Good Friday evening to all of you here on r/stocks! I hope everyone on this sub made out pretty nicely in the market this past week, and are ready for the new trading week ahead. 🙂
Here is everything you need to know to get you ready for the trading week beginning November 21st, 2022.
The major averages ticked higher in afternoon trading Friday to end the day on an upbeat note as investors assessed tougher language from Federal Reserve speakers and pored over the latest earnings reports.
The Dow Jones Industrial Average rose 199.37 points, or 0.59%, to 33,745.69, while the S&P 500 climbed 0.48% to 3,965.34. The Nasdaq Composite finished just 0.01% above the flat line at 11,146.06.
All of the major averages posted losses for the week. The Dow ended 0.01% lower. The S&P 500 lost 0.69% for the week, while the Nasdaq ended 1.57% lower. All three indexes are positive for the month, however.
The market was divided for much of the day, with the S&P 500 trading mostly flat as investors started to reset expectations after a couple of rallies over the past week, beginning with the October CPI print. Stephanie Lang, chief investment officer at Homrich Berg, said this week is characterized by a “back-to-reality viewpoint.”
“Following the big rally coming off the better-than-expected CPI print, the market’s digesting the current data, which is bringing things back to reality,” she said. “The rally that followed the CPI print we don’t feel was justified by fundamentals… The market’s also pricing in a soft landing here, which we don’t think is likely to occur. So when you hear the Fed officials coming out and reiterating their stance, you’re starting to see the market readjust to that.”
On Friday, Boston Federal Reserve President Susan Collins expressed confidence that policymakers can tame inflation without doing too much damage to employment.
St. Louis Federal Reserve President James Bullard said Thursday that “the policy rate is not yet in a zone that may be considered sufficiently restrictive.” He suggested that the appropriate zone for the federal funds rate could be in the 5% to 7% range, which is higher than what the market is pricing.
“We continue to think investors should place much more emphasis on the actual data and not focus too much on Fed rhetoric (the former will show where inflation is headed while the latter is fixated on where it was),” said Adam Crisafulli, founder of Vital Knowledge. “That said, investors are tired of battling the Fed’s daily tape bombs and the fear is it may take 2-3 more CPIs for officials to stop admonishing the market every time it tries to rally.”
This past week saw the following moves in the S&P:
S&P Sectors for this past week:
Major Indices for this past week:
Major Futures Markets as of Friday’s close:
Economic Calendar for the Week Ahead:
Percentage Changes for the Major Indices, WTD, MTD, QTD, YTD as of Friday’s close:
S&P Sectors for the Past Week:
Major Indices Pullback/Correction Levels as of Friday’s close:
Major Indices Rally Levels as of Friday’s close:
Most Anticipated Earnings Releases for this week:
(CLICK HERE FOR THE CHART!)
(T.B.A. THIS WEEKEND.)
Here are the upcoming IPO’s for this week:
Friday’s Stock Analyst Upgrades & Downgrades:
Do Stocks Really Like Gridlock?
The midterm elections are over, and the results aren’t 100% official yet, but we do know that we’ll have a divided government. As of now, the Democrats have 50 seats in the Senate to maintain control there, while the Republicans gained their 218th seat in the House to take control there. The bottom line though is neither the Senate nor the House has large majorities, in fact, they are both near historically small margins.
So that’s the big question, do stocks really like gridlock? Of course, things are never this simple, as there are so many other factors that matter to how stocks do, but it sure looks like gridlock could be a tailwind for stocks. Or at the very least, not a major headwind.
Here’s a chart that shows all the times since 1950 we’ve had a divided government and how the S&P 500 did in those years. The average return for stocks was a very solid 15.7% under a divided government, with only one-year falling significantly back in 1981, while 2011 was nearly exactly breakeven. The other years saw some solid returns.
As of now, it is expected the Republicans will take a three-seat majority in the House (this could change, but it’ll likely be near this number). This would be the smallest majority for the Republicans since 3 seats in 2001 and 2002. Here’s a great chart that shows just how rare it is to have a majority this small. Fun stat, the House moved to 435 seats in 1913, meaning 218 seats gives a party the majority. Fun stat #2, the Democrats controlled the House from 1955 to 1994, but things have been more even over recent years.
What exactly does a small-seat majority in the House mean? Odds are a small majority means there could be some gridlock, so do stocks like this? Below we show again this appears to be the case. When there is less than a 20-seat House majority, the S&P 500 gained a median of 19.5% and was higher 12 out of 15 times when looking at the first year of a new Congress. In fact, 9 of the past 10 times there was a new Congress and a small majority, stocks finished higher.
In conclusion, stocks really do appear to have no issues with a divided government and in many cases, stocks have done just fine under this scenario.
Weakness Sets Up Bullish Thanksgiving Week/End-November Trade
The recent 21-year typical November graph here points to a seasonal cycle low point tomorrow, the 14th trading day of the month, the Friday before Thanksgiving and Op-Ex day. Thanksgiving week has a notorious “holiday fueled” bullish bias as do the last seven trading days of the month.
