MARKET OUTLOOK

What will 2023 hold for investors? At this point are you feeling bullish or bearish?

2022 was the worst year for the SP500 index since 2008. It was a brutal year across the board for investors thanks to the highest inflation in 40 years and aggressive tightening of monetary policy by central banks.

The SP500 index currently remains in a bearish downtrend of lower highs, last trading about 4.5% under the 52w average range. Factset notes the forward 12-month P/E ratio for the S&P 500 is around 16.5x, below the 5-year avg of 18.5 and below the 10-year avg of 17.2. Weekly chart with RSI13 bottom:

ON THE WATCH-LIST

A few key names will lead off this next reporting cycle:

TSM reports Thursday Jan 12. Taiwan Semi holds the top rank for the largest market cap name in the semiconductor sector, producing chips for major tech names like AAPL, AMD, NVDA etc. As a whole the semiconductor SOX index has declined by more than a third since reaching all time highs about a year ago and remains in a bearish downtrend of lower highs.

Friday, Jan 13:

UNH is expected to post quarterly EPS of $5.17 per share, revenues of $82.79 billion. UnitedHealth is the largest US health insurer and largest DJIA component at about 10% by index weight. The stock managed to end the 2022 year up by nearly 7%, but has recently declined by nearly 11% the past month retesting October lows around 490. It is currently trading at 19.6 x multiple on $25 estimated earnings for the 2023 FY. On trailing earnings it has averaged around 22x multiple for the past 5 years.

JPM, BAC, WFC, C Many of the largest megacap diversified banks will report Friday morning to kick off the new ‘earnings season’. The XLF financials sector index ETF remained in a bearish downtrend for most of 2022 finally bottoming out in October after declining by nearly a third from the highs at the start of the year. Price action traded about +/- 10% from the $33 mid range for the second half of the year. By November the index appeared to have broken out above the down trend, managing to print a higher peak as of last month.

Chart: XLF weekly, MACD, RSI

ALL CHOKED UP

The 2022 year closed with the SPX trading very near mid-range for the quarter around 3815. Since mid December, the SPX price action has largely been choked up in a narrow 100 point trading range. The significant size of the collar hedge strategy by the $15 billion JP Morgan Hedged Equity Fund has been getting some attention. Last month analysts noted the price action forming around the top of the collar at 3835, with some some expectation the price would be pinned at that level towards the end of the 2022 year.

CALM BEFORE THE STORM?

The implied volatility (VVIX) of the VIX has fallen to its lowest level in many years, long since before the pandemic crisis when VIX suddenly spiked to above 85. Perhaps this temporary lull in the expected volatility of the VIX may be worth keeping a close eye on in the days ahead.

LINKTR.EE/DIME.RESEARCH

The S&P 500 finished the week 2% lower, at 3852.36. This brings the index down nearly 20% for this year, potentially the worst yearly performance since the financial crisis of 2008. During the past week, the energy sector held up the best, while consumer cyclicals, materials, communication & technology performed the weakest.  At the end of last week slightly more than half the 500 stocks in the index were trading above their 50 day averages.  

Last week’s report noted the potential for triggering stop losses upon declining more than 5% below the high of recent weeks.  If the selling trend continues, the index could soon be retesting the previous lows of October around 3491.  There also remains the potential for a sell-off into the end of the year, similar to what occurred in 2018 during the last round of quantitative tightening by the Fed.

Chart: the 13 day average crossing under the 26 day average for the 5th time this year.

NOTEWORTHY:

With most commodities being down anywhere from 12% to 65% this year, when do we talk about deflation?

With prices for raw commodities collapsing like this, how hard will it be for the Fed to get inflation down to its target near 2%? Right now the market inflation expectations 5 years out sits just slightly above 2% on the 5y forward and 5y breakeven inflation rates. 

WATCHLIST:

Some of the names we’re keeping our eyes on this week :

TSLA 

Tesla is still among the top 10 largest market cap companies of the S&P500 despite being down by almost 63% this year.  Tesla just had its largest weekly decline since the 2020 financial crisis.  The 3rd largest shareholder KoGuan Leo has been calling for Elon Musk to step down from CEO. 

NKE

This Dow 30 index component reports after the close Tuesday , 20th.  Forward earnings multiple at 34x  seem high  considering the outlook for  earnings decline of -30% this fiscal year.   Investors will be watching for improvement with the growing inventory problem.  The supply-chain problems in recent years led to increased ordering of products.   Last Q they reported nearly $10B in bloated inventory, a 44.23% increase year-over-year. 

