Charting the Hot Mess Inside the Stock Market, with J.C. Parets

Episode 83 of the Investopedia Express with Caleb Silver (April 25, 2022)

Let's get set up for a very busy week ahead, the biggest week of the season for earnings reports, and they will be flooding in from some of the most widely-held companies on the planet. Meta, Apple, Amazon, Microsoft, and Google will all be reporting results, along with Ford, General Motors, Caterpillar, PayPal, Visa and Coca-Cola, just to name a few. And how are earnings coming in so far? Well, according to FactSet, for the first quarter of 2022, with about 20% of companies reporting, 79% of S&P 500 companies have reported a positive upside surprise, and 69% of companies have reported a positive revenue surprise. They tend to do that. So far, for companies reporting first quarter results, the blended earnings growth rate for the S&P 500 is 6.6%. If that 6.6% holds, it will mark the lowest earnings growth rate reported by the index since the fourth quarter of 2020, when it was 3.8%. Growth is slowing.

We're going to get some updates to the U.S. housing market this week with the February Case-Shiller Home Price Index and March pending home sales due to be released on Tuesday and Wednesday. Tuesday's Case-Shiller update will include both the National Index and the 20-City Composite Index, measuring price gains in major metropolitan areas. In January, housing prices rose 1.4% month-over-month and 19.2% year-over-year compared to December, and just below the record annual gain of 20% in August of 2021. Price gains will likely subside over the coming months, however, as rising mortgage rates and declining affordability continue to affect demand. Growth projections for 2022 have been revised sharply lower in recent weeks. And you know why. Rising inflation driven by commodities, more aggressive monetary policy tightening by the Fed, and the uncertainty following the Russian invasion of Ukraine, now in its third month. Economic growth for 2022 is projected at 3%, followed by a 2.2% growth projection for 2023.

Elon Musk and Twitter are keeping it interesting. Musk's bid for the social media platform attracted some unlikely allies to the party: about 18 Republican congressmen from the House Judiciary Committee. The committee, led by Representative Jim Jordan of Ohio, sent a letter to Twitter's board last week demanding that the company retain all records, digital and otherwise, related to Musk's bid to buy Twitter and take it private. The committee is doing this, it says, in the name of preserving free speech, and these members do not believe Twitter upholds free speech. The letter reads: "Free speech online is under attack by Big Tech. In particular, Twitter has increasingly engaged in heavy-handed censorship to silence prominent voices and stifle views that disagree with the prevailing progressive consensus. Big Tech's eroding commitment to free speech prevents informed public discourse and undermines First Amendment principles." We'll link to the letter in the show notes. Keep in mind, Republicans do not control the House of Representatives, but we have a midterm election coming up at the end of the year, and if they take the house, expect Twitter and the other social media and tech giants to come under a lot of scrutiny. Meanwhile, Musk raised his bid to $46.5 billion last week, including about $24 billion worth of debt financing led by some pretty big banks, including Morgan Stanley, Bank of America and Societe Generale. Musk threatened in a letter to the board and through a tweet, of course, that he might make shareholders a "tender offer" and bypass the board altogether. A tender offer is a public solicitation to all shareholders requesting that they tender their stock for sale at a specific price during a certain time, typically at a higher price per share than the company's current stock price, providing shareholders with a greater incentive to sell their shares. Musk hasn't followed through with that yet, and news dropped over the weekend that the Twitter board is actually considering Musk's $43 billion offer. There is blood in the water around Twitter.

Meet J.C. Parets

J.C. Parets, founder of AllStarCharts

J.C. Parets is the founder of All Star Charts and is one of the most widely-followed technical analysts in the world. His website, AllStarCharts.com is a research platform for both professional and retail investors covering U.S. and international stocks, interest rates, commodities, and foreign exchange markets. J.C. Parets earned his Chartered Market Technician (CMT) designation in 2008 and specializes in technical analysis, trading, and investing. He is also a frequent speaker at top investing conferences and universities.

What's in This Episode?

