EB Daily Market Report - Friday, May 20, 2022

Spring Special - One More Week To Go!

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ChartList Update

Just about every ChartList that we have has been updated within the past few days, including the 5 portfolio ChartLists that were discussed at last night's "Draft".

Executive Market Summary

• Futures were higher overnight and our major indices gapped up
• For the second day of the past three, however, the subsequent selling has been nearly all day long
• It's once again a risk-off environment with defensive groups leading - real estate (XLRE, +0.12%) is the only sector higher today
• Consumer discretionary (XLY, -3.75%) is the big loser with automobiles ($DJUSAU, -8.27%) tumbling as Tesla (TSLA, -9.29%) loses price support at 700
• Apparel retailers ($DJUSRA, -12.30%) are led lower by Ross Stores (ROST, -23.41%) and Burlington Stores (BURL, -16.73%)
• The 10-year treasury yield ($TNX) is down 5 basis points to 2.80%
• Commodities are mixed with crude oil ($WTIC, +1.14%) higher and natural gas ($NATGAS, -2.12%) lower
• The Dow Jones is down more than 400 points today and approaching the psychological 30000 level; Boeing (BA, -6.90%) is the worst-performing component stock

Market Outlook

Our major indices are market-cap weighted, meaning that the largest market cap companies carry the most weight. When the S&P 500 was hanging in back a couple months ago and had yet to fall into bear market territory, defined by some as a 20% decline, a couple of reasons for it were the steady relative performance of stocks like Apple (AAPL), Microsoft (MSFT), and Tesla (TSLA). There are highly-weighted components of the index that, despite falling in 2022, had held up fairly well relative to much of the market.

Well, let's fast forward to now. These three aren't performing so great any longer, dropping hard on a relative basis, and that's a primary reason why the S&P 500 can't seem to find a floor right now. Check out this chart:

I've said for much of 2022 that when the large cap growth names started to drop, the S&P 500 would have no defense. Its very light weighting of the energy sector is not nearly enough to make up for the large cap growth selling. AAPL alone is weighted nearly twice as much as the entire energy sector. AAPL, over the past 2-3 weeks, has completely fallen apart.

Sector/Industry Focus

Computer hardware ($DJUSCR) fell apart primarily because of AAPL's weakness. The DJUSCR lost March price support close to two weeks ago and its relative strength absolutely got crushed:

It looks like the DJUSCR (and AAPL) have plenty of downside ahead, and that will only prolong this 2022 cyclical bear market.

ChartLists/Strategies

We had our portfolio draft last night so we closed out last quarter's stocks and added 50 more. There are 10 equal-weighted stocks in each portfolio. Our philosophy currently is to not get swept away by underperforming growth areas of the market. I firmly believe there'll be a time to jump back into those stocks, but we may need to remain patient for another 1-3 months. I believe this is the proper strategy at this time.

From a trading perspective, I think it's important to maintain a high level of cash as conditions for trading will likely improve immensely in the second half of the year, especially the fourth quarter. However, if you're inclined to trades stocks here or there, consider sticking with stocks that have been working and are pulling back to an area where you can keep a very tight stop in place. For instance, check out Unum Group (UNM):

After reporting better-than-expected quarterly results, UNM soared, opening at 33.79, before closing the day at 36.31. Usually the opening price tends to provide excellent support and it already did once. In addition to that gap support, the rising 20-day EMA is at 33.90. In a good market environment, I'd be a buyer just below this 33.79 level just about every time. In this market environment? Well, that's up to each individual. I like the set up, I just don't like the market. Keep stops in place.

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 several 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.

Friday, May 20:

DE, BAH, RLX, FL

Monday, May 23:

ZM, XPEV, HEI, AAP, NDSN, SKY

Economic Reports

None

Happy trading!

Tom