Our August 2022 stock and ETF watchlist with entry points, sector analysis, and market outlook.
Market Overview
The month of July was very bullish for investors. It seems like the bottom so far for the year 2022 was June 16th. Since that date the market has been driving upwards. Now, at the date of this watchlist being posted it seems that we have reached some short term exhaustion. There is some sideways movement when looking at the four indices. This sideways movement is called consolidation. When there is consolidation usually there is a strong move to the upside or downside. Since we just had a nice run to the upside, it would be safe to speculate that we will have the market move towards the downside. RSI is between 60-68 for the main indices at the time of this writing. When we hit 70 on the RSI that is a signal that things are being overbought.
Fed & Monetary Policy
Now to reflect on some things that happened in the month of July besides the bullish run. Inflation came in at another 40 year-high of 9.1% since 1981. Again, we have speculations that this may be the peak of inflation but who knows? We've been having 40 year highs for CPI (Consumer Price Index) since March 2022. I believe no one knows the true "peak". You have to wait for the data to show you. Yes it's lagging and the Fed has to raise interest rates based on said data. That's why many believed the Fed should have been more aggressive with raising rates since the beginning. But remember the interest rates being raised can only do so much. As stated in the July 2022 Watchlist: "Raising interest rates does not and will not mitigate this issue in regards to the supply chain." Now Jerome Powell and crew chose to go with the same approach of raising the Federal Fund Rate another 75 basis points. A move that many analysts agreed with. This puts the Fed Fund Rate at 2.25%-2.50%. According to the CME FedWatch Tool as of 08/07/2022 there is a 69.5% probability that the Fed will raise interest rates another 75 basis points at the Fed meeting on September 21st. Down the line it is expected that the Fed will start cutting the rate come March 2023. The Fed does need to see convincing progress that inflation is working its way back to the Fed's target of 2%, obviously that's not happening at this moment. It is believed that the Fed will need to raise interest rates to 3.5%-4.1% in order to slow inflation. If that's the case we're likely to see probably one 75bps and two 50bps rate hikes over the next three meetings to get us to that 4% number. I personally feel like that's the way it'll play out. The Fed already committed to two 75bps hikes and I can see them doing another because their main focus is on slowing inflation and raising rates is the only tool they seem to have in this "toolbox" they always refer to. Some good news for many places through out the country is that gas prices have started to dip some. Gas has finally dipped under $5/gallon on average. The bad news? This may be short lived. We want to get back to the point where we can sustain to keep the gas prices relatively low but that will continue to be an ongoing challenge as it's been all year and will continue to be for the months coming ahead. We also had some other news amongst some giants in the market. Netflix has partnered with Microsoft for it's advertising. I'm sure you've heard that Netflix is planning to roll out an ad-supported tier for customers. Honestly it's surprising that they lasted so long without it. But it's very obvious across the streaming landscape that you need something else to help support the revenue numbers and Netflix is one of those companies that doesn't have it when comparing it to the other streaming giants. Apple TV can rely on everything else Apple has to offer (iPhones, MacBooks, iPads, etc.). Disney+ has the parks, theme parks, licensing agreements. Amazon Prime has the online market place in a chokehold for physical products. See the theme hear? All these other companies have another leg to stand on and they can burn millions for their streaming services and still stay in business for a long time. Netflix can do that for only so long, so them choosing to integrate ads is great overall for their business. Albeit they are taking a stab at getting into the gaming space but I strongly believe they'll need to get into something else that can give more immediate revenue. Another under the radar opportunity in this partnership is if Microsoft will probably look into buying Netflix. It would be wild if this were to happen and probably unlikely due to the financial ability of Microsoft at the moment. As of June 2022 Microsoft has $104 billon in cash on hand and Netflix's market cap is $100 billion. Obviously Microsoft would have to purchase them at a premium, probably 50% above premium pricing them at a market cap of $150 billion. Microsoft is the only giant that doesn't have a streaming service and it's very unlikely in my opinion for them to build one form the ground up. Just a thought.
