Heavyweights set to Report Q4 Earnings

As the month of January draws to a close, 5 companies out of the “Magnificent 7” are set to report earnings results for the last quarter in 2023. With the market sitting very near all time highs and amidst stretched valuations, the Fed will also be making a policy announcement on Wednesday. Friday, critical economic data will be released in the employment report, concerning the national Unemployment Rate and Non-Farm Payrolls numbers.

Let’s review where we are currently.

Last week, the market broke out of its recent trading range on positive guidance provided by Taiwan Semiconductor Manufacturing (TSM). The good news reverberated throughout the tech sector, the S&P 500 (where tech is heavily weighted) and forced analysts to raise various price targets in order to justify present valuations. Moreover, the rally pushed trend following models to bid the market up along the way, especially in the mega-cap space.

The earnings results themselves have been fair in the past week, with about 25% of S&P 500 companies having reported so far. Despite Tesla tanking in the aftermath of its earnings call (-11%) 68% companies have reported a positive revenue surprise while blended earnings dropped -1.4% YoY.

The market has proven resilient and SPY has continued its grind higher toward the $497 upside (+1.96%); technical support sits at $467 (-4.18% lower), near the 50-DMA and R2 level.

With a positive MACD signal in place, we expect downside to be rather limited at the moment, since liquidity has proven to be ample on the recent advance. It may be the case that liquidity has been the sole driver of higher asset prices last week, since valuations are nowhere near attractive enough levels at the moment.

Our Market Fundamentals instrument shows that P/E ratios for S&P 500 companies have reached near 2 standard deviation highs in the current cycle, a level only exceeded in 2021, after unprecedented levels of government stimulus injections.

The earnings schedule is packed this week, with potentially pivotal earnings calls on the horizon.

Market heavyweights and “Magnificent 7” stocks Apple Inc, Amazon.com Inc, Alphabet Inc Class C, Meta Platforms Inc. and Microsoft Corporation are set to report Tuesday through Thursday, with a combined upside of 3.47% based on analyst expectations, and approximately 6% of upside according to our own analysis.

We are especially bullish on AMZN and MSFT, and less bullish on AAPL and GOOG. META could provide a nice upside surprise as well, as their recent metrics are not entirely well captured in our 2 months old report.

All in all, we would expect more "earnings and revenue beat” headlines to support the bullish narrative this week as well. The real risk in our view is the FOMC meeting conclusion on Wednesday and Chair Powell’s subsequent press conference. While no change in interest rates is expected for now, mr. Powell might try to walk back the rather dovish assumptions that are currently backed into current monetary policy trajectory.

Bear in mind that for the next 5 meetings (except the one this week), the odds for rate cuts are unusually well distributed, with no particular path attracting more than 51% of probability. Case in point: the market does price in four 25 bps cuts by September… with a 47.2% probability. The market is effectively pricing in that anything can happen - except rate increases.

As a consequence, Jerome Powell’s statement on Wednesday has a high chance of upsetting this probability distribution and cause some volatility in the stock and bond markets.

Separately, oil (USO) has successfully completed a breakout above the key M-Trend level (which separates investible from non-investible assets that are trading in a negative sloping channel).

There’s plenty of potential upside in oil if this breakout can stick, and it would not be especially bullish for other parts of the stock market that rely on inflation remaining low (Tech).

For oil companies themselves, however, the set-up looks attractive. Our recent pick in the Sigma Portfolio, Valero Energy Corporation (VLO) enjoys a great risk-reward set-up, for example (assuming an $166 Price Target and 19% CAGR).

You may have noticed an extra panel in our charts. It’s a recent development, courtesy of ongoing discussions with our members! Check out this post from our Sigma Society Forum:

I recently had a conversation with Justin C, who suggested there should be a very easy way to get a sort of “system’s opinion on a stock”.

So kind of like a stock ranking… wait a sec… we do have a very successful ranking model already (Millennium Alpha). But in order to get to a stock ranking we need to click 3 times through various screens and filters.

What if there was an easier way? What if we could get a stock’s overall ranking, as well as the ranking within its own economic sector, specific industry AND peer group all within the same place?

Well, now you can - directly in the Single Instrument page!

As you can see in the excerpt below, VLO’s rankings are stellar. We’ll be adding this data to other various instruments shortly, so you can enjoy even more convenience when doing your research!

Our Trading Strategy

We are currently running the Sigma Portfolio very close to target weights. Sooner or later, a drawdown in the equity market is bound to occur. That would be our cue to increase exposure above target and “buy the dip”. Despite stretched valuation levels, suggesting below average returns in the long run, we need to play this game for what it is - a liquidity driven surge higher, and bullish psychology overcoming fear.

There are key levels where we will become sellers of stocks again, that is certain. As for the bond market, pressure is building up on the long end of maturities. We need to get past Wednesday’s FOMC meeting and assess the outlook again before making any moves.

Tomorrow’s Portfolio Rebalancing Article will shed more light on how various asset classes are performing and the strategy going forward. For now, there’s not much else to do than wait for the next major catalyst - we are well prepared to act in order to capitalize on upcoming opportunities.

Signal Sigma PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!