Well, the consecutive down week streak ended last week as all the U.S. major indexes rallied. As we have been stating, a bounce was coming so finally getting an up week should not be that surprising. If you look at the performance of sectors from the late March peak to the recent 5/20 low and compare it with the leaderboard since then, they are nearly mirror images as shown below.
Four of the five worst sectors on the decline (CD, Tech, Financials, and Industrials) were among the top five as wrapped up the week. On the flip side, the relative winners as the S&P 500 was falling (Utilities, HC, Staples and Materials) all underperformed ever since the trough. Interestingly, only Energy outperformed on both the sides, which is clearly the strongest area based on our earnings revisions work.
So, the 2022 “bear” market is over and it’s time to position for an even larger and long duration up move? I will reiterate some comments that I made last week.
Based on my work, the answer is NO. My key indicators are not yet signaling that we are out of the woods. The good news I am anticipating there will be a great opportunity for investors to take advantage of a lot of high-quality stocks that is still in front of us.
The oversold condition and hopes that a dovish Fed is coming to the rescue has helped fuel equities to bounce that very well could carry the S&P 500 beyond my 4100-4200 zone that I had been discussing as a likely area to fail. I continue to warn investors that my work still suggests caution is needed and that this bounce should be used to sell into or raise hedges.
Bottom line: I am reiterating my unfavorable view on equities, and I continue to target 3600-3500 as my next downside target.
Be careful. Despite the possibility of an oversold tactical bounce at some point, my key indicators are weakening and nowhere near negative extremes, which suggests considerable downside risk remains. Based on my work, I have the following conclusions:
- Monetary policy is still moving towards tightening
- A decline based on fears of economic slowing and negative earnings revisions to the forward outlook is still my base case and still in the early phases
- It is NOT time to shift positioning to the “other” side, and importantly oversold tactical rallies are expected to fail.
- Expectations for a great buying opportunity are still at a high level, and investors should be starting to identify candidates for their wish list.
MAIN CLIENT ISSUES
- Is the rally for real? Have I missed the bottom?
- Should I be moving heavily into Tech and other Growth names?
- 10-yr yields have pulled back. Has the peak in long rates been reached?
- The backdrop is challenging tricky, and confidence is low.
SPECIFIC CLIENT QUESTIONS
- What historically happens to equites when your ASM line crosses below zero?
- How are you viewing the health of the U.S. consumer?
- What names caught your attention from an earnings revisions perspective?
MY ANSWERS
What historically happens to equites when your ASM line crosses below zero?
The S&P has had a median decline of 10% over five months.
I have been discussing that the earnings revisions backdrop for future profits is beginning to deteriorate, especially for all things cyclical. This week fully supports my thesis and don’t let a handful of names who have held up better thus far fool you into thinking that the estimate cuts are not coming. Based on my work, I will borrow and slightly change a classic line from Hawaii 5-0, Book it, Danno.
I got a lot of questions on this over the week and will share an analysis my team and I performed to highlight why watching out for my expecting cutting cycle is important and supports my ongoing forecast that THE bottom is not in yet.
Since 1990, I have identified five occurrences when my proprietary earnings revision metric for the S&P 500 crossed below zero because of economic slowing concerns (the other periods we not comparable in my view). In these periods, the S&P 500 fell on average of 18% and the median decline was 10% over an average of five months with every event being negative (please see the following page for chart/table). If my expectations for the ASM line to decline further are accurate, investors should be on full alert. So, a 10% decline that takes five months would put the S&P 500 near my next target range of 3600-3500.
Bottom line: The important takeaway is our tools suggest an estimate cutting cycle, the lowering of absolute forecasts, is just beginning, as we expect economic slowdown fears to begin as stated above to grow quite noticeably for the next several months.
How are you viewing the health of the U.S. consumer?
Holding up for now, but early signs of cracking are becoming visible.
On the economic side of the equation, which will likely feed into my expected negative estimate revisions, evidence is mounting that the U.S. consumer is showing signs of getting near tapped out. In this week’s income, spending and savings data release, credit card balances are shooting up and the personal savings rate is now at its lowest level since September 2008. With the cost-of-living increases that have occurred during 2022, it is hard to imagine that discretionary spending will not slow and ultimately decline correspondingly.
Bottom line: While the Fed does not necessarily want to cripple the economy or the consumer, there is work to be done on the inflation and wage pressure fronts. To get the results that will be needed to keep its credibility, action needs to be taken that will slow economic growth and contribute to a negative estimate revision cycle that will likely impact all things cyclical over the next 1-5 months, at minimum.
What names caught your attention from an earnings revisions perspective?
There were a handful of single stocks that caught my attention this week and clients asked about them quite a bit.
Heath Care — CI -2.12% , MRK -2.29% , AZN 1.36% , GSK -2.11% , SAN 1.45% FP, WRBY -3.47%
Tech — BABA 2.20% , ADBE 0.60%
Materials — ALB -0.27%
Industrials — NOC -0.92% , RTX -0.35% ,
Financials — CME -0.76% , AXP 0.86%
Energy — FANG 2.30%