Crypto & Digital Assets
Another thing that seemed somewhat laughable throughout the month of July was the constant back and forth when it came to defining the word "recession". Now for "most" people a recession is when there are two consecutive quarters of negative GDP (Global Domestic Product) growth. In laymen terms, basically two quarters (6 months) of our economy not growing. Per the last GDP report we in fact did have another quarter of negative GDP growth which by definition puts us in a recession. But the argument is, "How can we be in a recession when the economy is so strong?". This led to the definition of the term "recession" to be contorted to the way others may want it viewed. We have a low unemployment rate at around 3.5%, produced 528,000 jobs in the month of July, and a 5.2% gain over the past 12 months for average hourly earnings. The consensus theme that most people are going with is that the economy is slowing down or showing weakness. Many are not agreeing to say that we are "officially" in a recession, but they do believe that we will be in one down the line. Also the yield curve is still inverted. We discussed what the yield curve is and its significance in the April 2022 Watchlist if you would like to have a refresher. Another way to come to a conclusion about this whole recession thing is to see what the banks are doing. Some banks are "increasing provisions for client loan defaults". A fancy way of saying that they are putting some money to the side in case people are unable to pay back their loans. If you choose to go down the rabbit hole on this, it screams red flag. Some banks, not all, are foreseeing a future where the consumer will not be able to pay them back which signals a weaker consumer. This leads to lower spending, higher debt, more use of credit, banks tightening up on who can access credit, and so on and so on. If some of the major banks like JP Morgan Chase, Wells Fargo, and Citigroup are taking precautions like this, that can definitely be a sign of what's to come. Also JP Morgan Chase and Citigroup suspended their stock buybacks in order to have more financial flexibility during this bear market. This could be viewed as another pessimistic sign as well on the view of the future of the economy. These companies are refusing to return value back to their shareholders buy purchasing shares to increase their shareholders' equity. Especially with their shares being down 28% and 18% respectively YTD. That's a steep discount. They believe that those funds would be better allocated towards preparing for loan losses and defaults. That's definitely saying something.
Macro Concerns
Some recession facts:-There has been a total of 14 recessions since the Great Depression (1 about every 6 years)-Recessions last for an average of 11 months-Longest recession was 18 months from December 2007-June 2009
Monthly Performance
For the past thirty days as of 08/06/2022 at market close all of the indexes are up. The Dow Jones (5.69%), S&P 500 (7.81%), NASDAQ (11.40%), Russell 2000 (11.25%). At the close of the month of July the VIX was at 21.33. As of 08/05/2022 the "Fear and Greed" index was at 50 indicating neutral market sentiment.
Index Performance
| Index | Performance |
|---|---|
| Dow Jones (Jul 2022) | +5.69% |
| S&P 500 (Jul 2022) | +7.81% |
| NASDAQ (Jul 2022) | +11.40% |
| Russell 2000 (Jul 2022) | +11.25% |
Top Sectors
Bottom Sectors
Stock Entry Points
| Ticker | Daily Entry | Weekly Entry |
|---|---|---|
| NKE | $101–$115 | $99–$124 |
| MSFT | $246–$290 | $249–$290 |
| AAPL | $148–$157 | $142–$151 |
| TSLA | $700–$941 | $622–$768 |
| AMZN | $103–$150 | $104–$147 |
| SHOP | $31–$42 | $31–$43 |
| NVDA | $158–$197 | $130–$196 |
| SQ | $66–$106 | $60–$91 |
ETF Entry Points
| Ticker | Daily Entry | Weekly Entry |
|---|---|---|
| ARKK | $37–$48 | $41–$53 |
| VOO | $343–$384 | $342–$383 |
| VGT | $324–$397 | $322–$386 |
| SMH | $202–$248 | $202–$248 |
Key Takeaways
- →July 2022: Powerful bear market rally — NASDAQ +11.40%, Russell +11.25%.
- →Second consecutive GDP contraction confirmed (technical recession) but markets looked ahead.
- →Fed's 75bps July hike was already priced in — "sell the rumor, buy the news" dynamic.
- →Q2 earnings better-than-feared; patient investors rewarded for holding through the bottom.
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