However, as you can see from the tables here of the history of the Thanksgiving trade the bullish bias has weakened over the last several years. The best short-term trade appears to be getting long into any weakness in the week or days before the holiday and selling any subsequent rally toward the end of Thanksgiving week or before month-end.
First published in the 1987 Stock Trader’s Almanac, the Wednesday before and the Friday after Thanksgiving combined were up 34 times in 35 years. The only S&P 500 decline was in 1964. Subsequently, this trend changed. In the 35 years since 1987, there have been 10 declines and 25 advances. See 2023 Stock Trader’s Almanac page 106 for more.
Highest Bullish Sentiment of the Year
As we noted last week, this week’s sentiment data is the first to encapsulate any reaction to last week’s CPI number as well as the subsequent market rally. Although price action has been somewhat choppy and there have been plenty of other catalysts (FTX’s collapse, more yield curve inversions, the missile strike in Poland) to balance out the inflation data and put investors back onto their heels, the latest AAII survey has shown a surge in bullish sentiment. The percentage of respondents reporting as optimistic jumped from 25.1% last week up to 33.5% this week. That is not only the largest one-week increase since the first week of June (when bulls rose by 12.2 percentage points) but is now the highest reading on bulls since the last week of 2021.
Bearish sentiment in turn dropped sharply falling to 40.2% for a decline of 6.8 percentage points. While an improvement, at the start of the month bearish sentiment had fallen by much more (both the last week of October and the first week of November saw double-digit week-over-week declines) and was at a much lower level of 32.9%.
The bull-bear spread has narrowed but still remains negative for the 33rd week in a row. If the spread remains negative into next week, it will tie the record streak from 2020.
Neutral sentiment fell for a second week in a row with the total decline in that time eclipsing 10 percentage points. At 26.3%, it is down to the lowest level since the week of October 20th, implying that investors have become a bit more decisive in their respective market views.
The AAII survey’s more bullish turn this week was also seen in other readings on sentiment like the Investors Intelligence survey and the NAAIM Exposure Index. As a result, our sentiment composite which aggregates the findings of the three surveys into a single sentiment reading is back up to its highest reading since mid-August. Although the reading remains negative, it is no longer at the extreme levels that were common earlier this year.
Consumer Discretionary’s Muddled Relative Strength
Ranging from today’s retail sales report to homebuilder sentiment to the earnings of some of the largest retailers like Target (TGT) and Lowe’s (LOW), the economic and earnings calendar this week has given Consumer Discretionary stocks plenty of news to digest. Outside of the spring to late summer, the sector has generally been on the decline relative to the S&P 500 in 2022. Last week, that relative strength line bounced right as it reached the late May low. However, over the past few days, it has been resuming its move lower, meaning it is back to underperforming.
While on a sector level the relative strength line has been falling, drilling down to the industry group level, there has been more variation. For example, even with some positive responses to earnings from the likes of Home Depot (HD) or Lowe’s (LOW), the retailing industry has seen a sharp grind lower in its relative strength line versus the S&P 500. Similarly, autos have seen a turn lower although it has been underperforming the S&P for a longer period of time since the early fall. Meanwhile, Consumer Durables and Appliances (which includes stocks like the homebuilders and home appliance makers) has been moving higher. That move has paled in comparison to the relative strength of Consumer Services stocks (restaurants, cruise lines, hotels and resorts), though, as that group’s line has surged over the past couple of months.
As mentioned above, retailers in the Consumer Discretionary sector have been underperforming the S&P 500 lately but there is another group of retailers in which performance has been more solid. The Food & Staples Retail industry is a component of the Consumer Staples sector, and its relative strength line has been trending higher since the spring lows. In fact, after the past week’s move higher thanks in part to a strong response to Walmart (WMT) earnings, its relative strength line is approaching some of the highest levels of the past year, entirely recovering the massive drop from May in the wake of another, much more negatively received, WMT earnings report.
How Bottoms Form. (It Might Surprise You.)
The S&P 500 rallied again last week and was more than 10% off the October 12 closing lows, before selling off some yesterday. Nonetheless, the truth is the overall news really hasn’t really been that great, yet stocks have staged a strong rally over the past month. What gives?
Turns out, this is what tends to happen coming off major lows for stocks more often than not. Our friends at JPM Asset Management put together some of the best charts I’ve ever seen to describe this phenomenon. You can read the whole report from Michael Cembalest here.
They found that from the Eisenhower recession in 1957 to stagflation in the 1970s, to the early 1980s double dip recession, to the 1990 recession, stocks turned higher well before the other parts of the economy began to turn higher. As you can see below, stocks tended to bottom months (and sometimes years) before earnings, GDP, and payrolls officially turn higher.
