EB Daily Market Report - Tuesday, January 4, 2022

Tom Bowley - January 04, 2022

Market Vision 2022

Our annual Market Vision event will be held this Saturday, January 8th, beginning at 8:45am ET. There is NO COST to EB.com subscribers. In fact, we are not even offering the event to non-members. This is exclusive EarningsBeats.com content and we're happy to provide it as yet another benefit of being a loyal EarningsBeats.com member. So thank you!

We'll be sending out room instructions later this week. If you cannot attend on Saturday, no worries. We'll record the event and make it available for all EB.com members so that you can enjoy it at your convenience.

Executive Market Summary

Futures were solid overnight and we saw mostly higher prices at the open
Rotation quickly favored value stocks vs. growth stocks, however
The NASDAQ is the clear relative loser today, falling heavily in the first 90 minutes of trading
Cryptocurrencies are holding up well as etherium ($ETHUSD, +4.37%) and bitcoin ($BTCUSD, +2.23%) both advance
Gold ($GOLD, +0.71%) and silver ($SILVER, +1.01%) are performing well as inflation fears mount
Crude oil ($WTIC, +1.43%) has topped $77 per barrel, as energy (XLE, +3.15%) leads today and breaks to a new 52-week high
Growth is clearly the big loser today as large cap growth ($DJUSGL, -1.49%), mid cap growth ($DJUSGM, -1.75%), and small cap growth ($DJUSGS, -1.28%) are all being sold
Software ($DJUSSW, -2.98%) and semiconductors ($DJUSSC, -2.32%) are two of the hardest hit industries
Ford (F, +11.55%) and General Motors (GM, +6.83%) are among today's leading S&P 500 companies

Market Outlook

If you look at mid caps ($MID) today, you'll see it performing quite well, with early strength followed by some selling. Check this out:

The bottom two panels, however, tell the REAL story. Mid cap value stocks ($DJUSVM) have opened 2022 with tremendous buying pressure, while the opposite is true of mid cap growth stocks ($DJUSGM). If you're holding growth stocks of ANY size today, you're likely underperforming considerably and this is what worries me about the near- to intermediate-term with U.S. equities. Whether inflation continues to ramp up in 2022 isn't the issue, it's the uncertainty that Wall Street does not like. Volatility ($VIX), which typically resides in the 10-13 area during secular bull markets, has stubbornly remained above 15 since the pandemic began. Currently, the VIX is at 17.31. An elevated VIX means that the stock market is nervous. It won't handle bad news well given this level of fear. And selling can quickly accelerate as we're seeing today.

Sector/Industry Focus

The transition to defense remains a big problem. While the S&P 500 holds up fairly well "on the surface", it's doing so mostly because of the performance of energy (XLE, +3.15%), defensive sectors like consumer staples (XLP, +0.88%) - vs. consumer discretionary (XLY, -0.42%) - and both financials (XLF, +2.76%) and industrials (XLI, +2.01%), which are reacting positively to higher treasury yields. Check out the sector leaderboard for today, plus for the past 30 days:

Sector Performance (today):

The rotation towards value stocks today is quite evident from this performance table. But it's not the one-day performance that concerns me. Check out the monthly performance leaderboard:

Sector Performance (one month):

The good news is that all 11 sectors have risen over the past 30 days. Unfortunately, the stock market has historically run into problems when new highs are accompanied by leadership in defensive groups. Four of our five aggressive sectors - XLI, XLK, XLY, XLC - are taking up residence at the bottom of this leaderboard. That's not good and really needs to change for me to grow more bullish. Again, I'll emphasize that I see this much more of a short-term problem, because I expect the stock market will begin to anticipate lower inflation later in 2022. But if I'm wrong and inflation persists much longer than I anticipate and treasury yields experience a considerable rise, growth stocks could be in for a very rough 2022. I don't see that happening, however. I believe the rate of inflation will top out in the May to July period. If I'm correct, the stock market will anticipate this and we'll see a massive move higher in growth stocks. This is going to be the tricky part of investing in 2022, especially in the first half of the year.

ChartLists/Strategies

The stock market is behaving MUCH more like it's paranoid about inflation. Treasury yields ($TNX) are now rising and growth stocks are tumbling today, while value names are doing much better. From a trading perspective, stay away from growth for now. Take a look at a stock like CrowdStrike (CRWD). I mentioned this one recently as it failed to clear its declining 20-day EMA. Now the selling is accelerating. There is good news in that positive divergences are forming on fresh new lows, but we need to see reversing candlesticks to become more aggressive on the long side. That is more likely to occur at key price support levels. So for CRWD and other growth names like ETSY, these are levels that might draw more interest from a buying perspective:

CRWD:

There are reasons to be very concerned about CRWD here. First, in the bottom panel, look at software stocks ($DJUSSW) vs. the S&P 500. The relative weakness is rapidly accelerating. So the headwinds here are very strong. CRWD is also downtrending relative to its software peers. Buying weak stocks in weak industry groups is not exactly a strategy that I'd consider. Therefore, any position in CRWD would be a short-term trade, that's it. If CRWD were to trade into the 160s and set lows beneath those back in March and recover back above 170 on a closing basis, a short-term long position could be considered with a tight stop beneath the intraday low. But stepping in today is incredibly risky as the selling may intensify in the near-term.

By the way, the blue line that I've drawn on the CRWD price chart to mark a potential positive divergence might appear to be inappropriate as it connects the 195 level in early December. Remember, PPOs are based on closing prices. That candlestick in early December is a hollow candle, with the close coming at the top of the hollow candle. So that's where I've drawn the line from.

ETSY:

ETSY has a chance to hold onto price support just below 200 today, but its industry group is very weak and ETSY has been losing a ton of relative ground vs. its peers since late November. If inflation worries really ramp up in early 2022, a stock like ETSY could easily retest its May low closer to 155.

Earnings Reports

Here are the key earnings reports for the next two days, featuring stocks with market caps of more than $10 billion. I also include a few select companies with market caps below $10 billion. Finally, any portfolio stocks that will be reporting results are highlighted in BOLD. If you decide to hold a stock into earnings, please understand the significant short-term risk that you are taking. Please be sure to check for earnings dates for any companies you own or are considering owning.

Tuesday, January 4:

SGH

Wednesday, January 5:

RPM, SMPL

Economic Reports

December ISM manufacturing: 58.7 (actual) vs. 60.5 (estimate)

Happy trading!

Tom