Earnings Season: A Lesson in Reward and Punishment

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Another crazy week with rapid stock index moves taking us into the middle of earnings season.

In the past week, some of the biggest stocks have been recorded, including (NASDAQ:), (NASDAQ:), (NASDAQ:), (NYSE:), (NYSE:), (NASDAQ:), (NYSE:), (NYSE:) (NYSE:) and (NYSE:) signaling an earnings beat.

Most not only grew revenue on top of the line, but also posted significant net earnings per share on bottom line and optimistic expectations for the future.

There were also quite a few disappointments, including (NASDAQ:), (NASDAQ:), (NYSE:), (NYSE:), (NASDAQ:), (NYSE:), (NYSE:), (NYSE:) , (NASDAQ:), (NASDAQ:), (NYSE:) and (NYSE:).

Interestingly, the national media didn’t bother to comment on the positive beats, but instead decided to highlight the biggest one-day loss of around $230 billion in Meta (FB) shares, a historic first.

Similar industry stalwarts reported vastly different earnings (Bank of America and JP Morgan or Facebook and Snap). Which give?

Most companies disappointed with their earnings cited a few significant reasons summarized in two areas: supply chain disruptions and increased labor costs (wage inflation).

A ruthless market

So why such big rewards (GOOG, AMZN to name two) for beat wins and why such decimation (FB, F to name two losers)?

We mentioned in our previous Market Outlook, that market dynamics started to change in Q4 2021. There has been a lot of sector rotation and leadership change in the markets.

This is mainly due to a number of factors including a) rising inflation which has led to higher labor costs, b) rising raw material costs making the production of products more expensive , c) global supply chain disruptions, d) rising energy costs which in increasing production expenses, e) remaining COVID infections and a disruption in human capital available for work, f ) geopolitical unrest and tension causing corporate anxiety and increased cybersecurity risk, g) rising interest rates and h) recalculation of equity multiples .

Cash flow is another contributing factor. There is still a huge amount of investor capital out there, including retirement funds with deep roots in the stock market. However, as an indication of market fragility, last Monday (January 31), the $407 billion SPDR® S&P 500 (NYSE:) saw its biggest buyback since its launch in 1993 according to data compiled by Bloomberg. Around $7 billion came out on Monday alone, the biggest daily outflow in 4 years.

The January outflow was not limited to the fund. The $191 billion Invesco QQQ Trust ETF (NASDAQ:) (which tracks tech names) saw its biggest exodus since the dot-com meltdown (2000-2002) when around 6.2 billions of dollars left the ETF during the month.

All of this reinforces the fragility and liquidity of stock markets and their components. In fact, the amount of money needed to move the major US stock indexes by 1% is extremely small.

When US Treasury yields are exceptionally low (negative real returns for investors after accounting for inflation), investors reward high Price to Sales and Price to Earnings stocks and increase multiples even further, a dilemma self-reinforcing…until the easy money stops.

This environment is changing, and the end of a 40-year cycle of rate cuts supporting highly speculative tech companies may be over before some time.

As a result, growth stocks – Vanguard Stock Growth Index Fund ETF (NYSE:) – are underperforming value – Vanguard Stock Value Index Fund ETF (NYSE:) – this year, reversing a decade-long positive trend. Don’t get me wrong here because there could be some serious rallies that can fool someone into thinking that growth is always the right strategy.

This type of market causes “impatience” and the consistent quality of long-term earnings begins to be blessed by the market and those who disappoint, punished by investors.

Such is this earnings season.

What could we recommend now?

Surprisingly, even though many companies are disappointing in terms of earnings, there are enough surprises and earnings beats to support the market and maintain a bottom below.

Our own Mish, in several recent national TV appearances, thinks we’re caught in a trading range that could stretch and last for some time. The S&P 500 could be building a strong bottom (4200) and a tough top (4700) and we could find ourselves hovering between those two numbers for a while until there is a catalyst one way or the other. in the other to cross these beaches. .

We continue to urge you, our valued and loyal readers, to stay in close contact. Monitor risk gauges, keep a close eye on investment patterns, and be alert to the frequent changes we initiate. Be ready to change perspective quickly.

If you are a follower of Mish or our ETF Complete, you may have noticed the exposure to energy and agricultural commodities. Do not dwell too much and be very selective on technology issues or small cap stocks that are currently in a bearish phase.

Market Highlights from Last Week

Risk Activated/Bullish

  • The SPY and DIA recovered to their 200-day moving averages, while all 4 key indices continued to signify a comeback and all averaged +1.5% higher on the week.
  • TSI turned positive for both the SPDR® Dow Jones Industrial Average ETF Trust (NYSE:) and SPY, but not for QQQ or iShares Russell 2000 ETF (NYSE:)
  • For the first time in more than a month, the number of days of accumulation in the 4 indices exceeded the days of distribution, a significant improvement.
  • Speculative sectors led the rally this week, including Consumer Discretionary (NYSE:) and Semiconductors (NASDAQ:), while Risk-Off plays like Consumer Staples (NYSE:) and Utilities (NYSE: ) lagging behind.
  • Energy-related stocks including Energy (NYSE:) +5%, Clean Energy (NYSE:) +5.2% and Solar (NYSE:) +4.8% on the week
  • The (COMPX) shows slightly positive market internals in all areas.
  • The New High/New Low ratio for SPY and QQQ is showing signs of bottoming.
  • Improved risk gauges, currently showing neutral levels
  • Volatility ratios (one month vs. three months) bounced off extremely oversold levels and set up for more bullish action.
  • The number of stocks above their 10-day moving average is rebounding from oversold levels.

Risk off/downside

  • Cash Volatility () held in a bullish phase despite the market rally, still showing Risk-Off.
  • Interest rates (NASDAQ:) have been hit hard, especially with
  • Small caps (IWM) continue to lag with the TSI posting a -5.72 reading, a big divergence from the Dow Industrials (DIA) and SPY
  • Growth stocks (VUG) still lag value stocks (VTV) as VUG is stuck below its 50 and 200 day moving averages, while VTV is above both.
  • 4 of the 6 modern Mish family members are still in trouble below their 50 and 200 day moving averages, excluding regional banks (NYSE:) which are currently in a bullish phase thanks to favorable interest rates.
  • Foreign equities, including emerging markets (NYSE:) and foreign large caps (NYSE:) have both abandoned their short-term bid to take some leadership over US equities (SPY). However, EEM with commodity sensitivity outperformed on a relative basis versus EFA.
  • Soft commodities (NYSE:) roared, closing Friday at multi-year highs.
  • (NYSE:) is compressing and looks set for a run above $100 a barrel.

Neutral Metrics

  • (NYSE:) closed just below its 10- and 200-day moving averages in a sideways compression range and looks longer-term poised to break out either way. The monthly charts are the most revealing.
  • Despite rising rates, the (NYSE:) was hit hard this week and entered a warning phase against the (NYSE:).
  • Internal market data has run on oversold readings and is still in slightly negative territory according to the 10-day advance/decline and the McClellan oscillator for SPY.

Coin Crypto
By Holden Milstein

  • On Friday, Bitcoin () saw its biggest daily percentage gain since Feb. 2, 2021, surging +11.5% and rallying above the $41,000 level with only the 50-day moving average as resistance ahead of a new exploration of prices.
  • Although we have seen a rally in major equity indices, all up +1.5% on average this week, the cryptocurrency market has clearly outperformed across the board, with other major coins significantly outperforming even the best stocks.
  • This week we saw reports from international Binance exchange users of phishing scams directly targeting their login credentials, while leading blockchain bridge provider Wormhole was hacked and exploited for over 320 million of dollars.
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