The Weekend Edition # 43

Bear Market Rally; Contrarian Views; Key Earnings Metrics

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter this week!

Here’s what we cover this week:

• Market Recap - Bear Market Rally

• Macro - The Contrarian View

• Earnings of Week - Key Metrics

• The Week Ahead - Economic & Earnings Calendar

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - 24 May to 27 May, 2022

The markets have had quite the upweek. On average, the indices are up 7% for the week. Quite the turnaround!

This seems like a classic case of a bear market rally. And rest assured, we still are very much in a bear market. But, this is a good sign of some relief, not just in the equity markets but also in the bond markets. The sectors were up not just on the day for Friday but for the week, with Consumer Discretionary leading the way, no less. A clear sign that the market has become less defensive.

Bonds are seeing some signs of life here. BBB rated (LQDB) and High Yield bonds caught a substantial bid last week. There’s some consensus that this is the bottom for bonds and rates will peak this year so, it’s time to start looking to add bonds to the portfolio. I still think it’s too early. And, I don’t think the Fed will pivot so soon. Having said that, HYG and JNK could be a good trade, if we are seeing a bear market rally.

So the question then remains is whether we see some continuation into next week for this rally? There seems to be some conditions that suggest that we will see some continuation.

• Monday is a US stock market holiday and we usually have some pent up demand from 3-day weekends.

• We’ve also seen an extended period of sell-off’s now and the market seems to be in oversold conditions so there’s some exhaustion there.

• Market internals have been quite constructive over the last few days with advances > declines by a significant margin.

We also have conditions to be wary of. Next week is the end of the month, and the Fed officially starts QT on Wednesday, Jun 1. The market may have priced some of the effects of that in but, I highly doubt that we don’t see any effect at all. But then again, you never know.

The Fed minutes were out this week and there weren’t too many surprises there, which is probably one reason the market rallied. We also had softening PCE numbers which is positive; although the sentiment reading was the lowest we’ve seen in the last 10 years.

Macro - The Contrarian Podcast

Earlier this week, I appeared on The Contrarian Podcast to discuss my somewhat contrarian views on the market. The podcast is behind a paywall for now and will be released for free in a week’s time. In the meantime, here’s a 3 min clip.

The summary of some of my discussion:

We may not have a very deep bear market but, we will continue to have a bear market for a while. It won’t be short lived by any means and will be marked by intermittent bear rallies (face-ripping ones even). 

Controlling inflation will remain the number one priority because it’s a bigger killer than other market forces. So, the Fed can and will tighten into a recession even if the level of unemployment increases. In the past, the Fed has lived with unemployment levels of 7-8% and still raised rates to control inflation. 

Earnings of the Week

Key earnings metrics for the week from FactSet:

The Week Ahead

Economic Calendar

Earnings Calendar

Closing Thoughts

The market is clearly experiencing a bear market rally which can be quite violent but also fun to trade if you know what you’re doing. I’d caution against taking large positions because the market can turn anytime.

On the bright side, we’re almost done with the current earnings season and there are few companies that will move the market violently. Although, one can never tell, seeing as how SNAP did drag the markets down on Tuesday. It pays to be vigilant.

Here’s wishing you a happy week ahead, and safe investing.

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers

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None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have no affiliation with any of the companies that are mentioned.