Stocks Rip to Close the Week, but where are we in the Market Cycle?

May 29, 2022 | Is the bear market over? Is the latest move false hope?

Stocks Soar for Best Week Since 2020

Investors finally had a reason to cheer this week, as the S&P 500 and the DOW both rallied for their best week since November 2020.  On Friday, the DOW jumped nearly 2% and the S&P rose over 2.5%. Meanwhile, the tech-heavy Nasdaq was the top performer, jumping nearly 3.5%. The Technology Sector was helped by strong earnings and a slight dip in the 10-year Treasury Yield. For the week, all three indexes saw significant gains. The DOW finished up 6.2% for the week, while finally snapping its 8-week losing streak. These last 8 weeks have been one of the worst stretches for the index, going all the way back to 1923.  Much of this week’s gains came late, as a rally began to form on Thursday and into Friday. Stocks were helped after receiving positive earnings from parts of the Retail Sector, and also by slowing inflation. 

Is Inflation Finally Slowing Down?

As we previously noted, key inflationary data was one of the biggest reasons for the late week rally. Any signs of slowing inflation are sure to help overall market sentiment. One key report released last week was the core personal consumption price index. While this shows prices still rising, jumping over 4.8% in April, this represented a slowing rate month over month. Down from 5.3% in March. This report is one of the key inputs the Fed considers when setting fiscal policy. Additionally, investors got additional support from Retail earnings. As we reported during last week’s earnings, the Retail Sector had been trading down given the poor guidance issued by companies like Target, Wal-Mart, and Home Depot. But this week, shares of beauty product standout Ulta Beauty exploded nearly 13% after strong earnings. Longtime clothing retailer Gap also jumped nearly 5% on positive earnings. As we continue to analyze consumer spending during high inflation, the following storyline has been noted. It appears consumers are spending as much as they need on low-end necessity items, while also paying up for high-end experiences or luxury items. 

What it Means: While this week showed positive strength in the market, averages are still well off their highs. Investors will continue to assess if this week represented a bottoming–out, after a year-long selloff. With interest rates moving slightly lower and better than expected inflation data has been received, investors may have a valid reason to get excited. We’ll continue to watch how new inflationary data impacts a market rally. 

Is this the End for Cloud Stocks?

When the pandemic hit in 2020, the entire stock market crashed. Nobody had any idea what was happening, and it was impossible to predict what the ‘Covid-Era’ would really look like. As stay-at-home orders commenced and we all began to define our new normal, the Technology sector of the market soared. As the entire planet went virtual, stocks that could help deliver services in these unprecedented times began to outperform. This was especially true for Cloud stocks. These stocks were vital to ensuring businesses were able to continue their operations in the new, almost exclusively virtual world. 

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

Growth Remains High

Despite stocks being in the tank for most of 2022, profits for tech stocks, especially cloud stocks remain high. Several industries made large investments in the cloud during the pandemic as they were forced to pivot their core operations. While many top cloud stocks are seeing revenue surge, most are trading 50-60% lower than just a year ago. One key concern remains for cloud-based growth stocks… and that’s profitability. Many companies, especially those in growth mode, will delay profits now by reinvesting revenue back into their business. This is a common practice to help establish long-term and sustainable growth. 

In today’s market though, rising interest rates continue to be especially taxing for any pre-revenue company. This has forced investors to take an even deeper look into profit margins and free cash flow. While these financial data points have always been important, the market had previously shown greater tolerance and more patience for pre-revenue companies. But lately, the Fed has played a key role in cloud stocks falling out of favor. 

What it Means:  Fear in the market and increased pressure from the Fed have made trading in the Technology sector especially tough. Pre-revenue cloud stocks have had a difficult time gaining traction, despite continued growth. Investors are taking a harder stance against pre-revenue stocks as the Fed tightens policy. Additionally, many of these high-flyers were pumped exceptionally high during the height of covid. As we began to revert to the means, it may be a couple more months before investors begin to show a renewed appetite for cloud stocks. 

Bitcoin Finally Shows Signs of Life 

After 9-straight weeks of losses, Bitcoin began to show signs of life this week. As the broader market rose, so did crypto. As we noted last month, Bitcoin has been trading down while also busting through previously solid support lines. Bitcoin previously tumbled all the way down to $25,000 before inching back over $30K this week. The asset has slid for 9 straight weeks for the first time in its history. We've been seeing strong support for around $29,000 as that number has been tested repeatedly over the last few weeks. Additionally, Bitcoins RSI or Relative Strength Index (used to calculate the magnitude of an asset's price moves) may be suggesting signs of a bottoming out.

Another reason Bitcoin could be trading higher is that major Chinese cities have begun to ease the latest round of Covid restrictions. The hope is as the Chinese economy begins to reopen; consumer spending should begin to increase which will only help crypto. Now that BTC is once again trading over $30K, we’ll be watching to see if the lessening of Covid restrictions continues to help the asset increase. 

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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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