don’t end for another nine months on average after the recession started, before they find their ultimate low. Again, we don’t see a recession, so this wouldn’t be the case now, but the data is quite compelling.
Fourth, the month of October tends to be a bear-market killer. Most bears have met their end during the month of October, more than any other month.
Below, we break down those previous 17 bear (or near bear) markets. The bottom line six of them ended in October, and we think there’s a very good chance number seven just happened.
Fifth and lastly, if October was indeed the bear market low, be open to the idea of higher prices over the coming two years. While not a predictor of future behavior, history shows the markets were up more than 40% a year off of the bear-market lows and up almost 60% two years off of them. During uncertain and volatile situations (like the ones that markets have treated us to in 2022), it can be hard to imagine a positive path forward, and all we see are the obstacles. Stepping back a bit can be a helpful reminder of the resiliency of the markets over the long term.
Dr. Seuss said, “Sometimes the questions are complicated, and the answers are simple.” To me, bear markets can be confusing and complicated, but the answer has always been that they indeed do eventually end, and historically better times will come when they do.
2022 US Stock Market Snapshot
With just a couple more weeks left in the year, the S&P is down 18.2% year-to-date, which is tracking for the worst year since the Financial Crisis in 2008. As shown below, we’ve seen huge monthly volatility throughout the year within an overall downtrend. If December’s declines hold, we’ll have seen a move of 3% or more in either direction in eleven of twelve months this year. September has (so far) been the worst month with a decline of 9.3%, while July was the best month with a gain of 9.1%. In terms of weekday performance, Mondays, Thursdays, and Fridays have averaged declines this year, while Tuesdays and Wednesdays have averaged small gains.
Energy Losing Its Grip
You know those scenes in the movies where a character finds themselves hanging off a bridge, and slowly their sweaty grip starts to loosen as a finger or two starts to slip? That’s what the energy sector is going through right now. As oil prices have been under pressure over the last few months, energy stocks had been holding up relatively well as the S&P 500 Energy sector hit a new cycle high exactly a month ago today. Since then, the sector has declined nearly 9% even as the S&P 500 has moved higher. Last week, the sector broke below its 50-DMA for the first time in over two months before stabilizing this week. Since that break below the 50-DMA on 12/6, the sector has made multiple intraday attempts (including today) to get back above it, but each time the sector has sold off and finished off its intraday highs. When looking at a price chart, any time you see a security break below a key moving average and then make several unsuccessful attempts to get back above that level, it’s often a sign of a momentum shift.
On a relative strength basis, the Energy sector is also toeing a key trendline. The chart below compares the relative strength of XLE to the S&P 500 (SPY) over the last year. During that time, Energy’s relative strength has been riding a trendline higher with bounces each time it kissed that level. The most recent example occurred this week, but at this point, the bounce has been meager. Energy stocks have been outperforming energy commodities in recent months, so it’s only natural to see some mean reversion in the stocks as well, but with the sector already breaking below its 50-DMA, this is a key trendline to watch. If the sector’s relative strength weakens further, the technical picture for the sector would weaken materially, which would be a development investors in just about every other sector wouldn’t shed a tear for.
The Monetary Policy Conversation is Going to Shift in 2023
First, the good news –
The Federal Reserve raised the Federal Funds rate by 50 basis points (bps) to the 4.25-4.50% range – a step down from the 75 bps rate hike pace they went with at the last four meetings. This was expected, but it’s always good to see confirmation.
They also said that “ongoing rate increases will be necessary” and raised their estimate of the peak rate from 4.6% to 5.1% in 2023, which was not a big surprise. What’s important is that the end of the rate hike cycle is near. The estimate revisions are nowhere as large as what we had seen earlier this year. At the end of 2021, they estimated rates to peak at 2.1% and then continuously shifted those up by 0.6% – 1% increments every three months.
The not-so-good news: They also provided revised estimates for the economy, which wasn’t great.
They revised economic growth lower, from 1.2% to 0.5% (2023)
They revised the unemployment rate higher, from 4.4% to 4.6% (about 1% point higher than where it is now)
They revised core inflation higher, from 3.1% to 3.5% (2023)
While Fed Chair Powell was careful to say that they don’t believe these forecasts qualify as a recession, keep in mind that the U.S. has never experienced a 1% rise in the unemployment rate outside of a recession.
But if you notice, I said “not so good news” instead of “bad news.” Powell pointed out that these are members’ best estimates “as of today,” but that could change as new data comes in. And we have plenty of data coming in. Before their March meeting (when they update the projections again), we have three more inflation reports, three employment reports, and an employment cost index report (which is a preferred gauge of wage growth).
