Breaking Out...Or Breaking Down

The 52-week high for the S&P 500 is up around 4,300. One year ago, on Star Wars Day (May the 4th) 2022, the index closed exactly at 4,300. Then on August 16, the S&P 500 closed at 4305, after failing to move above the 200-day moving average, which, on that day, stood at 4,325.

Both of the highs – May 4 and August 16 – were followed by some pretty nasty drops. 

6 weeks after the May 4 high at 4,300, the S&P 500 hit a low at 3639 a 15% drop. And the August 16 high precipitated a 17% drop down to 3,585 on September 30. Now, the index bounced around that 3,585 level for a couple weeks before moving higher, and it certainly looks like the S&P 500 hammered out a bottom at that time. 

The rally off that October low ran just shy of 4,200, cut short by the mini-crisis for regional banks. And as of Monday, April 1, the S&P 500 had recovered to…just shy of 4,200.   

There are three things that have worked in the market’s favor since the mid-March lows. The willingness of the Fed and Treasury to backstop depositors at the regional banks stopped the sell-off from getting worse, basically putting a floor under the stock market. 

Earnings and inflation data are the twin catalysts that have encouraged investors to buy stock and send the S&P 500 higher. (Now, as an aside, the simple fact that stocks have rallied is significant. Because a 3-month Treasury Bill is paying nearly 5%. That’s a guaranteed return, and big investors have to have some pretty good incentive to take on the risk of stocks instead of taking the guaranteed 5%.)

Factset.com is the best source for S&P 500 earnings data, so I’ll let them tell you: 

Overall, 53% of the companies in the S&P 500 have reported actual results for Q1 2023 to date. Of these companies, 79% have reported actual EPS above estimates, which is above the 5-year average of 77% and above the 10-year average of 73%. In aggregate, companies are reporting earnings that are 6.9% above estimates, which is below the 5-year average of 8.4% but above the 10-year average of 6.4%. 

In other words, pretty decent. And as you might expect, the best earnings are coming from IT, Consumer Discretionary, Energy and Industrials. 

Now, I’m sure some analyst-types will want to focus on the fact that total earnings for the S&P 500 are coming in lower than they did in last year’s first quarter – by -3.7%. And that this will be the second quarter in a row where year over year earnings are lower…

But the thing is, that little nugget tells us where we’ve been and where we are, and it may help explain why investors are feeling uncertain and bearish. But the fact is, it doesn’t tell us where we’re going…

An Earnings Rebound?

Earnings are always a game played between companies and analysts. Companies lowball their forward earnings guidance, analysts ratchet their estimates lower as reporting season approaches, and then companies beat those estimates. 

Factset tells us that analysts are lowering their estimates for second quarter earnings that will be reported in July at a lower than average rate. And Factset also tells us that:  For Q3 2023 and Q4 2023, analysts are projecting earnings growth of 1.7% and 8.8%, respectively. 

So if the rate of decline is slowing, and will actually reverse during the second half of the year, well, that’s a pretty compelling counterpoint to the bearish argument.

On the inflation side of the ledger, I think it’s fairly simple. Inflation has trended lower all year, and I think that continues. Which means I also think the Fed will pause after today’s quarter-point rate hike and stand down. 

Of course, Chair Powell isn’t likely to say that. We should expect the usual “we remain vigilant” and “we are committed to bringing inflation down to target levels” blah blah blah. And with any luck, the financial media will interpret these remarks to mean that the Fed may hike again in June and maybe July and maybe we can get the S&P 500 to test its 50-day moving average down at 4,035. 

Because like it or not, investors should be buying stocks for the medium- to long-term. 

And as usual, I have thoughts on this…

Fugly Charts

I first coined the phrase “Big Tech Piggy Banks” back on March 31 when it was clear that the “flight to safety” after the first stage of the mini-bank crisis was into big tech stocks. And those big techs like Meta (NASDAQ: META), Microsoft (NASDAQ: MSFT), Nvidia (NASDAQ: NVDA), and to a lesser extent Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG) haven’t disappointed. 

The lowest risk bet is that Big Tech will continue to outperform. And I think Amazon (NASDAQ: AMZN) is the one. It’s sitting just below its 200-day moving average at $106.74. A break over the 200-day moving average should lead to a further 20% gain pretty quick. 

And a big reason to be bullish on Amazon comes from our good friends at Factset: 

Amazon.com is also expected to be the largest contributor to earnings growth for the Consumer Discretionary sector for all of 2023. The mean (GAAP) EPS estimate for Amazon.com for 2023 is $1.55, compared to year-ago (GAAP) EPS of -$0.27. Again, if this company were excluded, the estimated earnings growth rate for the Consumer Discretionary sector for 2023 would fall to 10.1% from 27.2%.

For a market that is trying to breakout to the upside it’s amazing how few stocks are actually breaking out. After Big Tech, the charts for most companies look terrible. Like, I follow 56 stocks, and there’s only a handful that are showing any kind of momentum. Most of them are trading below their 50-day and 200-day moving averages.

For instance, I really want to recommend disruptive insurance company Lemonade (NASDAQ: LMND) at the current price of $11.25. The company has great potential, has executed well, and the stock is currently trading at about 2x forward 12-month revenue, which, for a growth stock, isn’t bad…

But my goodness the chart is ugly. The current price ($11.25) is just above a new recent all-time low. The 50-day moving average is 20% higher at $13.48 and the stock has to run 64% just to get to its 200-day moving average at $18.49.

It’s no better for my favorite EV plays Rivian (NASDAQ: RIVN) and Fisker (NYSE: FSR). Rivian has to double in price to retake its long-term trendline (the 200-day MA) and Fisker needs a ~50% move to do the same (at least the 7% gain Fisker is putting in today is encouraging). 

Canadian Solar (NASDAQ: CSIQ), also known as Sea-Sick, fell below its 200-day MA on Monday. 

Even my value fertilizer play, Nutrien (NYSE: NTR) with its 3% dividend and forward P/E of 7 is nearly 20% below its 200-day moving average.

But, let’s end on a high note. Here’s what I got that’s looking pretty good…

Lithium miner Albemarle (NYSE: ALB) looks good, the stock is rolling today after really good earnings from another lithium money, Livent (NASDAQ: LTHM). 

Yeti (NASDAQ: YETI) just broke above its 50-day moving average last Friday, April 28 and has extended that move to also take out its 200-day moving average. 

Aehr Systems (NASDAQ: AEHR) is just bouncing higher off its 200-day moving average. Currently at ~$26, the 200-day MA is up near $31.

Recent recommendation Schrodinger (NASDAQ: SDGR) is one of the few stocks I follow that looks strong above both its 50-day and 200-day moving averages. If this market does move meaningfully higher, SDGR will do very well. 

Taiwan Semi (NYSE: TSM) looks good for a bounce off its 200-day MA at $82.20. 

Ok that’s a good place to stop. Take care and I’ll talk to you on Friday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today 

brit.ryle@protradertoday.com

Facebook: https://www.facebook.com/ProTraderToday

Twitter: https://twitter.com/BritonRyle

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