KEY POINTS

• During Earnings Season, stocks follow one of three patterns. Earnings reports distinguish the best in class companies and give Big Money Managers the opportunity to rotate funds for the next phase of profitability.
• Three primary catalysts were brought closer to resolution which may change the trend in the market direction.
• Technical Analysis reflects a market in an ‘oversold’ condition during the worst performing month since March 2020.

WEEKLY HEADLINES

• US Federal Reserve leaves interest rates unchanged, signals possible March rate hike
• Dow has worst month since March 2020
• Apple revenue pops 11% to $123.9 billion, Cook says supply chain improving
• Microsoft beats on earnings and revenue, delivers upbeat forecast for fiscal third quarter

MARKET DYNAMICS

EARNINGS SEASON

Last week we discussed the stockmarketHQ strategy that during earnings season stock prices follow one of three patterns

1. Stocks run up in anticipation of strong results, then selloff when earnings don’t meet high expectations.
2. Stocks remain neutral until the release then either move up or down based on the actual results
3. Stocks decline as a selloff due to uncertainty of the results, then climb when results are not as bad as expected.

Last week, most of the Big Tech stocks were in Pattern 3 and were at ‘Oversold’ levels.

The following stockmarketHQ companies have reported earnings so far

JPMorgan (JPM) – Reported Earnings January 14, 2022 of $3.33/sh vs analyst estimates of $3.01/sh and Revenue of $30.35B vs analyst estimates of $29.9B. However, the company lowered forward guidance stating “that management expected “headwinds” of higher expenses and moderating Wall Street revenue… JPMorgan will see expenses climb 8% to about $77 billion in 2022, Barnum added, driven by “inflationary pressures” and $3.5 billion in investments.” Shares dropped from a previous high of $167 to a low of $142 last week.

Goldman Sachs – Reported Earnings January 18, 2022 of $10.81/sh vs analyst estimates of $11.76/sh and Revenue $12.64B vs analyst estimates of $12.08B. Goldman said operating expenses jumped 23% to $7.27 billion in the quarter, exceeding the $6.77 billion estimate of analysts surveyed by FactSet. The bank cited “significantly higher” pay and benefits for its employees, technology expenses, and $182 million set aside for litigation and regulatory costs, compared with $24 million in the year-earlier period. Shares dropped from a pre-earnings price of $390 to a low of $320 last week.

Microsoft – Reported Earnings January 25, 2022 of $2.48/sh vs analyst estimates of  $2.31/sh and Revenue $51.73B vs analyst estimates of $50.88B. Management provided strong forward guidance indicating that demand remains strong across much of the business expecting Revenue of $48.5B to $49.3B which is above analyst estimates of $48.23B and expects full year operating margin to widen. The company provided positive forward guidance with continued growth in cloud, gaming, security, productivity and business processes’ and personal computing.

Boeing – Reported Earnings January 26, 2022 of a loss of $7.69/sh vs. analyst estimates of a loss of $0.42/sh and Revenue of $14.79B which was less than analyst estimates of $16.59B. The company reported taking a $3.5B expense charge due to the 787 Dreamliner which has been grounded for the past 15 months. management stated, “The company continues to perform rework on 787 airplanes in inventory and is engaged in detailed discussions with the FAA regarding required actions to resume deliveries… these activities will take longer than previously expected, resulting in further delays in customer delivery dates and associated customer considerations.” 737 Max production increased from 19 to 26 aircraft/month and is expected to increase to 31/month. The company reiterated on Wednesday that it expects passenger traffic to return to 2019 levels next year or in 2024.

Apple – Reported Earning January 27, 2022 of $2.10/sh vs analyst estimates of $1.89/sh (up 25% year over year) and Revenue of $123.9B vs analyst estimates of $118.66B (up 11% year over year). Apple beat analyst sales estimates in all categories except for iPad which it attributed to chip supply constraints, diverting chips destined for iPad to the iPhone production, and not due to demand constraints. The company does not provide forward guidance but CEO Time Cook stated, “What we expect for the March quarter is solid year-over-year revenue growth… And we expect supply constraints in the March quarter to be less than they were in the December quarter.”

