MID Q2 Market Update
The S&P just had its 7th consecutive week of losses, which is only the fourth time in history including 1970 (8 weeks), 1980 (7 weeks) and 2001 (8 weeks).
We thought last week would be up especially when the S&P climbed 2% on 5/17 (advancing 4% from its close on 5/12) despite scary results from Walmart which drove a 11% drop in its stock (its worst daily decline since Black Monday of 1987.)
But then came Target, which echoed Walmart’s negative comments on the consumer, compressing margins and surging unsold inventory. Their stock dropped 25% (their worst daily decline as well since Black Monday of 1987) and drove the S&P down 4% on 5/18.
Results from Home Depot and Lowe’s did not alleviate investor concerns about a slowdown in the housing market which generally precedes recessions. Both names are now down ~30% from their record highs in December of last year and declined 3-5% during the week.
And finally, disappointing results by technology stalwarts Cisco (down 13% for the week) and Applied Materials (down 5% for the week) sent those stocks even lower despite only a 13-14x PE ratio versus 17x for the S&P. Both are now down over 30% from their all-time highs. This punished related large cap technology names (QQQ down 4% for the week) which are now down 29% from their all-time highs.
Furthermore, a collapse in a so called “stable-coin” in crypto did not help more speculative technology names. TerraUSD (UST), an algorithmic (not asset backed) crypto that was supposed to be pegged to 1 US dollar, is now trading near zero ($1.00 to $0.05). The collapse of UST and LUNA led a crypto market sell off which wiped out $400 billion in value at one point.
As a result, the S&P/Nasdaq on Friday 5/20 closed -0.7%/-0.1% below their prior 52-week lows on 5/12. However, China technology names were quite strong with $KWEB (China internet ETF) up 8% from 5/12. Unlike most other stock markets, many of China’s stock market woes are self-inflicted driven by: 1) their drive to common prosperity, 2) heavy regulation of technology companies, and 3) zero-Covid policies locking down major cities. But there are signs that the regulatory pressure is nearing its end along with some more flexible Covid policies. $KWEB is down 74% from its all-time record highs versus the Nasdaq which is down 30%. We have a large long position in $KWEB which we hedged with short positions in big cap US technology names last week before earnings results. The QQQ (Nasdaq 100) fell 5.7% from its highs on 5/17 to its close on 5/20. We have since covered those shorts.
The market is near oversold levels and we have technical metrics that will hopefully help us take advantage of the usual bear market rallies on the way lower:
Several of our 17 technical metrics flashed oversold during the lows on the S&P on Friday. Unfortunately, the late day rally negated most of those oversold metrics which require a closing oversold condition for more certainty of a bear market rally.
But we believe the next 10-15% move in the stock market is lower. A recession combined with inflation above 3% is now our base case for 2023 with a 30-50% drop in the S&P from peak to trough.
Since World War II:
Additionally, during high inflation environments, the trailing PE for the S&P is much lower than average:
We believe that the key to building long-term wealth boils down to avoiding crushing losses. Following the 48% price decline in the S&P that started in early 1973, it was almost a decade before the S&P stayed above that level. Therefore we focus on capital preservation and steady performance over-time that is minimally correlated to the stock market.
On a positive note, we believe there will be an incredible buying opportunity at some point in 2023, particularly for technology names when the market hits its ultimate low for this down-cycle during the next recession. In the meantime, all the best to you and your family during these challenging times.
Dan & the Satori team
5/22/2022 06:15:04 pm
Great article, thank you
5/22/2022 07:05:30 pm
Thank you Dan for guidance during these difficult times. Request more frequent news letters at least until these challenging times pass by.
5/22/2022 06:56:37 pm
Dan, appreciate all the information and commentary from your research. Although it’s not what I’d like to hear about where markets may be going, you’re approach has always been thoughtful and sincere.Thanks for sharing all your valuable insight…..
5/22/2022 07:46:11 pm
Please send more frequent newsletters as these could make life and death difference.
5/22/2022 09:04:57 pm
Thank you so much for your analysis and regular post. You hit all the right notes and have data to back it up. How do you hedge your KWEB position?
5/22/2022 09:23:42 pm
5/23/2022 12:20:25 am
Thank you for your incisive & generous sharing. Helps the small investor enormously
5/23/2022 01:17:42 am
Hi. Confused you say the next move is 5-10% higher and then the paragraph after you say next move is 10-15% lower?
5/24/2022 11:09:32 am
I was going to post the same exact thing.. Unclear if the contradiction was to take 2 different sides or a snafu..
5/26/2022 05:07:11 pm
In my view what Dan means is S&P to go up 5 to 10% ( avg. 7.5%) on short covering to about 4193 level BUT overall decline to 3413 level by year end. ( 12.5% which is avg. of 10 to 15 %). These levels have reference date of Jan. 4 (S&P 4804 level) . Dan please correct me if I am wrong in above. Hope this helps everyone 😄
5/26/2022 06:05:46 pm
That's what I assume from Dan's article too. I hope to reduce my stock exposure in the next few days if we're lucky enough to have a little more rally to S&P 4150~4200.
5/23/2022 11:55:07 am
Dan, your market behavior forcasts are among the best. I always am eager to watch your market calls. The early April short covering rally was a great time to get short.
5/23/2022 12:06:20 pm
Thank you again for your direct points, and for small, retiree investors like me, who feel nowhere to go, it seems the best option is not to get back into the market, and be humble that one knows so little in this world, when so many parallel things are going on the same time.
5/24/2022 05:54:48 am
Always eager for new posts. Appreciate the concise, insightful analysis.
5/25/2022 11:04:19 am
Dan, thanks for sharing this extremely timely article. I regret to take heavy market index long position just a half week before the publication of this article. Hope the market will rebound in the next 3-5 weeks with 5-10% higher as you have forecasted. Thanks again.
6/10/2022 02:46:22 pm
6/11/2022 07:33:05 am
Thank you for such astute market analysis.. I am only familiar with your viewpoints due to CNBC and very grateful to that network offering access to your thinking regarding market direction...I have paid attention.
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Dan Niles is founder and portfolio manager for the Satori Fund, a tech-focused hedge fund.