If you look back at the previous chart, we’ve seen significant shifts in rate expectations just over the course of this year. There’s no reason to think we won’t see more revisions if the data cooperates.
The shift: From how fast and how high to how long
The conversation in 2022 revolved around inflation, which surged to the highest level since 1981. As a result, we saw the most aggressive monetary policy tightening cycle in four decades as the Federal Reserve (Fed) looked to get on top of inflation. The Fed’s singular focus was to ensure they did more than “enough” to lower inflation. Consequently, the over-arching question on investors’ minds across the year was how quickly the Fed would raise rates, and how high they would go.
I believe that’s going to shift in 2023. Fed officials will likely start thinking about balance again: the risk of tightening too much vs. the risk of not doing enough. Powell mentioned this in comments he made a couple of weeks ago but didn’t mention it again in his post-FOMC meeting press conference. The omission was curious, more so because we just got a second consecutive inflation report that surprised us to the downside. All he said was that, while the report was encouraging, they need substantially more evidence to believe that inflation has turned a corner. And so, they’ll keep rates “sufficiently restrictive.”
I think it was probably more a matter of Fed officials not having enough time to digest the report and not revising estimates accordingly. But as I wrote, the prospects of softer inflation in 2023 look good. There is enough reason to believe that disinflation will kick in as we get into the backend of 2023, especially if energy prices don’t spike again and core goods prices continue to ease. Official rental inflation starts to reflect market rents (which are falling rapidly). All of which makes it likely that estimate revisions will happen.
So, the question for investors will also shift—from how fast and how high to how long and how long they will keep interest rates at an overly restrictive level. The conversation will revolve around how many months of soft inflation data they need to see and how soft it must be. This could obviously take some time since inflation is not going to go down in a straight line – there may be fits and starts and false alarms, but the trend is clear.
The risk of “transitory” deflation
What will upset the apple cart is that the disinflation we see in goods prices and housing is deemed transitory by the Fed, and they maintain rates at an overly tight level. This is not an insignificant risk. Powell again mentioned core services inflation, excluding housing in his press conference. He tied it to wage growth and a tight labor market. This group includes personal care services, education, childcare costs, wireless services, insurance fees, etc. – all captured in the light blue bar in the chart below.
As you can see, the good news is that the light blue bar just made its lowest contribution to core inflation in four months. The risk is that the Fed looks past all of this. Instead, they use wage growth and other labor market metrics as their guiding light as they think about “how long to stay restrictive.”
I think the odds are weighted in favor of them moving lower once inflation starts to fall rapidly, though only by the end of 2023 at the earliest. Which is not as early and not as big cuts as the market currently expects.
Is Anyone Bullish?
“The future ain’t what it used to be.” Yogi Berra
We’ve noticed a recent trend: nearly no one is looking for stocks to do much in 2023. As Yogi said many years ago, the future ain’t looking too good.
The general consensus is that the first half of next year could be very rough, with many banks and investment shops expecting stocks to go back to new lows. Here’s a tweet I did summarizing some of the recent calls.
Adding to this, for one of the first times ever, Bloomberg data showed that Wall Street Strategists expect negative returns for the S&P 500 next year. That just doesn’t happen, or it didn’t happen until now.
We’ve also noticed a considerable spike in put volume over the past week, another way of showing how potentially worried the masses are currently. Then yesterday, I saw this headline, adding to the festive mood.
Here are two more signs of near-historic levels of skepticism. First, the recent Bank of America Global Fund Manager Survey showed a record low level of risk appetite. In other words, lower than the financial crisis and COVID.
Second, our friends at TDAmeritrade have proprietary data showing retail investors near the lowest level of sentiment since April 2020. This is called the Investor Movement Index (IMX), which measures what investors are actually doing and how they are positioning in markets. Again, not a lot of excitement out there.
There’s an old Wall Street adage that it is hard to get hurt falling out of a basement window, and we think that could be the case now. Our take is that an incredible amount of negativity is priced into markets currently, and any good news could continue the recent strength off the October lows. Or, as General Patton said, “If everyone is thinking alike, somebody isn’t thinking.”
What could spark it? It’ll likely be better trends in inflation, which could open the door for the Fed to turn slightly more dovish. Coupled with what we continue to believe is a healthy and robust consumer, the economy may likely avoid the recession that many are expecting. We discussed better trends in inflation here and here.
