Recession Talks Grow

May 08, 2022 | What will the Fed do with Upcoming Rate Hikes?

Weekly Newsletter- Week of 5.8.2022

Rate Hikes Keep-Up Talks of Recession

Last week was another rough one for stocks. All major sectors of the market traded down, except for Energy, Utilities, and Communication Services. Utilities and Comm Services mostly traded sideways, while Energy took home the week’s big gains, jumping 8%. The Energy Sector continues to outperform the market as it becomes costlier to fill up your tank. Stocks aren’t just battling inflation right now. Stocks are battling the continued rate hikes that the Fed has been rolling out for the last several months. As the price of doing business continues to increase, rising interest rates have continued to keep stocks seeing red. This is especially true in the technology sector, where growth stocks have been beaten down the most, thanks to the rate hikes.

Steepest Increase Since 2000

This week, the Fed raised interest rates by half a percent, representing the largest increase handed down by the Fed, since 2000! In addition to the rate hike, the central bank also announced plans to start shrinking its balance sheet in June, in a concentrated effort to drive down soaring inflation. Fed Chairman Jerome Powell cited “taming inflation... as a multi- decade matter of economic importance”. Clearly highlighting the long-term effects of inflation, and the increasing likelihood of a recession hitting.

March represented an 8.5% jump in inflation, the largest jump in nearly four decades. For most Americans, you probably feel like you have less for savings these days, even if your spending habits have not changed drastically. It's obvious that the increase in daily essentials such as gas, groceries, and energy are having a long-lasting impact on consumer spending and economic growth.

Battling Inflation Through Rate Hikes

As we’ve noted over the last few months, the battle to lower inflation has been far from painless. The Fed has prioritized balancing out consumer supply and demand through continued rate hikes. This process is destined to increase rates for mortgages, automobiles, and credit cards. Meaning, that rates for borrowing cash are becoming much higher. Powell has not ruled out issuing even more extreme rate hikes if inflation cannot be curtailed. This week Powell cited his respect and admiration for a previous Chairman from the 1970s, whose entire tenure can be tied to extreme rate hikes used to battle inflation in the early 80s. Unfortunately, those hikes led the U.S into two separate recessions, which have Economists of today clearly concerned. Current estimates predicate a 35% likelihood that the tactics being used to bring down inflation will lead to another recession. When asked about another possible recession, Chairman Powell retorted “I think we have a good chance of restoring price stability without a recession, or without a severe downturn and significantly higher unemployment.”

What it Means: The Fed has made its intentions known; more rate hikes are on the way. Additionally, Chairman Powell has not ruled out an even more aggressive approach to taming inflation. Despite the beating, many growth stocks have taken over the last several months, we shouldn't expect to see a major reversal or even a true ‘bottoming’ without a real catalyst. Calming inflation is the primary goal for the Fed, but at what cost? There is increasing concern that the strategies put in place to calm inflation, could also be the reason another recession hits.

This Week’s Picks

EDR (Endeavor)

August 14, 2022

Entry Price:

24.50

Stop Price:

23.35

Target Price:

26.46

Time Frame:

3 Week Hold

EDR has been in a channel pattern over the last few weeks. As it approaches the bottom band, after a some mid-week volatility, look to make enter the trade off the rebound. As noted in KMX, keep a trailing stop loss and close the position quickly should the market turn.

KMX (Carmax)

August 14, 2022

Entry Price:

101.85

Stop Price:

96.45

Target Price:

109.15

Time Frame:

4 Week Hold

KMX, along with most of the market, has been rebounding off June lows. We've seen strong momentum and a crossover of our long-term MAs. Watch for a market pull-back and keep a trailing stop loss. We're riding strong tailwinds, so get in and out quickly

Robinhood Attempts to Stop the Bleeding

We all remember the early stages of the pandemic... when stay-at-home orders forced most of the planet to remain in their homes. This led to a large wave of new investors joining the market. Thanks to convenient apps like Robinhood, buying or selling stocks from your home and your phone had never been easier. Robinhood’s mission statement looked to decentralize finance while making it easier for new entrants to buy or sell stocks. Robinhood then looked to capitalize on the wave of new investors, by taking their fintech public.

