Despite Facebook Earnings, Our Base Case of Violent Upside February Move Remains Intact

Markets were roiled by the Facebook earnings miss this week. The stock declined around 26% yesterday in response which was the largest single-day decline of market-cap ever. Despite the market’s harsh reaction to that big miss, we still see the most likely outcome as a violent upside rally in February 2022. Remember we went over three reasons why we say an upside rally is likely earlier this week.

  1. Retail investors raised cash at the fastest pace since before the pandemic –> contrarian buy signal
  2. S&P 500 daily RSI fell to 26, the lowest reading since March 2020 –> oversold = buy signal
  3. Retail sentiment (AAII) fell to the worst reading since 2013 –> contrarian buy signal

One of the reasons we feel confident in using retail sentiment as a contrarian signal is because retail investors have now come to comprise such a large portion of markets. Retail investors have become about 40% of the market and right now they are “bear-market” bearish. Thus, we see nearly half the market being structurally bearish as a contrarian bullish signal. We also are seeing cases rapidly decline in the places where Omicron first surfaced in the US, like New York.

Institutional accounts and retail accounts have been moving in opposite directions cash-wise. While retail inves...
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