Tesla – Reported Earnings January 26, 2022 of $2.52/sh vs analyst estimates of $2.36/sh and even of $17.72B vs analyst estimates of $16.57B. The company’s stated that profit margin grew from 26.6% in the previous quarter to 27.4%. CEO Elon Musk expressed that the company would remain ‘chip-limited’ in 2022 and “We will not be introducing new vehicle models this year. We will still be parts constrained.” Shares dropped from a pre-report price of $950 to a low of $800 January 28.

Visa – Reported earnings january 27,2022 of $1.81/sh vs analyst estimates of $1.70/sh and Revenue &7.06B vs analyst estimates of $6.80B. On the Earnings call the company expected accelerating revenue generation as economies around the world continue to improve and they do not believe the current surge in the pandemic will curtail the recovery. Interestingly the company noted that there is very little effect of inflationary pricing pressure on their company, if anything there is a net benefit as costs of purchases increase so does the transaction fees visa collects. Additionally the company reported that consumers used the Visa payments system for $2.5B of cryptocurrency transactions.

The Following companies report earnings this week

• Amazon (AMZN) February 3
• Meta Platforms (FB) February 2
• Alphabet (GOOGL) February 1
• Ferrari February 2
• PayPal February 2

NEGATIVE CATALYSTS

Last week we discussed three negative catalysts for the market and once those were over, the uncertainty that the ‘Bears’ were able to capitalize on would decrease.

Federal Reserve – the US Federal Reserve made its interest rate policy statement and signalled a possible first interest rate hike in March.

Big Tech earnings reports – Three of the big six tech companies reported earnings. Microsoft and Apple both reported excellent quarters as well as Tesla, however, Tesla provided guidance that expressed concerns on parts supply chain issues. This week, the next big three Tech Companies report earnings, Amazon, Alphabet (Google) and Meta (formerly Facebook).

Russia/Ukraine Conflict – Headlines reflected political posturing but no action. 

FEBRUARY EFFECT

February is generally the best month of the year to buy stocks. Why? because it is generally a down month.

• The bulk of companies have reported earnings by the end of the first week
• The US Federal Reserve is not scheduled to meet again until March 15
• There are very few catalysts

February is the month of ‘no man’s land’. Effectively there is an economic and corporate information vacuum, which creates an opportunity for algorithm trading computer programs to move markets based on headlines and speculation.

This can lead to volatile and choppy market moves.

TECHNICAL ANALYSIS

What does that mean at stockmarketHQ

At stockmarketHQ, the strategy is to buy companies which are

1. Best in Class
2. within a secular growth trend
3. in a strong macroeconomic environment

US Federal Reserve Chairman JPowell confirmed the strength of the US macroeconomic outlook with the signalling of raising interest rates at the next March meeting.

The effect of rising interest rates causes Big Money Managers to revalue stock prices as free money changes to cheap money and then expensive money. A large part of the recent market pullback can be attributed to this ‘revaluing’ effect and ‘growth’ stocks are revalued to lower prices. This is reflected in a growing number of stock downgrades and price target cuts by analysts.

Once that ‘revaluation’ is complete, Big Money Managers look to reposition themselves for the next phase of profitability.

The earnings reports over the past week as well as the coming week, distinguish the best in class companies within secular trends that are long lasting.

In a rising interest rate environment, those are the companies Big Money Managers traditionally rotate into.

The technical Analysis reflects that in the short term, the market reached an ‘oversold’ level which would generally lead to a ‘bounce’ or rally. Money has started to flow back into the market, momentum has turned upwards, fear has started to decline. The charts appear to be following normal market patterns.

The general philosophy behind stock market theory is that markets and individual stocks follow trends or patterns. This is because the markets are directed through buying and selling by human participants and their behaviours are repeatable in similar situations. This applies to both Bulls and Bears.

The objective of trading/investing is to spot a change in a trend early enough to maximize profitability both when buying near a bottom and selling near a top. As a trader/investor you have to be aggressive to make money, but if you don’t have a defensive strategy you won’t keep your money.