More recently we saw similar action during the Financial Crisis and then again during the worst of COVID. I’ll never forget how stocks soared in April, May, and June of 2020, yet we saw some of the very worst headlines in our country’s history. The truth is the stock market isn’t looking in the rear-view mirror, it is always looking forward and discounting what could be out there in the future.
To keep things honest, this doesn’t have a perfect track record, as, after the dot-com burst, GDP and earnings both turned higher well before stocks officially bottomed.
This in one of the more confusing concepts for many investors, but it is one that is so important to understand. Stocks will likely rise even as the news is bad, this is how it works. If you are waiting for things to officially improve, you likely will miss out on substantial gains along the way.
Burt White likes to say if you are playing a video game and you are going toward the monsters, you are going in the right direction. Investing is similar, as times will sometimes be extra scary, but this is part of the process. If you are scared or uncomfortable, that is all part of investing in a lot of ways and if you run the other way every time things get scary, you’ll likely never be able to meet your investment goals.
Homebuilder Hopes Demolished
The national average on a 30-year fixed rate mortgage has come back below 7%, but it remains elevated versus recent history as housing data still can’t catch a break. This morning, the NAHB released their latest reading on homebuilder sentiment and for the eleventh month in a row, the headline index fell month over month. As shown below, the current streak of nearly a year straight of declines is far and away a record, surpassing two eight-month long streaks leading up to the Financial Crisis.
This month, homebuilder sentiment dropped another 5 points down to 33. That is not the largest drop of the current streak of declines, with bigger drops of 8 points last month or 12 points in July, but it still ranks in the bottom 4% of all months on record. In other words, not only is homebuilder sentiment falling consistently, but it’s falling fairly fast. The other components have also seen bottom decile declines with the only sub-index avoiding declines being in the West.
After the November decline, the headline homebuilder sentiment reading sits 3 points above the spring 2020 low. Similarly, Present Sales and Traffic are down to the lowest level since April 2020 while Future Sales have actually surpassed those levels to now sit at the weakest reading in over a decade.
Last month, we highlighted how the geographic breakdown of sentiment was showing homebuilders in the Northeast being much more optimistic than their counter parts in the rest of the country. In November, that region joined the rest of the pack with a massive 17 point decline. That ranks as the third largest monthly decline on record behind a 19 point drop in June 2010 and the 45 point decline at the onset of the pandemic in April 2020. While that has not been enough to result in a new low, similar to sentiment in the Midwest, sentiment in the South is down to the lowest level in a decade. The same could be said for the West although it rose marginally month over month.
As for the reaction of homebuilder stocks, the iShares US Home Construction ETF (ITB) is trading 1.1% lower as of this writing. As shown below, after last week’s equity market surge on CPI in which the group moved not only above its 50-DMA but also its 200-DMA, ITB has continued to hold above its moving averages for now. Without much follow through on the post-CPI surge, any move above last week’s highs would be a welcome bullish sign, whereas the 200-DMA is looking to be the critical level of support for the time being.
Here are the most notable companies reporting earnings in this upcoming trading week ahead-
(CLICK HERE FOR NEXT WEEK’S MOST NOTABLE EARNINGS RELEASES!)
(T.B.A. THIS WEEKEND.)
(CLICK HERE FOR NEXT WEEK’S HIGHEST VOLATILITY EARNINGS RELEASES!)
(T.B.A. THIS WEEKEND.)
Below are some of the notable companies coming out with earnings releases this upcoming trading week ahead which includes the date/time of release & consensus estimates courtesy of Earnings Whispers:
Monday 11.21.22 Before Market Open:
Monday 11.21.22 After Market Close:
Tuesday 11.22.22 Before Market Open:
Tuesday 11.22.22 After Market Close:
Wednesday 11.23.22 Before Market Open:
Wednesday 11.23.22 After Market Close:
Thursday 11.24.22 Before Market Open:
(CLICK HERE FOR THURSDAY’S PRE-MARKET EARNINGS TIME & ESTIMATES!)
(NONE. U.S. MARKETS CLOSED IN OBSERVANCE OF THANKSGIVING DAY.)
Thursday 11.24.22 After Market Close:
(CLICK HERE FOR THURSDAY’S AFTER-MARKET EARNINGS TIME & ESTIMATES!)
(NONE. U.S. MARKETS CLOSED IN OBSERVANCE OF THANKSGIVING DAY.)
Friday 11.25.22 Before Market Open:
(CLICK HERE FOR FRIDAY’S PRE-MARKET EARNINGS TIME & ESTIMATES!)
Friday 11.25.22 After Market Close:
(CLICK HERE FOR FRIDAY’S AFTER-MARKET EARNINGS TIME & ESTIMATES!)
(T.B.A. THIS WEEKEND.)
(T.B.A. THIS WEEKEND.) (T.B.A. THIS WEEKEND.).
What are you all watching for in this upcoming trading week?
I hope you all have a wonderful weekend and a great trading week ahead r/stocks. 🙂