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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 May 9th, 2022.
After a week of extraordinary turbulence, stocks are likely to remain volatile as investors await fresh data on inflation and watch the course of bond yields.
The big report for markets is Wednesday’s April consumer price index. Economists expect a high inflation reading, but it should moderate from the 8.5% year-over-year pace of March. A second inflation report, the producer price index, which is a gauge of wholesale prices, is released Thursday.
“I think it’s going to be a hot number but not as sizzling as last month,” said Mark Zandi, chief economist at Moody’s Analytics. Zandi expects headline CPI to rise 0.3% for the month or 8.2% year-over-year.
Investors are honing in on inflation and other key reports that will influence the Federal Reserve as it moves forward with interest rate hikes.
The Fed raised its fed funds target rate by a half percentage point Wednesday, and signaled it could follow up with more hikes of the same size. Fed Chairman Jerome Powell, following the meeting, said he expects the economy could see a “soft or soft-ish” landing.
“I think the two big concerns for the market are inflation and how hawkish the Fed will be trying to get that under control,” said Art Hogan chief market strategist at National Securities. Hogan said investors are also concerned about China’s economy as it locks down to fight Covid and how that slowing could impact the rest of the world.
Hogan said if the CPI comes in as expected that could bring some stability to both stocks and bonds, since it would then appear that inflation has peaked.
Stocks were wildly volatile in the past week, notching big intraday swings in both directions. The S&P 500, closed at 4,123 and was down just 0.2% for the week. The Nasdaq was off 1.5% for the week
Energy was by far the best performing sector, rising 10% for the week. REITs were the worst performing, down more than 3.8%, followed by consumer discretionary, off 3.4%.
Stock investors have also been eyeing the bond market, where yields have been rising as bonds sold off.
The 10-year Treasury yield pushed through 3% for the first time since late 2018 in the past week. On Friday, the yield was at 3.13%, up from 2.94% the Friday before. The rising 10-year yield has had a stranglehold on stocks, particularly growth and tech, during its rapid move higher.
The benchmark 10-year was at about 1.5% at the start of the year. Many lending rates are linked to it, including mortgages.
“If people figure out inflation is peaking, and you could make the argument that the 10-year yield will not necessarily peak, but will stop going parabolic…that’s what could get the public to slow down the selling,” said Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI.
Emanuel said retail investors have been heavily invested in growth names. Those stocks do better when money is cheap.
“The bond market is calling the tune here,” he said. But he expects the stock market is in the process of finding its low-water mark. “What we’ve seen is both upside and downside volatility in equities…and that’s the start of a bottoming process.”
Some technical analysts said stocks could take another dip lower if the S&P returns to Monday’s low of 4,062 and stays there.
Scott Redler, partner with T3Live.com, targeted 3,850 on the S&P as the next stop lower, if the index breaks the Monday low.
“As of now, it looks like every rally where you can get an oversold bounce has been sold,” he said. “I think the weekend news is going to play a factor into the emotional open Monday.”
He said there could be news on Ukraine, since it is Victory Day in Russia, and Russian President Vladimir Putin is expected to speak.
Redler said Microsoft and Apple could have a big impact on trading next week. If Apple breaks support at about $150 and Microsoft breaks $270, a level it’s been holding, the two biggest stocks could sweep the S&P 500 below 4,000.
“If they break those levels, it will add some grease to the wheels and bring the market to new lows. That could bring us closer to a tradeable low,” he said. Apple ended Friday at $157.28 per share, slightly higher on the day.
Redler said if Microsoft breaks the $270 level, its chart would complete a negative head and shoulders formation that could signal more weakness for the stock. Microsoft closed at $274.73 per share Friday.
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:
1970 All Over Again?
This comparison of 1960 & 1970 to 2022 was first presented to subscribers & @CMTAssociation Symposium. 2022 is tracking eerily close to those two bear market years. Today’s mammoth drop, the worst since 2020, doesn’t alleviate this alarming comparison.
Both 1960 and 1970 hosted recessions and rate increases in the prior year. Inflation in 1970 was closer to current conditions with CPI peaking around 6.5% year-over-year. At the end of April 2022 S&P 500 was down 13.3%, the worst start since 1939. Only 1932 & 1939 were worse. The second worst start since WWII was 1970.