It is hard for us not to keep pointing out that it is extremely rare for stocks to fall two years in a row. The S&P 500 was down two years in a row in ’73 and ’74 (one of the worst recessions ever), then three years after the tech bubble burst in the early 2000s, that’s it. Even during the financial crisis, stocks only fell in 2008 before a significant rebound in 2009.
As the table below shows, it pays not to drive the car looking at the rearview mirror, as what just happened likely won’t happen again. As every time stocks fell in a midterm year (likely where we land in 2022), they bounced back the following year each time and gained 25% on average. Now, to be clear, we aren’t saying stocks will gain 25% next year… But we are saying it isn’t as crazy as it sounds.
Warren Buffett said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” Things haven’t been good for investors this year, but there are many opportunities to plant some trees today and benefit from what we predict to be a surprisingly good year for investors in 2023.
VIX Death Cross Historically Bullish for S&P 500 over Next 2 Weeks
On Friday December 9, a Death Cross appeared on a chart of CBOE Volatility Index (VIX). A Death Cross occurs when the 50 day moving average crosses below the 200-day moving average. When this happens to an individual stock or major index like S&P 500 it is normally considered bearish. But since the VIX is designed to measure near-term market volatility the lower it goes the better the S&P 500 usually performs. Thus, a VIX Death Cross can be a bullish indication.
Going back to 1990, including the most recent cross, there have been 36 VIX Death Crosses. The S&P 500’s average performance 30 trading days before and 60 trading days after the past 35 VIX Death Crosses have been plotted in the following chart. In the 30 trading days prior to the VIX Death Cross, S&P 500 rose an average of 4.1%. This solid advance is what played a large role in the VIX Death Cross as a rising market is normally accompanied by falling volatility and a declining VIX. After the Death Cross, S&P 500 continued to climb another 2.5% over the next 60 trading days.
Also included on the chart are the 35 VIX Golden Crosses. A Golden Cross is just the opposite of a Death Cross, the 50-day moving average crosses above the 200-day moving average as VIX is rising. A VIX Golden Cross is not a good event for S&P 500 as it has typically declined an average 2.4% before the VIX Golden Cross and failed to return to breakeven 60 trading days later.
In following tables, we present the S&P 500 performance after past VIX Death Crosses and VIX Golden Crosses across various timeframes. Based upon average performance the near-term, 1-and 2-week S&P 500 performance following a VIX Death Cross is better than a VIX Golden Cross, but by 1-month later and beyond the results are less clear. This would suggest that the current VIX Death Cross is likely bullish in the near-term, but not a great indication much beyond 2-weeks.
Here are the most notable companies reporting earnings in this upcoming trading week ahead-
(CLICK HERE FOR NEXT WEEK’S MOST NOTABLE EARNINGS RELEASES!)
(T.B.A. THIS WEEKEND.)
(CLICK HERE FOR NEXT WEEK’S HIGHEST VOLATILITY EARNINGS RELEASES!)
(T.B.A. THIS WEEKEND.)
(CLICK HERE FOR MONDAY’S PRE-MARKET NOTABLE EARNINGS RELEASES!)
(NONE.)
Below are some of the notable companies coming out with earnings releases this upcoming trading week ahead which includes the date/time of release & consensus estimates courtesy of Earnings Whispers:
Monday 12.19.22 Before Market Open:
(CLICK HERE FOR MONDAY’S PRE-MARKET EARNINGS TIME & ESTIMATES!)
(NONE.)
Monday 12.19.22 After Market Close:
Tuesday 12.20.22 Before Market Open:
Tuesday 12.20.22 After Market Close:
Wednesday 12.21.22 Before Market Open:
Wednesday 12.21.22 After Market Close:
Thursday 12.22.22 Before Market Open:
Thursday 12.22.22 After Market Close:
Friday 12.23.22 Before Market Open:
(CLICK HERE FOR FRIDAY’S PRE-MARKET EARNINGS TIME & ESTIMATES!)
(NONE.)
Friday 12.23.22 After Market Close:
(CLICK HERE FOR FRIDAY’S AFTER-MARKET EARNINGS TIME & ESTIMATES!)
(NONE.)
(T.B.A. THIS WEEKEND.)
(T.B.A. THIS WEEKEND.) (T.B.A. THIS WEEKEND.).
DISCUSS!
What are you all watching for in this upcoming trading week?
I hope you all have a wonderful weekend and a great trading week ahead r/stocks. 🙂
