12/17/2022

12/18/22 Newsletter – Did the Fed kill the Santa Claus rally?

The absence of a Santa Claus Rally on Wall Street tells us nothing about the stock market’s prospects in 2023. The U.S. stock market has done just as well following holiday seasons when there is no Santa Claus Rally as when there is.

Stocks fell this week in the wake of the Fed’s 50 basis point interest rate hike on Wednesday — the highest rate in 15 years. 

Remember, this is why we told you to pay close attention to the FOMC meeting on December 14th. 

Following the policy update, the Dow dropped 142 points on Wednesday, plunged 764 points Thursday, and declined further on Friday.

The central bank said it would continue hiking rates through 2023 to 5.1%, a larger figure than previously expected.

Stocks continued building on their year-end sell-off, as fears grew over a recession taking place as the Federal Reserve continued raising rates.

Let’s run the numbers real fast!

The Dow Jones Industrial Average lost 281.76 points to 32,920.46. 

The S&P 500 fell 1.11% to 3,852.36. 

Meanwhile, the tech-heavy Nasdaq Composite declined 0.97% to 10,705.41.

The indexes notched a second consecutive week of losses. 

On the week, the Dow and Nasdaq slid 1.7% and 2.7%, respectively.

The S&P 500 fell 2.08% for the week, putting its December losses at 5.58%, as hopes for a year-end rally fizzle. (Sorry Santa Claus)

Options Expiration (normally the 3rd Friday of the month)

Trading was especially volatile Friday with a large amount of options expiring. 

There were $2.6 trillion worth of index options expiring, the highest amount “relative to the size of the equity market in nearly two years,” according to Goldman Sachs. At session lows, the Dow was down as much as 547.63 points, before paring back some of those losses.

The expiration date for listed stock options in the United States is normally the third Friday of the contract month or the month that the contract expires. In months that the Friday falls on a holiday, the expiration date is on the Thursday immediately before the third Friday.  

[Side Note: We will be discussing “options” in more detail in our upcoming commentary reports, so if this is a topic you’re interested in learning more about, stay turned because we have you covered.]

The sell-off was broad-based, with three stocks falling for every advancer at the New York Stock Exchange. At one point, there were only 10 S&P 500 names in positive territory. The real estate and consumer discretionary sectors were the biggest losers, down nearly 3% and 1.7%, respectively.

Watch out for the Real Estate Sector this week!

Can the real estate market affect the stock market? 

In short, the answer is yes. 

There are several real estate related reports (coming this week) that can have an impact on the stock market. 

This is because investors see these reports as indicators to the overall strength of the economy. 

And especially for those of you who have real estate related stocks in your portfolio, you should pay close attention to these report dates. 

Monday, December 19, 2022 – 10AM ET – NAHB Housing Market Index Report

The NAHB/Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.

The NAHB housing market index in the US extended losses for an 11th straight month to 33 in November of 2022 from 38 in October and below forecasts of 36. It is the lowest reading since 2012 excluding the immediate onset of the pandemic. Current sales conditions declined to 39 from 45, sales expectations in the next six months went down to 31 from 35, and traffic of prospective buyers fell 5 points to 20. 

“Higher interest rates have significantly weakened demand for new homes as buyer traffic is becoming increasingly scarce”, NAHB Chairman Jerry Konter said.

We’re seeing the consensus estimate for Monday’s NAHB report is 34.

Tuesday, December 20, 2022

8:30AM – Housing Starts / Building Permits Report

Wednesday, December 21, 2022

7AM – MBA Mortgage Applications, MBA 30-Yr Mortgage Rate – 6.42%, The MBA Purchase Index.

10AM – Existing Home Sales

The MBA Purchase Index is a weekly report of mortgage loan applications based on a sample of 75% of U.S. mortgage activity. Analysts consider the report to be a leading indicator of housing market activity. 

Existing Home Sales measures the change in the annualized number of existing residential buildings that were sold during the previous month. This report helps to gauge the strength of the U.S. housing market and is a key indicator of overall economic strength.

A higher than expected reading should be taken as positive/bullish for the USD, while a lower than expected reading should be taken as negative/bearish for the USD.

Existing home sales in the US tumbled 5.9% to a seasonally adjusted annual rate of 4.43 million in October of 2022, the lowest since December of 2011 with the exception of a very brief fall at the beginning of the pandemic, and compared to the market forecasts of 4.38 million. 

It was the ninth straight month of falling sales as home prices remained elevated and a 30-year fixed mortgage rate hit a 20-year high pushing many buyers out of the market. 

“More potential homebuyers were squeezed out from qualifying for a mortgage in October as mortgage rates climbed higher. The impact is greater in expensive areas of the country and in markets that witnessed significant home price gains in recent years”, said NAR Chief Economist Yun. 

