Volatility Up, Biden's UAE Trip, & Sri Lanka Collapse

Jul 17, 2022 | How will earnings season play out over the next month?

Volatility Spikes

Stocks saw a mini-rally last Friday to close out another volatile week for the markets. Decent enough Q2 reporting from the banking sector had investors feeling optimistic to close out the week. All major indexes saw big gains on Friday, but the rally wasn't enough to erase the losses accrued earlier in the week. In summary the Dow dropped 0.2%, while the S&P and Nasdaq each netted losses of 1.0% and 1.6% respectively.

For context, the S&P is currently trading 20% off its all-time highs. Once again, fears over more rate hikes from the Fed had investors feeling whiplash as heavy selling turned into buying. Early week trading was dominated by fear of another large 0.75-point rate hike potentially looming as the Fed battles to curtail inflation. This came after a surprise 9.1% year-over-year jump in June inflation which fueled further speculation of another possible rate hike. 

Banks Provide Positive Start to Earnings

Earnings season for Q2 officially kicked off last week, with 17 companies within the S&P all reporting. In typical fashion, banks and financials started off this quarter's earnings. 

Despite early losses in the trading week, positive reporting from the banking sector helped turn around the entire market. The entire banking sector rose by 2% last week. While overall profits were mixed, it's clear banks have been benefitting from the ever-increasing rise in interest rates. Net interest margin (NIM) the spread a bank earned in interest on loans, compared to the amount it paid in interest, rose substantially for all major banks. 

We also saw decent information regarding consumer spending. Despite the increase in prices due to inflation, we all continue to spend healthy amounts. We expect earnings seasons and projected profitability to be a key driver in overall market sentiment for the coming weeks. With inflation making it costlier to do business and the rise of interest rates set to eat into company profits, only three sectors look poised to outperform during earnings. 

Energy, health care, and consumer staples all look primed to beat earnings estimates this season. With energy prices set to record a year-over-year increase of over 200%, it's no surprise that 2022 has been a strong one for the energy sector. Consumer staples should continue to outperform, as consumers have prioritized home goods into their spending habits, regardless of inflation. And healthcare should continue to benefit as long as we don't see any more major COVID scares. 

On top of earnings, we're also set to receive key data around housing. The National Home Builders Index and other extensive homebuying data will all release key info this week. 

What it Means: Q2 earnings season has officially begun as banks will continue to report out this week. While projections for profitability have been lowered across the board with stocks, investors are looking for any sign of optimism this earnings season. With most stocks already trading at steep discounts, there may be a low bar for success during this earning season. We'll be watching closely to see how the Fed reacts if earnings continue to stay favorable.  

The Dollar is Strong!

The euro is hovering close to the U.S. dollar in value for the first time in nearly 20 years, while even briefly touching a one-to-one exchange rate with the U.S. currency this week. The euro has been especially beaten down ever since Russia began its invasion of Ukraine. The 19 countries that currently use the euro have seen its value tick lower as they all struggle to deal with the impacts of war on the energy market.  

Euro and Dollar Parity

As previously noted, the euro and the dollar are worth virtually the same amount right now. This is especially important when considering exchange rates.

A currency's exchange rate reflects its future economic prospects, and Europe's economic outlook has been steadily declining. Initially, predictions for Europe began to fall with the rest of the globe thanks to the pandemic. But now, growth projections continue to trickle lower thanks to the effects war has had on Europe. Much like here in the states, talks of a recession continue to intensify throughout Europe.

Effects of War on the Euro

Europe is significantly more dependent than the U.S. on Russian oil and natural gas. Fears that the war in Ukraine will lead to a loss of Russian oil on global markets have helped push oil prices even higher. Additionally, Russia has been cutting back its natural gas supplies to countries within the European Union. This is seen as a direct retaliation to the many sanctions levied against Russia for its attack on Ukraine. The energy crisis within Europe has driven inflation to a record-level 8.6% in June. Much like here in the U.S., Europeans are feeling the pain of inflation in all of their spending, from their groceries to the gas pump.

What it Means:  The euro hasn't been valued below the $1 mark since 2002. It's now below $1.01. Meanwhile, the U.S. dollar continues to be viewed as the world's dominant currency for trade and the dollar has been hitting 20-year highs against other currencies, not just the euro.

Additionally, as the Fed continues to raise interest rates here in the states, this has attracted more investments from euros into dollar-denominated holdings. Further pushing the euro down and the dollar up. A strong dollar and weaker euro may mean lower prices on imported goods, things like cars, computers, and devices. American tourists may also find this a more advantageous time to travel, as restaurants and hotels are certain to be cheaper across Europe these days. 

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

Record Day for Amazon

Amazon's annual sales event known as "Prime Day" has once again broken the record for total sales over two days. Smashing its own record set last year in 2021. Amazon sold over 300 million items, a steep increase from last year's then-record of 250 million purchased items. 

Over the two-day event, household essentials were purchased at the highest rate. Second and third on the list were luxury beauty items and consumer electronics. Amazon noted some of its top sellers included Fire TV sticks, Alexa speakers, and cameras. Amazon predicted that its members saved a total of $1.7B over the two days. 

The growing success of Amazon's prime day has seen many competitors follow suit with their own mega-savings flash events. Wal-Mart, Best Buy, and Target have all noted huge sales through similar initiatives. 

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Market Performance- Week of 08.14.2022

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Weekly Watchlists

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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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