The market is making intense moves every day. One day it will rally like crazy and then it will fall vertically. Everybody is worried about recessionary fears. There is real concern that aggressive Fed policies would damage economic growth but would not bring down inflation that’s caused by broken supply chains, Russia Ukraine war, and China’s zero covid policies. The only bullish argument one can make right now is how bearish everyone is but that’s not helping anyone for now.
There is no place to hide. Mega-cap stocks (market cap > $200 billion) breaking down
Companies tend to cut dividend payouts and stock buybacks during recessionary periods to conserve capital
The market is pricing in recession and cut back in dividends/buybacks. No wonder, Coca-Cola stock got slammed with a Large candle selling. The story with Pepsi stock is no different. Just look at how P&G has been sold off from the resistance. Today, Apple has broken the key support level of 138 and the 100-week moving average. Microsoft is now down 26% from the highs. The story is no different with Google or Amazon. Tesla seems to be in free fall.
The only trade that worked this year in the mega-cap universe – Oil and Gas plays i.e. Chevron and Exxon Mobil
There is always a Bull market somewhere. In a mega-cap universe, Eli Lilly stock has broken out to a new high this year. As long as the stock holds 280, the stock can surprise on the upside. The stock is a buy with a stop loss below 275.
The Inflation bug has infected Retailers
Large retailers are now confessing how hard it is to manage costs in inflationary times. Freight and wage costs are out of control and customers are pulling back on spending – a toxic combo. First, it was Walmart that posted shocking results, followed by Target. Both Walmart and Target sank Gap down post earnings. Today, Ross Stores, a discount apparel and home fashion retailer, which seems to have some pricing power came out with horrible earnings and the stock is down 23% 🙁
What disappointed the market – 1. Comparable-store sales at Ross Stores declined 7%; and 2. Cost inflation dented the operating margin from 14.2% last year to 10.8%. When a stock gaps down on earnings, one should stay away. I made a similar comment when Walmart was down to $136 from $150. Now it is at $118. I hope at least this is one lesson you have learned from me.
AT&T – One Gap up trade that’s still holding
When a stock Gaps up on any Corporate development/earnings, and if it sustains the Gap, then it has the potential to surprise on the upside. Despite the bearish market environment, just see how AT&T has done.
Fundamentals matter when things become bad
A strong stable company can survive a recession by making less money but companies that have to raise money find it hard to even survive. The rising interest rate environment is now having its impact. Carnival, the cruise company, raised $1 billion money at an annual interest rate of 10.5%. Just imagine interest expense going forward and its impact on the company’s profitability. How can you buy even if you get excited about the Home Away trend?
The stock now reacts to downgrades and not upgrades
There was a time when the stocks used to fly on brokerage upgrades but now stocks rarely react to upgrades but do sell off violently on downgrades. Hewlett Packard Enterprise HPE is down 9% on the Bank of America Sec downgrade. The reason: business slowdown anticipated. Well when stocks fail to move past resistance, then they are vulnerable
Do Good earnings matter?
Palo Alto Networks PANW revenue grew 29% year over year for the quarter to $1.39 billion. Adjusted net income rose 38% pace to $193 million, which translates to EPS of $1.79 per share. If that’s not all the company now anticipates growing its revenue by 29% in 2022 to $5.5 billion and EPS of $7.43. Did it help the stock? The answer is No.
PANW stock did Gap up but then it has been slammed near the highs. The sentiment is so negative that no one wants to buy. Take TJX TJ Maxx – the stock made a Gap up move on strong earnings but today the stock is collapsing.
I will add more stories here as the day progresses.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers
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