Meanwhile, the total housing inventory fell 0.8% to 1.22 million units. The median existing-home price for all housing types was $379,100, up 6.6% from October 2021. Properties typically remained on the market for 21 days in October, up from 19 days in September.

As you can above, on November 18, 2022, Octobers Existing Homes sales came in at 4.43 million 

But next week, on December 21, 2022, Novembers Existing Homes sales are due and we are seeing the consensus numbers coming at 4.2 million. 

New Homes Sales Report Coming – Friday,  December 23, 2022

Every month, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly publish a report measuring the sales of new single-family houses in the United States by region: Northeast, Midwest, South, and West. 

The new-home sales report provides an important snapshot of housing demand, and even though it provides results from events that took place in the past, many analysts consider it to be one of the economy’s leading indicators. After all, buying a home is a major investment for an individual. Economists view stronger-than-expected new-home sales data as an indication that the economy is healthy because it means that there are more people out there able to buy homes.

New home sales in the United States rose by 7.5% to a seasonally adjusted annualized rate of 632K in October of 2022, beating market forecasts of 570K sales and defying the recent drawdown in housing demand as the Federal Reserve aggressively tightens monetary policy. 

Sales rose sharply in the South (16% to 399K) and in the Northeast (+45.7% to 51K), more than offsetting the decline in the Midwest (-34.2% to 50K). 

The median price of new houses sold was $493,000, while the average sales price was $544,000. 

There were 470,000 houses left to sell, up 21.4% from one year ago and corresponding to 8.9 months of supply at the current sales rate. 

The stock market eagerly awaits these reports, as it provides an important snapshot of housing demand. (so keep your eyes on these reports.)

Jobs and the GDP

Initial Jobless Claims Report Coming – Thursday, December 22, 2022 

According to the Department of Labor, the number of Americans filing new claims for unemployment benefits fell by 20,000 to 211,000 in the week ending December 10th, the lowest since the end of September and well below market expectations of 230,000. 

The seasonally unadjusted gauge fell by 39,095 to 248,881 with the largest decrease reported in New York after a big jump the previous week. 

Applications in Texas, Georgia and California also were down. 

The four-week moving average, which removes week-to-week volatility, fell by 3,000 to 227,250. 

What is the Gross Domestic Product (GDP) and Why Does it Matter?

The GDP is a comprehensive measure of U.S. economic activity. GDP measures the value of the final goods and services produced in the United States (without double counting the intermediate goods and services used up to produce them). 

Changes in GDP are the most popular indicator of the nation’s overall economic health.

The value of the goods and services produced in the United States is the gross domestic product. 

The percentage that GDP grew (or shrank) from one period to another is an important way for Americans to gauge how their economy is doing. 

The United States’ GDP is also watched around the world as an economic barometer.

The US gross domestic product price index, which measures changes in the prices of goods and services produced, increased 4.3% in the third quarter of 2022 to a record high of 128.177 points. 

The US economy grew an annualized 2.9% on quarter in Q3 2022, better than an initial estimate of 2.6%, and beating forecasts of 2.7% reflecting upward revisions to consumer and business spending and net trade. 

The biggest positive contribution came from net trade as imports sank more while exports rose more. At the same time, consumer spending rose more than anticipated, as growth in health care and “other” services partially offset a decrease in spending on goods, namely motor vehicles and food & beverages. 

Have you heard about the “52-week high effect” ?

The “52-week high effect” states that stocks with prices close to the 52-week highs have better subsequent returns than stocks with prices far from the 52-week highs. 

Investors use the 52-week high as an “anchor” against which they value stocks. 

When stock prices are near the 52-week high, investors are unwilling to bid the price all the way to the fundamental value. 

As a result, investors under-react when stock prices approach the 52-week high, and this creates a 52-week high effect.

This effect could be enhanced with a strategy using a narrower investment universe and buying stocks in industries in which stock prices are close to 52-week highs. 

The strategy is related to the momentum effect, but research shows it is independent of it. 

The strategy should not be implemented in January as it has negative results in this month (like momentum). So keep this in mind as we enter 2023 in just a few weeks.

Most of the gains for the long-short version are from long positions, which makes the “52-week high effect” easier to implement in real-world trading.

Who Made New 52-Week Highs This Week?

Here are some notables as of Friday, December 16, 2022.

Taking the cake this week is Cabaletta Bio (CABA) after skyrocketing over 1,050% from its 52-week low. 

Coming in second place is Biovie (BIVI) moving up over 909% from its 52-week low.

And Akero Therapeutics (AKRO) coming in third place after climbing over 524% from its 52-week low.

If you’re interested in discovery stocks that have the potential for making 1,050%, 909%, or 524% moves like the top 3 stocks above, then you’re in luck…

Because we have been hard at work uncovering what could be the next big stock play for you.

In fact, we just identified our next stock play and we’ll be bringing it to you very shortly.

So clear your plate and get ready… 

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