The Bulls Are Back

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The S&P 500 got a boost this week from the December U.S. inflation report which showed inflation falling further. Year over year inflation fell to 6.5% from a high of 9.1% in June 2022 while core inflation dropped to 5.7%. More importantly, forward looking inflation based on December's monthly rate was 3.7%  - slightly higher than November's forward looking inflation reading of 2.4%.

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Why does this matter?

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The Fed's inflationary target is 2%. This includes wage growth. On a forward looking basis, the wage growth is at 3.6% not accounting for deceleration.  Markets rallied on the belief that the Fed has done enough tightening already to hit their target of 2% inflation.

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This belief assumes the Fed keeps rates too high for too long before changing course, causing more economic damage than is necessary. This is the bear case which we feel is still the likely case given the Fed has been very deliberate in telling people they will hold rates in restrictive territory "for some time...until the job is done."  

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Markets Shrugged Off the Fed

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All signals pointed to the belief that not only is the inflation fight won, but that the Fed will soon pause its rate hiking cycle. Market pundits and the CEO's of major banks made bold assessments that the economy would not fall into a deep recession and would have a mild recession, if one is had at all.

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We're a bit concerned with the data from the banks showing that credit card debt has increased 15% year over year - the highest increase in two decades. But overall, there were no major sirens rung that the consumer was struggling.

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The best measure of this confidence in the U.S. market this week came from the first VIX reading below 19 in a year. The VIX is known as the market's fear gauge - the lower it is, the less fear there is in the market. The VIX is highest when there is more uncertainty about the future.

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Ten other indicators - including a rise in consumer sentiment (shown above) - also provide evidence the market is really starting to embrace the bull case scenario that inflation is in the rearview, the Fed will chill on the rate hikes, and earnings won't be as bad as previously believed. We will get into these in our Level 2 Newsletter.

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Are we in for a bigger rally?

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The problem with the December CPI report is that it also showed costs for shelter rising by 10% and costs for energy services (e.g. electricity, gas) rising by 19.6% on a forward looking basis. Costs for clothing also rose in December vs November.  Will the Fed see this data and think their job is done? It's not likely.  

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The next Fed meeting is January 31st where they will decide on the next rate hike and communicate their views - a view which has been on a repeat loop for many months. We're likely to see this rally continue until the meeting puts out the fire, unless corporate earnings and more importantly, CEO guidance for 2023 comes in better than expected.

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China's reopening is also providing a tailwind to the rally, as is inflation coming down across other major economies.

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KNOWLEDGE CORNER: TRADING DIPS

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In various newsletters last year, we noted that stock buyback announcements are a great way to make money trading stocks, and that there are many ways to trade it.

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The past week proved this to be true, and Synnex shares (pictured above) delivered an 11% gain over two days following the announcement of a large buyback program for those willing to be patient with the trade.

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SNX announced their buyback pre-market on the 10th. Shares rose +8% pre-market and then began giving up gains at the market open, falling from 108 to 102, which created a great entry point for those who did not give up so quickly on the stock.

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Then, over the next 2 days, the stock continued rising from 102 to 111.

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We break down these types of trades and how to handle them in detail during our Level 2 onboarding sessions and trade alerts.  The important takeaway here is: there are multiple entry points and multiple ways to trade an event (e.g. buy, sell, short, buy puts, sell puts, buy calls, sell calls, trade competitors, and long-term holds).

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HIGHLIGHTS FROM LAST WEEK

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Bed, Bath & Beyond Bankruptcy

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The retailer - which we alerted you might be headed for bankruptcy on January 5th - has seen its stock rally following an initial drop on the news. As speculators and meme stock traders attempted to crowd into the stock on hopes they will get Hertz type returns, the price rose.

A LevelFields Quick Sprint alert was sent at 8am January 12th. The stock rose +40% from there.    

Tesla Suddenly Looks Like Everyone Else

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Tesla cut prices on its vehicles by up to 20% in an attempt to boost demand for its car sales. The move makes it look like every other car company, but may be a way to regain control of the slowing growth narrative that has recently formed.  

Victoria's Secret Revealed

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Victoria's most recent secret was apparently a giant buyback around 8 percent of the company. Shares popped +12% on the reveal.

Carvana Carves Off Employees

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Used car retailer Carvana said it's laying off more staff due to falling sales. As is the trend for unprofitable companies doing layoffs, the stock dropped -12% on the news and has now shed -92% of its value in the past year.

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Key Earnings Announcements This Week

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January 17

• Goldman Sachs (GS)
• After recent news that GS lost $3B due to consumer lending projects, investors are watching for more insight into potential losses and the impact of the credit market.

• Signature Bank (SBNY)
• Signature Bank earnings come with hesitancy from investors as the commercial bank has had recent exposure to the crypto meltdown. Silvergate Bank, whom SBNY shared blockchain project interests with, shaved off nearly 50% within the past month due to a "crypto deposit drop."
• Alcoa (AA)
• Aluminum prices on the rise could be a substantial potential catalyst for the world's eighth-largest producer of aluminum.
• Morgan Stanley (MS)
• Will give insight into retail and professional trading volumes

January 18

• Procter and Gamble (PG)
• Consumer Goods: personal care and hygiene products.
• Kinder Morgan (KMI)

January 19

• Netflix (NFLX)
• Will the entertainment subscription-based service beat expectations of user growth and demand amidst a slowing market for extra expenditures?
• Silicon Valley Bank (SIVB)
• provides a window into the venture-backed startup world and whether it sees VC deals restarting yet

See More in the Earnings Calendar

Economic Reports:

• Jan 16: China GDP Growth Rate

• Jan 18: GB Inflation Rate

• Jan 19: US Jobless Claims

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The LevelFields Team