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"If you're like me, you're getting pretty tired of all the headlines swirling around the stock market these days. Walls of worry everywhere you look, from rising rates to inflation to geopolitical uncertainty, you name it, it's all weighing on sentiment. It's heavy. When I feel this way, I like to cut right through those feelings and get inside the charts. Step away from the fundamentals and focus on trends, prices and patterns. And there's no one I like doing that more with than our pal, J.C. Parets of AllStarCharts. And speaking of swirling, we're going to get J.C.'s spring wine recommendations while we have him here. Welcome back aboard the Express, my friend J.C."

J.C.: 

"What's up Caleb?! I'm happy to be here. Are we going to get right into the wine or are we talking about stocks first?"

Caleb:

"Markets first, wine second. Business, then pleasure. You know how we do it around here. All right. The major market averages and the big popular stocks are what you like to call a hot mess. That's your own technical term. Take us inside the charts of Big Tech, the Nasdaq 100, and all those popular stocks that used to be just a family favorite over the last few years."

J.C.:

"Well, let's remember they were family favorites in an environment where Big Tech and growth stocks should do well, which is in falling rate environments, when those "long duration" trades make more sense. But if history has proven anything to us over a long, long period of time, is that when interest rates are going up, those are the last types of stocks you want to own. You want to be in the more cyclical names. You want to be in the more value-oriented names - industrials, materials, energy, even some financials. And as it turns out, those are the ones doing well. Those are the stocks that are doing best, the types of stocks that should be doing better when interest rates are going up. So to me, it makes perfect sense that these tech companies, and not just tech, look at communications. You had a group like Google, Facebook, Netflix - they're in the communications sector, they're not tech, but you know, you can throw those into the same category. Amazon hasn't done anything forever. And I think that makes perfect sense, considering the environment that we're in. So then when you look at the typical American portfolio, what do you have? You got a ton of that stuff. Half the American portfolio is in technology and growth and usually even more than that. So when those are the underperforming sectors, individual investors are really getting hurt because let's say you own the S&P 500, just 2% of your portfolio is in energy. If you own the Nasdaq 100, 0% of your portfolio is in energy. And a lot of your portfolio is in something like communications. So we're seeing the widest dispersion among sector returns in over 20 years, Caleb, I don't know if you realize that. The difference between the best-performing sectors and the worst-performing sectors is the widest it's been since the fourth quarter of 2000, over 20 years ago. That's how different the returns are from a sector-to-sector standpoint, and you're seeing it in other countries too. So the United States, because of all of this growth exposure, is a huge underperformer. Who would have been the leader so far this year? Latin America: Brazil, Chile, Peru. And when you look at the top 10 best-performing countries in the first quarter, the top 10 were all emerging market countries. So it's quite obvious what is happening around the world in terms of stocks, and, I think, interest rates have had a big role in that."

Caleb: 

"And it's not just a little dip. This is not just a little pause in the rally for growth stocks. This is a change, a fundamental change in a cycle that could go on forever. And you write recently, commodities take the wheel. Commodities have been in the driver's seat as we've gone through this recovery for the past year, irrespective of the spikes in oil prices that happen around the Russia-Ukraine situation. But you don't see that ending anytime soon. You see this as a supercycle for the big commodities, right?"

J.C.:

"They tend to be, right Caleb?! As market participants, we have to be historians. We have to go and study past cycles. And one thing we've learned is that when commodities are outperforming and you're getting these commodity "super cycles", it's not something that lasts a few weeks or a few months, it lasts a decade or more. So just like in the 2000s, we're commodities, we're outperforming for a decade. And then in the teens, over the last 10 years, commodities were the underperformer. Well, now commodities have been the outperformer for about two years. And if you recall, when did this outperformance start? When crude oil traded below zero. Can you think of a better catalyst to spark a new commodity supercycle, Caleb, than crude oil trading below zero? I mean, you can't even draw that up any cleaner. So I think that was the beginning. And if we know that these things last a decade and we're in year two. Well, you tell me, are we in the early stages or the later stages? Like to me, I think the real risk has been and continues to be American investors not having enough exposure to energy and commodities and way too much exposure to growth in technology. Look at countries like Canada, for example, much better positioned for this sort of environment. The United States, considering its exposure to industrials and the Canadian banks, has been doing very well. And of course, regarding natural resources, the Canadian stock market looks a lot stronger than the United States for the first time in a long, long time. When you look at the components and the weightings of Canada versus the United States, it makes perfect sense."

