Weekly Preview / May 23
Notable Events on our Weekly Watchlist:
Monday:
Earnings > AAP, CIR, ZM, NIO, VTSI,
Tuesday: New Home Sales
Earnings > A, AZO, BBY, RL, JWN
Wednesday: Durable Goods, FOMC Minutes
Earnings > PLAN, BOX, NVDA, DKS, NTNX, WSM, SPLK, ZUO
Thursday: Q1 GDP Growth revision
Earnings > BABA, ADSK, ULTA, BIDU, COST, DG, DELL, FTCH, GPS, VMW, WDAY, ZS, M, IQ
Friday: Personal Income, Personal Spending
Earnings > PDD
ETFs to watch: ARKK, XLK, XLY
Friday marked the 7’th consecutive losing week for the S&P 500 (a record since 2001), while the Dow notched its 8’th weekly decline (an occurrence that has only happened in the 1930’s bear market). These extremes add to the case that it’s high time we get a rally this week. While conditions are supportive for a short term bounce in equities, such is not a guarantee by far.
The most important development in the past week have been earnings from major retailers Wall Mart (-20% since ER) and Target (-26% since ER). Margin pressures are mounting and operating metrics from these firms argue that we are in fact in the middle of a recession. This week will feature lots of earnings from high-tech, growth oriented companies, along with significant names from the consumer discretionary sector.
Buying the dip in equities is a winning strategy only outside recessionary periods. Furthermore, as we will see below, bonds are starting to signal that a “flight to safety” is occurring.
TLT Analysis
Long-dated treasuries (TLT) have triggered a speculative buy signal. We will initiate a starter position in the Sigma Portfolio before Monday’s close, as TLT’s Z-Score is now 0.95 and trading above the 20-day moving average. The short term correlation between stocks and bonds has turned negative the past week, implying treasuries might start to work as a hedge to an equity portfolio.
Volume Analysis
Transaction dollar volumes are starting to decline, signaling an exhaustion of trading counter-parties in the current trend. A trend reversal might be just where the “pain” trade may lie, with a move upward confusing most market participants.
Takeaway:
We are most likely in the midst of a recessionary bear market. While rallies are spectacular and alluring, they are best used as moments to reduce exposure and hedge further downside. Don’t fight the Fed is a useful mantra in bull and bear markets alike. So far, as shown in our latest instrument (Market Fundamentals) the re-rating of valuation measures is only beginning and has a lot of room to fall further.
Andrei Sota