It would be nice if 2022 played out more like 1960 with milder losses. Unfortunately, present circumstances are more akin to 1970. 1960 was also an election year, while 1970 was a midterm year like 2022.
This time is a little different due to covid-disrupted supply chains and the fallout from Russia’s invasion of Ukraine with soaring energy and commodity prices. We are not implying the 36% bear market losses from the 1968 top to the 1970 bottom are in the cards, but we suspect that we have not found bottom just yet.
However, it is becoming increasingly likely we get a bottom sooner rather than later as we did in May 1970 with the Fed raising rates 50 basis points this week and Russia looking to chalk up a victory on WWII Victory Day celebrated on May 9 in Russia.
Fed Day Follow Up
In last night’s Closer, we recapped the market reaction to the FOMC’s 50 bps rate hike noting that equities really took off once Fed Chair Powell ruled out the possibility of 75 bps hikes on the horizon. By the close, the S&P 500 rallied 2.55% from right before the decision (1:59 PM). As shown below, that marked the third-best S&P 500 reaction to a Fed day since 1994 when the FOMC began to announce its decision on the same day as the meeting.
Given today’s massive declines, the S&P has already erased its 2%+ post-FOMC gain. Below we show the S&P’s intraday performance the day after each Fed day when the index rallied over 2% post-meeting (1:59 to the close). For each day, the date shown represents the day of the FOMC meeting. On average, the S&P 500 has tended to gap down the following day and continue to trade lower throughout the first post-FOMC session as we are seeing today.
Today’s performance is certainly on the weaker end of these occurrences, though. In fact, like the other two largest post-FOMC rallies that saw over 3% gains in the afternoon of Fed days, December 2008 and August 2011, today saw a significant gap lower with continued losses through mid-morning. The continued selling today is setting up to more closely resemble the August 2011 occurrence. Following the December 2008 instance, on the other hand, the S&P 500 found a low in the late morning and even briefly went positive the day after the big post-FOMC gain.
While today is shaping up to look like another time the market rallied hard in response to the FOMC, taking a step back to look at all Fed day afternoon performance (1:59 to the close) versus next-day performance (full day), there is not much of a strong trend. As shown below, the S&P 500’s performance from 1:59 to the close on a Fed day is a statistically poor explainer of next-day performance. That being said, today does stand out as one of the worst Fed day follow-ups on record.
NASDAQ Midterm Seasonal Pattern Trends Lower
NASDAQ’s midterm election year trend is no friend of the bulls. Off 21.2% year-to-date at the end of April clearly significantly lower than the average NASDAQ midterm year decline. But that does not mean that the decline is over. A plethora of headwinds from the War in Ukraine, negative GDP, midterm year and seasonal pressures, supply chain issues, inflation, and rate hikes are likely to conspire to push stocks lower in the near term, a prototypical midterm bottom does appear on the horizon over the next few months, which sets up the quadrennial buying opportunity ahead of the Sweet Spot of the 4-Year Cycle.
The Quitter Market
If it seems to you like the market simply can’t hold on to gains this year, you aren’t mistaken. The chart below shows an intraday composite of the S&P 500 on a median basis over the last 100 trading days through the end of April. The general pattern during this period has been for the market to open modestly higher, but then sell off for the remainder of the morning. It has then regained its footing shortly after mid-day but then sells off into the close.
How does the last five months or so compare to history? The charts below really put the recent trend of intraday weakness into perspective.
The first chart shows the number of days over a rolling 100-trading day period that the S&P 500 tracking ETF (SPY) traded in positive territory on an intraday basis but finished the day down. The reading currently stands at 38 and was as high as 40 (red line) in the last week of April. As shown in the chart below, there hasn’t been another period that the S&P 500 has had so much trouble holding onto intraday gains in more than a decade (October 2010)!
For the Nasdaq 100 (QQQ), it has been a similar story. As recently as April 22nd, the trailing number of times in the last 100-trading days that QQQ traded in positive territory on an intraday basis but finished the day lower reached 42 and currently stands at 40. Like SPY, the recent reading of 42 was the highest number of occurrences in a 100-trading day span since October 2010.
