The bear market rally has fuel to continue, especially if Republicans reclaim the U.S. House of Representatives as expected. Markets usually rise this time of year too. But with 150 companies reporting earnings this week and the Federal Reserve meeting to announce more rate hikes and discuss future rates hikes, it’s a risky bet to pile in now to the broad market.

‍

If you follow the current trend line, the S&P 500 will likely move up 2-3% more before another selloff.  But the market doesn’t follow trends, it follows events, so anything is possible. If they Fed signals they will pause hikes, the market rally will expand.

‍

We’ll breakdown exactly how we’re trading this for Level 2 members. (Sorry we have to plug our work a bit because it’s time consuming and makes money for subscribers).

‍

Despite poor earnings and forward looking expectations from Amazon and Google, many parts of the market seem optimistic. Visa reported the consumer is strong and still spending, as have most of the banks, kicking the can on the “recession is here” argument further down the road. A stronger than expected report on GDP, showing the U.S. economy grew at +2.6% in Q3, put further evidence to the argument that things are not as bad as predicted and there is no recession…yet.

‍

While there are signs everywhere of economic slowdown - from housing to manufacturing to semiconductor demand - we have not yet hit a brick wall, forcing many market pundits to start believing we may be able to bring down inflation without crashing the economy in the U.S.  Reports showed weakening data from manufacturing to housing, bringing Treasury yields lower on the belief the Fed won’t need to hike rates above 4.5% which fueled the market rally.

‍

In previous newsletters we relayed PC sales data and our assessment that Apple would perform well, given its growing share of the market in PCs. Its earnings were a standout among big tech companies, sending its share price up by $11.  Lockheed Martin stock took off like its rockets, following the monster buyback we noted in alerts and the newsletter. The stock rose $89 per share since then (+22%).
‍

‍

"The Bird is Freed"

‍

Elon Musk completed his takeover of Twitter. In the transition, Musk fired CEO Parah Agrawal, CFO Ned Segal and has plans to let go more. As part of the $44B deal, Musk will be delisting the social media giant and taking it out of public shareholder control. Starting Tuesday, November 1st, Arch Capital (ACGL) will replace Twitter in the S&P 500.

Event: We hope you took advantage of the opportunity we alerted you to last week to buy Twitter at $50/share before Elon bought it for $54.20 per share.

‍

‍

ACGL Added to S&P 500

‍

Arch Capital Group Ltd. will be joining the S&P 500 starting November 1st. The insurance company will be replacing Twitter after the recent Musk takeover. After the news broke regarding ACGL's addition to the S&P 500, shares popped +9.51%.

Industry: Insurance - Diversified

Subindustry:  Fire Marine & Casualty Insurance

Event Impact: +9.51%

‍

‍

‍

Turning Coal Into Diamonds

‍

We sent the following notice out last week to Level 2 members. ARCH rose $18 after we sent it.

‍

It hasn't been an attractive place to invest for many years, but the war in Ukraine changed all that. Coal is hot again. The reason is pretty simple: with lower amounts of natural gas and oil exports to Europe - thanks to Putin cutting off supplies - European companies are switching to coal for their heating needs. That has driven the price of coal up +73% over the past year. And companies are profiting big time from this macro trend. Our favorite is Arch Resources (ARCH).

‍

ARCH is experiencing a supertrend in coal demand, for reasons outlined above. This morning, they reported an astounding Q3 net income of $181 million (+100% from a year ago) on $864 million in revenue (+45% from a year ago). They also announced plans to execute a Q4 dividend of $10.75 per share on December 15, 2022 for those holding the stock as of November 29th. That is a yield of 8% for holding the stock a couple of weeks.

‍

Coal prices are -12% from their September high as Europe is experiencing mild weather. But with winter approaching, demand will rise, and coal prices will most likely rise with it increasing revenues for Arch and its share price with it.

We're holding Arch through the dividend until the price crosses 150/share or until March, whichever comes first. That should yield 19% over a few months time for an annualized return of 57%.

‍

‍

‍

‍

Amazon Product Launch

‍

Amazon announced an underwhelming earnings report Thursday afternoon. Shares were down a mere -20% in after-hours trading as the company report $127B in sales and $2.9B in income. However, Amazon did announce a new product: Project Kuiper.

Project Kuiper is Amazon's plan to launch 3,000-plus internet satellites into low Earth orbit to extend high-speed broadband internet access around the globe. "In order to meet its target of getting 3,000-plus satellites into orbit, Amazon will need to build one to three satellites “every single day, maybe even a little more than that,” Amazon devices chief Dave Limp said in an interview with The Washington Post on Thursday." (Palmer, CNBC)

The new service would be a direct competitor to Elon Musk's Starlink which is valued at $100B. The announcement shows that Amazon, despite blowing through $-20B in free cash flow over the past year, isn't afraid to continue huge capital expenses to fuel growth and the nomad lifestyle.

‍

‍

‍

Knowledge Corner

‍

What ETFs Can Teach Us About Market Sentiment

RSP vs SPY

The equal weighted ETF, the RSP, was up 4.9% over past week while the market-cap weighted SPY and nasdaq index (QQQ) were up 3.4% and 1.9%, respectively, over the week. That kind of deviation usually happens when there is broader participation in the market vs in big tech, which makes up a large proportion of the S&P 500 by market cap. Put plainly, investors came back into many parts of the market - just not the big names (Google, Microsoft, Amazon, Apple).

In 2005, the last time the Fed raised rates in the U.S. up towards the 5% level, the RSP outperformed the SPY by about 20%. Following the last U.S. recession in 2008, the RSP outperformed the SPY by 64%, ending 2009 up 42%.

Asset managers follow playbooks and shifting money to a broader allocation of sectors following a pullback is one of them.

Key Earnings Announcements This Week

Oct 31:

• Lowes - shows demand for homebuilding
• Global Payments - payment processing data
• Trex - shows demand for homebuilding
• Hologic - holds up well during recessions

‍

Nov 1:

• Uber
• SoFi
• Pfizer - presents many trading opportunities we break down for Level 2 members
• AMD - demand for semiconductors in focus
• Eli Lilly - all eyes watching for information about its obesity drug
• Phillips 66 - oil refining business is booming
• LPX - losing revenue as lumber prices plummet to pre-pandemic levels

‍

Nov 2:

• Generac - solar business growing nicely
• CVS - proxy for consumer demand and vaccines
• Ferrari - life for the wealthy still good?
• Zillow - getting crushed as housing market deteriorates
• Qualcomm - when the chips are down

‍

Nov 3:

• Peloton - a broken business model
• Moderna - rising recently in anticipation of earnings and likely to sell off
• Crocs - the ugly shoe everyone loves
• Royal Carribean
• Marriott
• Cheniere - big supplier of natural gas taking advantage of energy crisis in Europe
• Papa John's
• Westlake Chemical

‍

Nov 4:

• DraftKings
• Fubo Tv
• PBR - look to huge revenues

Economic Reports Due:

• Dallas Fed Manufacturing Index for October (Oct 31)
• JOLTs Job openings for September (Nov 1)
• ADP Employment Data for October (Nov 2)
• Weekly Jobless Claims (Nov 3)
• Unemployment Rate for Oct (Nov 4)

‍

‍

The LevelFields Team