Why our technical analysts believe markets could climb … does January’s performance predict yearly performance? … Louis Navellier flags one of Eric Fry’s favorite investments
A quick note before we begin today’s Digest.
Our InvestorPlace offices and Customer Service Department will be closed this Monday, 1/16 in honor of Dr. Martin Luther King Jr.
If you need assistance, we’ll be happy to help when we re-open on Tuesday.
This morning, the big banks kicked off Q4 earnings season with a “ho hum” response from Wall Street
Here’s a quick rundown as of Friday morning.
JPMorgan topped expectations, but the stock traded lower based on the bank’s outlook that includes a mild recession arriving in Q4 this year.
Meanwhile, Wells Fargo reporting a 50% decline in net income. That was largely due to three factors: lower revenues from mortgage originations, more money set aside for loan loss provisions, and the costs of a recent settlement.
Citigroup saw its profits fall 21%. Like Wells Fargo, some of this was due to more money going toward credit loss reserves as the bank eyes deteriorating economic conditions. However, though profits were down, revenues topped expectations.
Finally, Bank of America reported better-than-expected fourth-quarter earnings, with net interest income up 29% over last year. Yet, the bank did call for net interest income to fall during Q1 2023.
Here was CEO Brian Moynihan’s take on the recession debate:
Our baseline scenario contemplates a mild recession. … But we also add to that a downside scenario, and what this results in is 95% of our reserve methodology is weighted toward a recessionary environment in 2023.
As I write, Wall Street is flat as it absorbs the news. Overall, this wasn’t a bad performance from the big banks, but the market seems to be focusing on the recessionary outlooks.
Looking ahead, what can we expect from this earnings season as things kick into high gear next week?
Let’s go to our technical experts John Jagerson and Wade Hansen of Strategic Trader.
For newer Digest readers, Strategic Trader is InvestorPlace’s premier trading service. It combines options, insightful technical and fundamental analysis, and market history to trade the markets, whether they’re up, down, or sideways.
From their Wednesday update:
Based on the information available to us right now, we expect earnings to be down -3-5%, but revenues will be up by nearly the same amount.
Remember that the market is already pricing in a mixed earnings season. The fact that analysts’ expectations are at an extreme low isn’t a bad sign either.
Extremes in negative expectations are usually followed by a flat or positive market in the short term. A situation like this is a good contrarian indicator.
To illustrate the negative sentiment swirling around these low earnings expectations, John and Wade point toward an indicator called the equity put-call ratio.
To make sure we’re all on the same page, puts and calls are options.
When option traders are bullish on the stock market, they buy call options, which generally increase in value when the price of the underlying stock moves higher.
Conversely, a bearish trader would buy a put option, which generally increases in value as the price of the underlying stock moves lower.
Back to John and Wade:
The put-call ratio measures the volume of puts traded versus calls. Typically, this ratio is below 1.0, which means calls are favored.
However, right now, traders have been hedging and put-option volume is above call-option volume.
The chart below shows that the weekly put-call ratio (black) climbed towards 1.4 while the S&P 500 was channeling. It reached a similar extreme at the bottoms of the spring 2018 decline, the 2018 bear market, and the 2020 pandemic crash.
To be clear, we don’t expect the market to rally as it did in the second and third quarters of 2020.
Still, the likelihood that traders have overpriced the downside makes it more likely that support will hold this month despite a soft earnings season.
As to where that support is strongest, John and Wade point toward the 3,800 – 3,900 range in the S&P. As I write Friday morning, the S&P trades at 3,975, or about 2% above the top of this support range.
Looking bigger picture, should the strong start to 2023 influence our forecasts about where the market will go this year?
In recent days, you might have seen a headline referencing the “January Barometer.” It’s a belief held by some traders that the S&P’s performance in January somehow has predictive power about the S&P’s full-year performance, with a January rise meaning a full-year rise is in store.
Some analysts take it even further. For example, a recent Barron’s article looked at historical market performance based on just the first five trading days of a new year.
Here’s Barron’s with those details:
In seven of seven times when the previous year was negative for the S&P 500 and it gained more than 1.4% in its first five trading day of the new year, it went on to average a 26% gain.
At the end of trading on Jan. 9, the fifth trading day of the year, Dow Jones Market Data showed the S&P 500 up 1.37%.
Let’s hope that rounding-up is acceptable to the market gods.
But before we get too excited, let’s see what John and Wade have to say about the January Barometer:
Unlike many seasonal-based investing ideas, the January barometer appears to have a very slight predictive edge.
If we go back to 1950, a negative January led to negative returns for the rest of the year 35% of the time. That’s higher than using any other month in a random sample, but not by much.
However, we think the historical study is irrelevant because today’s market can’t be compared to previous decades that included a quasi-gold standard and a more hands-off Fed.
That said, John and Wade are bullish on the year. Here’s their bottom line:
Although our outlook for January is neutral, we think market conditions are still good enough to allow for a rally later this year – even if January isn’t great.
Switching gears, Louis Navellier just pointed toward an investment that’s been one of Eric Fry’s darlings for years
Regular Digest readers know that we’ve been bullish on copper and industrial metals for a long time. That’s because these metals are critical components of countless next-generation tech products.
Since 2019, we’ve brought you research from Eric pointing toward the huge, multi-year tailwinds behind a copper investment. Eric’s copper picks have brought triple-digit returns for his subscribers.
Well, Eric isn’t the only InvestorPlace analyst with copper in his crosshairs.
Let’s jump to legendary investor Louis Navellier:
Due to China reopening to international airline travel after a 3-year Covid ban, plus some evidence that economic activity may be picking up, copper prices have resurged and are now back over $9,000 per ton for the first time since last June.
Goldman Sachs’ analyst Jeff Currie said that copper may reach $11,500 per ton by the end of the year.
I should add that as electric vehicle sales rise and the electricity grid is upgraded with battery storage facilities, copper demand naturally rises.
Two notes based on Louis’ comment…
First, we’ve referenced Jeff Currie and his research on copper here in the Digest. Here’s Currie’s take from last year:
The metals are the primary beneficiary of this super-cycle… And the reason why is the green cap-ex story.
You have every country in the world pursuing the exact same policies at the exact same time. And there’s no way you’re going to decarbonize the world without copper.
Copper is the strategically most important commodity out there. We like to say “copper is the new oil.”
Inventories are dropping like a brick. Inadequate supply already. And we haven’t even started to decarbonize the world.
Copper is the one that really benefits from that story.
Second, for a bit more context on the amount of copper used in an electric vehicle, the Copper Development Association reports that conventional cars have 18-49 pounds of copper.
With that as a baseline, what’s your guess as to how much copper is in a hybrid electric vehicle?
It’s about 85 pounds.
And a plug-in hybrid electric vehicle?
That bumps it to 132 pounds.
Finally, if we look at a pure, battery electric vehicle, the amount of copper used explodes to 183 pounds.
It’s easy to see why copper demand – and by extension, its price – is poised to soar as our world continues to move away from gas-fueled cars.
On that note, the price of copper has surged more than 12% over just the last seven trading sessions.
How can you play copper?
An investment we’ve profiled here in the Digest is COPX, which is the Global X Copper Miners ETF. It holds a basket of the world’s top copper miners. As the price of copper rises, these miners benefit.
As you can see below, COPX is up nearly 50% since mid-October.
We continue to urge readers to have at least some portfolio exposure to copper and other key industrial metals.
Have a good evening,