Shares Down Big

Shares of Robinhood have been sliding downward ever since the company went public last year. Initial bad press, followed by negative sentiment for tech stocks has been weighing heavy on the stock price. Robinhood shares originally traded for $38 upon going back, before dropping all the way down to $17 so start 2022. Now, Robinhood shares are barely above the $10 mark. Since going public, Robinhood has lost nearly 75% of its total value. The company’s current market capitalization now sits at $8.5B after touching as high as $32B. With all of technology in a Bear Market, this is an especially difficult time to be a pre-revenue company fresh after yet another wave of IPOs.

Abandoned by Gen Z

Previously, Robinhood’s greatest asset was its ability to retain users from the extremely valuable ‘Millennial’ demographic. But now, Robinhood is struggling to keep its user base engaged. In their latest earnings report, Robinhood cited nearly a 10% drop in total users. Shares sank even further upon hearing the news. Robinhood cited its lower active users to difficult market conditions and “users with low balances, engaging less in the current market”. Though, Robinhood has been trying to roll out new features and initiatives to regain consumer interest. One such attempt was a failed venture to expand its current crypto listings to include some of the smaller and lesser-known digital assets.

Can Robinhood Recover?

Robinhood recently announced its latest attempt to win back the retail investor. Robinhood is prepping to roll out a crypto wallet, which would allow users to trade crypto outside of Robinhood. Additionally, the fintech has recently rolled out a plan to kick-start user growth through acquisitions. Robinhood recently acquired a crypto firm in London. This move will allow its U.K.-based customers to bull and sell 11 different cryptocurrencies. Also, Robinhood has recently announced a new stock lending program. This would allow users to lend their shares to market participants in exchange for a fee. Lastly, in sadder news, Robinhood is looking to lower its operating cost. They have decided to lower their cost by laying off 10% of their total workforce.

What it Means: Robinhood was once considered a key driver for helping Millennials get into the stock market. But now, thanks to some questionable PR moves and tough economic conditions, Robinhood shares are down huge as
newer investors leave the market. Robinhood is rolling out multiple initiatives to help energize user growth and we’ve already seen the fintech lay off a large population of its workforce to help lower costs... we'll be watching to see what happens if inflation continues to keep Robinhood shares down big.

Bitcoin Slides to 3-Year Low

Crypto has also been trading down lately, in line with the broader market. Inflation has caused many investors to ‘de-risk’ their portfolios, and Bitcoin has been a casualty. This weekend, Bitcoin continued to trade lower, hitting a 3-month low on Sunday. This comes just days after analysts warned that price charts were sending bearish signals. Bitcoin is currently caught in a 4-day slide with shares trading lower each day. Currently, Bitcoin sits just above $34K, its lowest price since January. If the digital asset continues to trend lower, $32K could be on the table. That would represent Bitcoin’s lowest price since last July. Additional analysis shows fear among crypto investors is on the rise. This fear measures the immediate sentiment regarding additional selling.

What it Means: While crypto’s long-term narrative remains intact, current
conditions make it hard to invest in something seen as significantly risky.

Upcoming Economic Reports

Market Performance- Week of 08.14.2022

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Weekly Review

Market Performance- Week of 08.14.2022

Recent Winners

CF (CF Industries)

CF (CF Industries)

Entry Price:

87.40

August 14, 2022

Price at High:

105.10

Return for Members:

16.84%

Timeline:

4 Week Hold

CF is a manufacturer of fertilizer and other farming products. Similar to our thesis on oil last week, we're expecting more global tensions to arise over the coming months. Although not directly related, CF should appreciate if adverse events occur. Technically speaking, we're seeing a bounce off the 180MA. However, there is negative momentum so be careful with entering too early.

MRNA (Moderna)

MRNA (Moderna)

Entry Price:

168.85

August 7, 2022

Price at High:

197.33

Return for Members:

16.86%

Timeline:

1 Week Hold

We're starting to see a reversal take place. Watching the 50 day moving average cross over the 100 day. Saw some weakness to close this week, so wait for upward momentum before jumping in.

X (US Steel)

X (US Steel)

Entry Price:

20.15

July 31, 2022

Price at High:

23.75

Return for Members:

17.86%

Timeline:

1 Week Hold

Stark momentum shift from the lows on this one. Tracking our moving averages on the 2-hour time chart. Looking for an early entry and quick trade.

Recent Watchlist Winners

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