FDX

FedEx reports after the close Tuesday , 20th.  The stock has lost about a third of market value so far this year but remains a favorite amongst institutional investors who own 74% of the shares.  Dow theory suggests that the  transports ‘lead the way’ in that the transportation sector gives a strong indication of the broader economic trend. Because transportation stocks are sensitive to changes in economic activity, the latest report from FedEx may give investors some further insight into the current demand for shipping and the broader economy as a whole.

MU

 Micron reports fiscal Q1 after the close Wednesday, 21st.   The memory and storage chip company has lost nearly half its market value this year and is struggling to deal with a buildup of excess inventory and reduced demand. At the lows of the year, the stock was trading just slightly above book value.   Last month the company announced  plans to reduce production and capex spending cuts but still  plans to invest over $150 billion over the next decade on memory chip manufacturing and R&D.

LINKTR.EE/DIME.RESEARCH

THE WEEK AHEAD:

Looking forward to the week ahead, the Federal Reserve meets for the last time this year, with a 50-basis-point (bps) rate hike expected. In the final weeks of this year, things could get interesting fast if the index fails to hold at its recent support level and continues to sell off, triggering a significant amount of trader’s stops at about 4% to 5% below the high of recent weeks. If the selling trend continues, the index could soon be retesting its previous lows around 3491, reached in October. Mid range for Q4 sits at 3796. As we approach the end of the year, there are concerns that we may see another sell-off, similar to 2018 during quantitative tightening.

NOTEWORTHY:

The #1 most popular article on The Atlantic this weekend was “The End of High-School English”. Certainly AI is a game-changer, even if half the output from chatGPT is factually incorrect (it’s just a demo and should be treated as such). Bottom line, this is exciting technology to experiment with. The ChatGPT demo gained over a million users in just 5 days. In comparison it took Spotify five months to reach a million, and Netflix almost four years to reach that number. I recall Bill Gross writing a few years ago about the threat of AI to employment and his view that UBI is inevitable. But at least for now, there’s probably going to be plenty of new jobs in the field of AI research and fact checking the output for errors.

WATCH LIST:

Some of the names we’re keeping an eye on this week are:

HAS

Hasbro holds a portfolio of iconic brands & best selling names in gaming, consumer products and entertainment. Currently the stock has sold off more than 40% year to date, as investors expect weaker consumer spending & growing inventory issues. Valuation remains at some of the lowest multiples in years under 2x EV/sales, less than 10x forward EV/EBITDA. Stock research firms CFRA, Morningstar, Argus report positive ratings on the stock. The stock is trading about 7% above the lows for the year. Patient long term investors may want to look closer at this name for a potential turnaround with consensus for EPS growth 11-16% in '23, '24 according to Koyfin data.

CRM 

Last week Salesforce was the weakest performing name out of the SP100 , down 18% so far this month.   At the end of last month it reported for Q3 a strong beat on EPS and revenue meeting estimates.  But the stock sold off on changes in leadership & soft revenue guidance.   Tipranks shows the street has a 12 month consensus target of $197 on CRM, implying nearly 50% upside potential.   Valueline rates the name as top rank for  “timeliness”, expecting the highest relative performance over the next six to 12 months.  They noted that the company will be buying back stock for the first time in Salesforce’s history and view it as a favorable selection for the year ahead.  With the recent sell off they note “shares of the global CRM provider offer attractive upside price potential over the 18-month and 3 to 5 year windows.”   Investors are “paid to wait” at > 6% total shareholder yield with buybacks over the last 12 months according to data from Morningstar. 

BAC

Bank of America last week was down the second most of the S&P 100, down by nearly 14% so far this month.   At the October lows the stock had sold off by about -40%.  With the growing uncertainty about where the economy is headed next year, the chart pattern appears to be widening into a broadening formation in the second half of this year making lower lows and higher highs.  If the pattern continues, the stock could potentially make new 52 week lows if it fails previous support below the 29 handle.   The stock is currently trading near book value, and well under 10x forward EPS.   Year ahead consensus GAAP EPS growth of over 15% , +7% for ‘24 according to Koyfin data.

Taking a quick look at the “big casino” some of the stocks with most active options markets recently are TSLA, AAPL, AMZN, AMD

LINKTR.EE/DIME.RESEARCH

Factset noted 70% of S&P 500 companies have reported a positive EPS surprise for Q3 2022,  but the earnings growth rate for the S&P 500 at 2.5% was slowest since Q3 2020. The forward 12-month P/E ratio for the S&P 500 is 17.6, below the 5-year average of 18.5.