For both indices, the currently elevated frequency of giving up intraday gains has been extremely uncommon for the post-financial crisis period. Interestingly enough, though, in the ten years before the financial crisis, these types of periods were a lot more common, especially for the Nasdaq. Could it have anything to do with the fact that the last 12 years have also been one of the more accommodative monetary environments investors have ever experienced?
Bond Market Massively Oversold
The sell-off in bond prices over the last six months has been extreme to say the least. There are a number of ways we could highlight the carnage for bond investors, but one way is to look at how far bond indices are trading below their 200-day moving averages. As shown below, the Bloomberg US Aggregate Bond Market Total Return index is currently 8.5% below its 200-day moving average.
Going back to 1988 when daily price data begins, the 200-DMA spread is currently 2x more negative than any prior extreme oversold reading.
Recent 21-Year May Seasonal Pattern: More Chop Likely
May’s first two days have historically traded higher. Recent market volatility suggests another day of gains could prove challenging especially as the market awaits the Fed’s next move on Wednesday. Bouts of weakness often appears around or on the third, sixth, and twelfth trading days of the month while the last four or five trading days have generally enjoyed respectable gains on average. In midterm years it has generally been better to lighten up on long positions early in May as the entire month tends to be weak (pages 42 and 44 STA 2022).
4 Things You Didn’t Know, But Need To
2022 has been one of the worst starts to a year ever for stocks and bonds. The reasons for the rough start, which are widely known, include inflation, a hawkish Federal Reserve (Fed), soaring yields, the conflict in Ukriane, and a slowing economy.
So we know all of the worries, but now we’ll take a look at 4 things you might not know, but should.
A bad start to the year isn’t fun, but it isn’t always a sign of things to come. “2022 ranks as the third worst start to a year ever for the S&P 500 Index,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But looking at the 10 worst starts ever shows that stocks tend to bounce back nicely the rest of the year, up 10% on average.”
As you can see below, continued huge losses the final 8 months are rare, with potential double-digit gains quite possible. The only years the final 8 months saw stocks lower were in 1941 (U.S. entered World War II), 1962 (The Kennedy Slide and Cuban Missile Crisis), and 1973 (oil spike and recession). We continue to expect the U.S. economy to grow at 3% in 2022 and avoid a recession, so an eventual large snapback rally later this year is quite possible.
The Fed will likely hike rates today (we expect a 50 basis point, or 0.5%, hike). As shown in the LPL Chart of the Day, previous Fed rate hiking campaigns has seen stocks perform fairly well. Looking at times of aggressive rate hikes shows that in 1994 the Fed quickly hiked from 3% to 6% and stocks were flat, while over a two-year period from 2004 to 2006 they hiked from 1% to 5.25% and stocks gained 11%. Yes, some periods of rate hikes saw stocks decline, but a period of aggressive hiking simply by itself isn’t a reason to expect stocks to do poorly.
Is a bear market possible without a recession? The answer is yes, but quite rare. Given the S&P 500 has corrected nearly 14%, how likely is it that things could spiral into a bear market? Well, if we can avoid a recession (our base case) we’d say the odds are slim.
Looking back in history, 1987 was the last time the S&P 500 was in a bear market without a recession. Then 1978, 1998, 2011, and 2018 all were more recent years that saw stocks nearly in a bear market (down 19%), but the economy avoided a recession. Adding up everything that we know, we’d side with a decline of 20% still not being our base case, with the market weakness likely closer to a major low than not.
Lastly, the S&P 500 peaked on January 2 and so far the low during the correction was on April 29, for a 13.9% correction. Turns out, there have been 24 other corrections since World War II, with an average decline of 14.3%, while it took 133 days to find the ultimate low. Given the current correction is 13.9% and has lasted 117 days already, we are getting into the range where previous corrections indeed hit bottom.
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.)
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 5.9.22 Before Market Open:
Monday 5.9.22 After Market Close:
Tuesday 5.10.22 Before Market Open:
Tuesday 5.10.22 After Market Close:
Wednesday 5.11.22 Before Market Open:
Wednesday 5.11.22 After Market Close:
Thursday 5.12.22 Before Market Open:
Thursday 5.12.22 After Market Close:
Friday 5.13.22 Before Market Open:
Friday 5.13.22 After Market Close:
(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. 🙂
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