The Weekend Edition # 21

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter this week. I am very grateful!

Now, let’s grab a cup of coffee ☕️, while we take a look at what happened in the markets this week. 

Here’s what we cover:

• Market Recap - CPI Data, Apple, Small Cap (IWF:IWD)

• Chart of the Week - RRG (Relative Rotation Graph) of the Sectors

• Earnings brief- Oracle, Costco, Lulu

• The Week Ahead - Volatile Week & the Santa Claus Rally

• Closing Thoughts - The FOMC Meeting

Let’s dive in ⬇️

Market Recap - Dec 6 - Dec 10, 2021

The broad market indices closed positive and strong for the week. There were pull backs but on the whole a positive week moving back above the 50-day moving avg.

CPI Data for the US was released on Friday showing inflation at its highest in 39 years with a year on year increase of 6.8%.

Despite the release of this hot inflation data on Friday, market volatility remained benign and the Vix (Volatility Index) dropped below 20 which is a level showing some stability. The markets also rallied on Friday, possibly because inflation data was expected? Or in part due bond yields coming down, which is yet again another surprise. While yields increased on a weekly basis, they closed lower on Friday.

A word of caution: Although the DJIA, S&P and Nasdaq rebounded on Friday, they did so on lower volume, which usually means the market is not showing a lot of strength in this rebound. And with the Fed next week, markets may be choppy.

Apple hit All Time Highs several times this week, finally closing at $179.45, a +9.2% increase during the week. This is actually quite telling about the market’s sentiment. People seem to be rotating into Big Tech, as a safe haven. These companies not only have positive cash flows but also superior pricing power, which make them ideal to hold in times of inflation and rate increases.

Which brings me to small cap stocks. Well, not all small caps are selling off but the Russell certainly seems to be under some significant pressure, as the smaller cap names which are yet to turn a profit saw some sell off. Here’s a chart of the Russell 1000 ETFs showing Growth vs. Value - (IWF:IWD).

An decrease in the chart means a sell off in small cap growth and you can see this happening quite clearly from Dec 1, with only intermittent recoveries. It’s no secret that the market is preparing for rate increases and consequently, we will probably see even more selling pressure on small cap growth, i.e., companies who are projected to have positive cash flows after about 5 years. 

Chart of the Week - the RRG

Relative Rotation Graph or the RRG® charts show you the relative strength (x-axis) and momentum (y-axis) for a group of stocks. It’s a proprietary model from RRG Research. I get mine from StockCharts.com but you can certainly get it directly from their website and it’s still free (for now).

This is a chart for the last 5 trading days of the relative rotation in the S&P Sector ETFs. It clearly shows XLY (Consumer Discretionary) has moved into lagging territory while XLP (Consumer Staples) is rising up the ranks. XLK (Technology) still remains undecided between leading and weakening.

The market is clearly becoming defensive despite the uptrend. Financials (XLF) and Energy (XLE) still remain in the improving quadrant with expected rate increases and oil price increases propelling these.

I think it’s likely that this rotation will continue.

While I completely understand that these sector rotations may change during the week, RRG shows a trail of the movement which provide a good deal of insight to where things are headed.

Here’s the data ⬇️

Earnings of the Week

We’re almost done with earnings season. There are those few outlier companies that reported this week and will report in the next couple of weeks before we start a new earnings season, all over again. Sometimes, it does feel like it never stops. 😆

• Oracle - Oracle gapped up nicely on earnings crossing $100 for the first time. Oracle’s cloud revenues increased 6% and has become a substantial part of their business. They claim to be the leader in cloud ERP now, beating out SAP and Workday. They also announced a $10B increase in their share repurchase program. Oracle might just be making a comeback to become a formidable player in the cloud space.

• Costco - Carrying on with last year’s momentum, Costco has been able to retain most of its margin increases. This quarter their margins decreased by a mere 0.26%. Consumer demand remains strong and the company has managed to pass on some of the price increases from supply chain issues to the customer. While they’ve managed to keep inventory flowing, they did say that many of the toys and seasonal products may not reach shelves in time for Christmas.

• Lululemon - Despite a strong beat, the stock sold off. The market didn’t like that Lulu didn’t beat expectations quite the way they did in Q2. They also reduced guidance for Q4 - a trend we will see for many companies who benefited from the stay-at-home phase. While the company is still struggling with supply chain issues, the good news is that that their factories in Vietnam have reopened and are ramping up production.

The Week Ahead - Dec 13 - Dec 17, 2021

Economic Calendar

We’ve got a full roster of economic events for the week ahead… so watch out:

• PPI - Tue Dec 14 - Producer Price Index measures price change from the perspective of the seller.

• FOMC Meeting - Tue Dec 14 - Wed Dec 15 (Rate decision at 2pm ET followed by Press conference)

• Retail Sales Data - Wed Dec 15

• Housing Data - Thu Dec 16

• Quadruple Witching - Fri Dec 17, 2021 - Options Expiry

Earnings

The Santa Claus Rally

So with everything that’s happening next week - the Fed announcing a possible acceleration in tapering, inflation at persistently high levels and options expiry - do we see a Santa Claus rally starting?

Well, according to the legendary Larry Williams, his short term cycle forecast shows that we will see the markets bottoming around Dec 10, with a potential rally starting by mid-Dec.

The Santa Claus rally is usually said to occur between Christmas and New Year’s Day, carrying on into the first two trading days of January and this has happened roughly three out of every four years. I feel even if we do get a rally this year, it will be muted.

Closing Thoughts - The FOMC Meeting

As the Omicron threat fades away, all eyes will be on the Fed next week. After Powell’s comments about possibly increasing the pace of tapering, the general consensus is that they will actually announce an accelerated time frame, possibly ending in March.

The Fed has been very careful with their press conferences and have always said that they would give the market sufficient warning before taking any measures. But, with inflation increasing and become sticky, it’s not something they can ignore anymore. So we’ll be watching if they actually announce the acceleration.

And, since Powell has now acknowledged that inflation is a concern, most experts think that the Fed will start raising rates starting in March, right after the taper ends, with 3-4 hikes during the year. What the Fed Chair says during this press conference may give us clues as to when & how many hikes we may see.

Here’s the thing - the market will change, whether there’s one or two or three hikes. If you’re a long term investor, you’re buying into great businesses and you don’t really care what’s happening in the short term, as long as your thesis is in tact.

However, what we can look for is the opportunity to pick up some great businesses during this time - for the long term and for the medium term.

So, over the next couple of weeks I’ll look at sectors and stocks where I think we could see some upside and with names we can add to diversify. In the meantime, let’s stay sharp this week.

Here’s wishing you a happy weekend and safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

@ayeshatariq

There’s always a story behind the numbers

None of the above is Investment Advice and all views are personal. 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.