Weekly Market Analysis
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What to Watch This Week:
- Recap from Last Weeks Market Events
- Russian Invasion of Ukraine is now Imminent; geopolitical risks were shrugged off by investors who bought the dip on risk assets, now it seems that reality is catching up.
- Oil Prices are set to surge in the face of Ukraine invasion due to supply constraints and increases in demand for oil. I’m long energy from a technical and macro standpoint.
- Markets started to Break Down in Bearish Patterns in the Face of the Market Hurdles of Rate Hikes and Geopolitical pressures.
- Emergency Rate Hike meeting on Monday; The question is 25 or 50 basis points? On top of that there is a “slew” of Fed Speakers coming this week.
- IPOs see a record number of withdrawals in January, after a year of record setting IPO debuts, we are seeing that capital raising is getting tougher rapidly as sentiment and liquidity dry up.
- Economic Data Earnings are important this week to determine if inflation trends persist and to see if net earnings guidance continues trend down, as its currently the worst since 2009.
Last Weeks Market Recap
Inflation raised 7.5% over the past year, even more than expected, according to CPI. The reading was expected to be at 7.2%. Yields spiked and the NASDAQ traded lower on the new. The market is now pricing in 6 rate hikes in 2022 (1.5% in total). Bitcoin also reacted to this showing us the ongoing correlation to risk assets like the majority of NASDAQ holdings. The SPY is was relatively pinned in the 450/460 range but dealers had QQQ to sell on declines, and QQQ to buy on rallies. This invoked higher relative volatility to the slightly more neutral S&P. Crude Oil began to surge now having macro and technical support for a continued bull rally. Gold also is starting to make a move testing a breakout over a cup and handle formation channel.
1. As Ukraine Invasion Looms, Reality Sets In
The Russia-Ukraine Invasion Seems Imminent with US intelligence revealing that Putin told his generals to be prepared for Invasion by Wednesday of this week. The situation with regards to the extensive Russian military mobilization surrounding Ukraine was initially ignored by the market (reminds me a bit of the markets delayed reaction to COVID) and now the market is facing multiple pressures along side this significant geo-political pressure.
Russia-related equities dropped, including the VanEck Russia ETF (RSX), which declined 7.5%, while West Texas Intermediate Crude oil rose more than 4% to over $93 a barrel. Russian aggression could be met with sanctions on the country’s oil from the U.S. or Europe, which might restrict the oil supply.
The Nasdaq Composite was the worst of the major US indices with the tech-heavy index falling 2.8% on Friday, giving it a two-day drop of 4.8%. That’s the index’s worst two-day stretch since September 2020. We are now on our way back to the lows on the QQQ (NASDAQ ETF). The SPY’s will hold up better with more cyclical names. Cyclicals are the place to be invested.
Here is how the market generally reacts to geopolitical events:
2. Oil Prices Set to Surge from Macro Environment
The turmoil that seems to be imminent now will result in higher oil prices due to constraints on oil from lack of interaction with Russian producers, as well as, higher demand from a war time situation. The increase in oil costs will justify faster rate hikes along side the higher than expected inflation print of 7.5%.
Natasha Kaneva, head of the Global Commodities Strategy team at J.P. Morgan, wrote that “either the confrontation will get much worse over the coming weeks, with oil likely hitting $120 per barrel, or we will see progress towards a peaceful resolution, in which case oil price should stabilize at around its fair value of $90 per barrel.”
3. Markets Starting to Break Down… Again
The dip might just keep dipping and those who bought it might still be in denial. Lets face it, technology couldn’t muster up a rally to retest all time highs and it has plenty of room to run to the downside with big tech FAANG+ stocks just starting to follow the rest of growth and technology down. This is debatably the most perfect scenario for a tech sell off with the pressures from the Fed and an emergency meeting on Monday for rate hikes. The bear flag below has strong structural resistance that makes a downside trade longing QQQ puts or SQQQ shares a strong asymmetric entry proposition. See the breakout below on the daily candle chart.
Check out this MACD cross over on the monthly chart of the NASDAQ 100 below. We are seeing similar behavior in price action to that of the Dot Com Bubble.
Its important to note that real earnings yield of the S&P 500 has taken a seriously significant nose dive now at -3.2% per the chart below. This is an All-Time Low.
Not only that, but earnings guidance is horrendous with net earnings guidance for companies has turned most negative since 2009.
SPY option flows after close on Friday suggesting more weakness to come in the broader US equity market:
4. The Federal Reserve Emergency Meeting Details:
Closed Board Meeting on February 14, 2022 The closed meeting of the Board of Governors of the Federal Reserve System at 11:30 a.m. [EST] on Monday, February 14, 2022, will be held under expedited procedures [to] …Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks. This all comes after VERY hot readings in CPI last week and Ukrainian tensions that will exacerbate inflation.
The main concern of the Fed is inflation will be with us at a time where unemployment is below 4%. A wage price spiral could occur. We have rarely gone into a rate hike cycle with GDP number so low. We could be seeing a quick rate hike cycle that pushes us into a recession from the inflation. This is because there is political pressure on the Fed like never before to increase rates to prevent more inflation. Inflation will not be transitory. Prices do not deflate after going up and this does not bode well for democrats in midterm elections this year.
5. IPOs: Record Withdrawals in January 2022
January set a new record with a total of 22 Initial Public Offerings withdrawn, the majority of which being SPACs.
Why? The pivot in policy by the Fed, wall of worry, and clear change in market mood has made capital raising a bit trickier.
But aside from the surge in withdrawals, it’s equally informative to reflect on just how violently extreme the past year was in capital raisings. Look at the chart below in regards to how dramatic it has gotten. @everyone You actually have to go all the way back to 1986 to find the next highest annual count of capital raisings and the following year spelled terror for the market. Looking at the IPO market for sentiment and liquidity signals is good for gathering a sense for the state of capital markets. Things are looking bearish in this regard
6. Another Big Week of Earnings & Economic Data
It will be another busy week of fourth-quarter earnings reports, with close to 60 S&P 500 components scheduled to present to investors next week. Advance Auto Parts and Vornado Realty Trust will get things started on Monday, followed by Airbnb, Marriott International, Roblox, and ViacomCBS on Tuesday. Wednesday’s highlights will include Cisco Systems, Kraft Heinz, Nvidia, and Shopify. Walmart releases earnings on Thursday and Deere closes the week on Friday.
Also note that consumer sentiment has dropped to its lowest level since October 2011, down to 61.7. (http://www.sca.isr.umich.edu/)
Economic data out next week includes the Bureau of Labor Statistics’ producer price index for January on Tuesday. That measure of wholesale inflation is seen soaring 9.3% year over year, after a 9.7% jump in December.
The Census Bureau will report U.S. retail spending data for January on Wednesday, followed by new residential construction data for January on Thursday. Finally, the Conference Board releases its leading economic index for January on Friday.
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