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By Jeffrey Cohen, Investment Advisor Representative
US Advanced Computing Infrastructure, Inc. May 16, 2022 This is not investment advice.
S&P 500 is trading around 4,000, which is a support level set at/over a year ago. Last night, Goldman Sachs and Morgan Stanley called a year-end level of 3600 and 3400 if we are heading into weaker earnings cycles. There is a 10% to 15% downside risk in the next 7 months in the fully diversified US stock market according to the large money managers and market makers. These investment managers 'read tea leaves.' We don't guess the direction of the market, we find stocks that should benefit from rising or falling markets.
BTW, the tea leaf readers analysis makes sense to us, because as more stocks swing from profit to loss (positive to negative net income), there will be more big (and unexpected) losses in individual stocks. We watched the US stock market futures move from positive to negative this morning, which indicated a lower stock market open. It is still lower as we write this, about 1% across the board. There was news last night from China. China's economy was significantly weaker (it shrunk) in April 2022. This was due to COVID lockdowns (their explanation) and global economic conditions (ours). We also see a continuing weakness in US bonds. We looked at the WSJ Bond Benchmarks and saw all fixed income is priced lower. Mortgage backed securities are down 8%, US government agency and Treasury debt down 10%, and corporate bonds are down 15%. The longer the duration (or years to maturity of the money you get back, on average), the worse the loss. We are invested in fixed income, and likely so are you. This shows there is no place to hide. Stocks and bonds are both down. We see the US Dollar is strong, and continues to show signs of strength. There is a flight to safety into US assets. The VIX is down slightly, down to 28 (from the 30s), and while this is still elevated, it shows a lower risk of catastrophic market drop than 1-2 weeks ago. Oil and gasoline are too high, and maintaining their elevated levels. We commented now this morning gasoline (wholesale) rose 2 cents to $4.00 a gallon while we watched. This is the price before taxes, shipping to your gas station, and dealer markup). This just isn't right for normal Americans who drive to work. This will hurt our economy and consumer spending. Years ago we studied this and could prove that a dollar spent at the pump is exactly a dollar less to spend in the general retail business (especially food and clothing). Our smart volatility model (Efficient Portfolio) called Chicago Quantum Net Score UP model, is showing a 20% greater edge than last week on slightly fewer stocks. The best portfolio has 7 stocks, and the same edge (within 10-4 rounding) can be maintained with 11 stocks. It is starting to be time to think about that 'buy list' for the long side, as these 'efficient stocks' will scream higher in a market recovery.
We discuss The Carlyle Group $CG having good news.
We discuss the extremely negative breadth of this market. A month ago, markets were significantly higher. If you were out a month ago, you would have more money. A year ago, the markets are lower, but it is a mixed bag. Some sectors have over-performed others, and so industry investing matters. Futures this morning:
Reasonable setup for a good opening on Monday. News articles were either not news, or 'gloomy Goldman.' Fallon says this is starting to be a buyers market, and he suggests small caps if you are ready to take the risk. Negative BETA stocks is the hot topic on our website. Most visited page is Negative BETA stocks that we share. There are very few negative BETA stocks, and a few exchange traded funds (or synthetic investments) that offer investments that tend to move in the opposite direction to the $SPY or S&P 500 Index ETF. Our data shows the US Dollar, and physical gold both have slightly negative BETA to the S&P 500. A good bet 'for' the market that should rise when the market rises, take a look at $TNA. This should rise with the market, as it rises when the market rises, on a leveraged basis. $CRBP Corbus Pharmaceuticals is looking up today. Nobody knows how this will do, and we call that this stock could hit $0.20 again today. It is at $0.26 right now, up around 25%, this morning. We reviewed some common sense 'wisdom' from David Goldman, CNN Business published on Saturday, May 14. Why are markets lower? Rising interest rates, stock market is in sell-off mode, bond market is in sell off mode, and there is chaos around the globe. Fixed income is lower, especially in corporate investment grade issues. High yield is already lower, and now corporate debt is falling. Many more new lows than highs. Across the board, whether mortgage backed securities, Treasury or Agency debt, corporate investment grade, or high yield are down 8% to 15% depending on where you invest. In this case, stocks and bonds are both down, and there is no place to hide. Dollar is strong, inflation is high, and people are running into US Treasuries, but they cannot overcome rising long-term interest rates. $AMC Bonds trading under $0.70, yielding almost 22%. AMC is the movie company. We just went to the movies, and the theatres were full, but their debt is junk. Yield curve is trending higher, it is positively sloped, and slightly above and below 3%. Short duration bill yields are down. We review industries trading pre-market. Some of the risky sectors of the markets are up, but most are down or mixed. Risky sectors were mixed pre-market. This helps you to see beyond the headlines. Chips and semiconductors were mostly red, which led us to believe the market would open lower. It did. The physical miners are mixed, and we like those companies. Not sure we like those stocks at those prices, but we like them. Overall, it looked like the market was in individual stocks, and not a big push to drive the indices into the open. A stock pickers market today. Finally, we tweeted an existential stock market thought this morning just before the open. If there is an event horizon where stocks move from trading ranges into freefall, what is that level. Is there a stock trading shop that wants to try and push us to that level and watch the ensuing chaos?
Key Links from this morning's analysis:
https://www.markets.fallondpicks.com/2022/05/markets-make-fresh-attempt-at-swing-lows.html https://www.chicagoquantum.com/negative-beta-stocks.html https://finance.yahoo.com/quote/TNA?p=TNA&.tsrc=fin-srch https://www.zerohedge.com/markets/hedge-fund-cio-markets-strongest-gravitational-force-produced-stop-losses-imposed-leverage https://finance.yahoo.com/ https://finance.yahoo.com/news/goldman-sachs-economist-slowdown-consumer-spending-151957462.html https://finance.yahoo.com/news/china-april-industrial-output-declines-020031783.html https://finviz.com/futures.ashx https://finra-markets.morningstar.com/MarketData/Default.jsp?sdkVersion=2.62.1 https://finra-markets.morningstar.com/BondCenter/Default.jsp https://www.wsj.com/market-data/bonds/benchmarks?mod=md_bond_view_tracking_bond_full https://www.cnn.com/2022/05/14/economy/recession-signs/index.html https://www.cnbc.com/2022/05/16/china-economy-covid-lockdowns-weigh-on-retail-industrial-production-data.html https://www.zerohedge.com/markets/price-wrong-morgan-stanley-says-bear-market-wont-be-over-until-one-two-things-happens https://www.zerohedge.com/markets/one-step-closer-recession-goldman-cuts-sp-price-target-4300-slashes-gdp-forecast
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