This is the 3rd time hitting resistance trend. Is it somehow  going to turn out differently this time?

S&P 500 BREADTH:

% OF STOCKS TRADING ABOVE AVERAGES:

• 20-DAY AVERAGE : 84%

• 50-DAY AVERAGE : 90% ←- note: similar to August when market rally peaked.

• 100-DAY AVERAGE: 75%

• 200-DAY AVERAGE : 62.5%

IMPLIED VOLATILITY:
With VIX back in the teens last week, the lowest level since April, it seems like this could be “the calm before the storm” after averaging at around 25% the past year.    
The VIX remains elevated at about 19% (as of Friday’s close) compared to the long term historical median under 17%.

 SENTIMENT: 
The weekly AAII Investor Sentiment Survey is a widely followed measure of investor mood.  Recently market sentiment has strengthened with about 40% of investors feeling bearish (more than the historical average of 31%). The high in bearish sentiment peaked in late September at 61%. About a quarter of investors surveyed are feeling bullish, which is less than a historical average near 38%.  

 WATCHLIST:
AAPL  is trading around the 13 week average. Watch 130-135 lows  for support,   CFRA sees $106 fair value. 

CPB   is trading under the 13 week & 52 week averages.  Reports Wednesday morning.  + 30% last 12 months.  Yields < 3% now.  Hasn’t traded above this range since 2016-2017.

AVGO is trading around the 52w average. Hass been a leader among the SP100 the past month. Near August resistance level. Reports Thursday this week.  With selloff may retest 475-580 < 13w avg.  Low 6 -8 %  EPS growth next 3-5y 

COST also reports on Thursday. Trading around the 13 week average, after failing the 52w after a sharp 9% sell off last few sessions.  Been in a massive narrowing wedge which could result in a dramatic breakout with potential to retest / fail support at lows under 475 range. CFRA sees fair value around 350 range!

LINKTR.EE/DIME.RESEARCH

WHAT WE’RE THINKING ABOUT:

The recent growing widespread protests across China against Xi’s iron grip on power are absolutely remarkable.   Apple’s iPhone factories in China run by Foxconn are in utter chaos.  Factory shutdowns are estimated to be costing Apple roughly $1 billion a week in lost iPhone sales.  AAPL holds significant weight in global equity indexes with a market cap at $2342B.  This makes up 11% of QQQ,  6% of SPY,  5% VTI.  It’s about 40% of the equity portfolio of BRK.b.  Any severe selloff in AAPL would weigh on the broader stock market.

THE WEEK AHEAD:
A loaded week ahead with various FOMC members giving commentary all week long. Here’s what I’m seeing on the calendar right now:

Mon: 3 & 6 month T bill auctions pricing in expected Fed rate increases at the front end of the yield curve. 
Tue:  API Weekly Crude Oil Stock,  CB Consumer Confidence (Nov)  
Wed: GDP (QoQ) (Q3) , JOLTs Job Openings (Oct),  Fed Chair Powell Speaks   
Thu: Initial Jobless Claims 
Fri: Nonfarm Payrolls (Nov), Labor Participation Rate (Nov)

S&P 500 INDEX:
Last week the SPX ended the week at 4026 gaining almost  60 points, up more than 1.5% the past 5 trading days.   Now trading at about the same price range as 6 months ago. Despite the bears constantly warning how “markets are crashing right now” its up about +15% from 52 week lows.  Breadth has been improving with most stocks trading above recent averages.

% OF STOCKS TRADING ABOVE AVERAGES:

20-DAY AVERAGE 90.25%    50-DAY AVERAGE 89.26%

100-DAY AVERAGE 73.55%  200-DAY AVERAGE 61.23%

Note the SPX is nearly trading back at the 200d average, up +6% over the 50d avg.  Late August it failed to break through resistance selling off at the 200 day avg. Will it be different this time? 

WATCHLIST:

Here’s a few names I’m keeping a close eye on lately. Think of these major names as bellwether stocks which can help give investors some insight where markets are headed.

AAPL See above.  Investors have been paying a premium valuation relative to the consensus growth expectations. Is it worth it “cause its Apple”?

UNH Recent pullback around the 200 range found strong buying support for this major Dow 30 index component. 

BRK.b   This mega cap conglomerate is trading 12% under 52w highs.  Largest stock equity position is AAPL and could be weighed down if AAPL sells off.  

TSLA   Most active options market on this mega cap.  Has lost nearly half its market value year to date.

LINKTR.EE/DIME.RESEARCH

Subscribe now