Caleb:

"And as you say, to quote Madonna, we're living in a material world right now. You're looking at natural resources and commodity-related stocks doing great. A lot of investors say they don't want to own these types of stocks, but that's where the action has been. But I love looking inside your charts with you, the equal weight materials and energy, looking at that compared to the rest of the market. You see a big, wide dispersion there as well, right?"

J.C.:

"Well, of course. And what's really interesting is that these materials stocks are so small that they're just not big enough to be in the large cap indexes, so you don't see them in the large cap indexes. These stocks aren't big enough. You talk about a gold company that's $9 billion in market cap and that's like a super mega-cap for gold. You know what I mean, because you've got all these little tiny gold miners in Vancouver, so a $9 billion company is like this monstrosity, and material stocks just aren't that big. So you're able to see more strength in materials when you're equally-weighted or when you look at material small caps or mid caps, you're able to see a lot more strength than you do in the large caps just because there aren't any. The exposure to materials has to be down-the-cap scale that you really see it. Because the S&P 500 is 2% materials, the Nasdaq 100 is 0% materials. So American investors just don't have that exposure."

Caleb:

"Everything is relative, and that's what I love about your analysis. And folks, J.C. and his team at AllStarCharts have now taken over. Our Chart Advisor newsletter goes out every weekday. If you love charts, if you love technical analysis, subscribe to Chart Advisor, we'll link to the subscription button in the show notes. Let's keep going. Looking around the world, looking at supply sort of overhead and all this resistance we're seeing in a bunch of major markets - looking at the DAX, looking at China. This is not just a US problem, you're feeling that pressure pretty much across a lot of the markets outside of Latin America and the materials-oriented countries."

J.C.:

"Yeah. There's two charts in particular that we, as investors, need to keep a close eye on. The first one is EAFE. So this is EAFE, and this is developed markets outside of North America. So you're thinking a lot of Europe, you're thinking a lot of Japan, some from Australia and Canada sprinkled in there. So that's a big one. And then there's also ACWI ex-U.S. This is the all-country world index, excluding the U.S. So these two major indexes, when you zoom out, they look exactly the same. And what we have our eye on are those 2018 highs. If you recall, that was a key pivot point for risk assets. That's when, like bitcoin peaked at the end of 2017, you had that crazy run. And then, the fundamental guys are telling me that there was like a trade war that started in 2018. And I don't know about all that stuff. But what I do know is that you, when you look at a lot of charts around the world, a lot of them peaked in January of 2018. There was a major, major moment in time. So these two indexes are not above those 2018 highs. I think there's a big problem underneath the surface and those things have a lot of work to do. So I would watch those two in particular, and I would feel much more comfortable being long risk assets, particularly stocks, if those two indexes are above the 2018 highs. If they're not, I think more caution is warranted."

Caleb:

"Yeah, I mean, that just speaks to your overall point, which is that we're in a different environment. This is a much different set of circumstances that we've experienced as investors in a very long time. And young investors, new investors, they haven't seen cycles like this necessarily play out since they began their investing careers. Which brings up the question, and you're not an overall strategist, but I love your insight, J.C. You know, a lot of a lot of our listeners and me included, we're pretty much passive investors and we, you know, we try to allocate balance and responsibly across asset classes and make sure we're diversified and make sure we're not to exposed one way or the other. But how do you invest when the 60-40 doesn't work really anymore and the things that worked for the last 20 years just aren't going to work like they used to?"

J.C.:

"Well, let's remember something. There's really no such thing as passive investing. We're all active investors. The question is, who's making your active decisions? Are you making them yourself? Or do you have a group in some boardroom somewhere in New York that works for Dow Jones or Standard and Poor's, that's deciding the allocation of the index? So nobody is a passive investor. It's nice to think that, but somebody is making these decisions, and a "passive investor" that might own the S&P 500 has had a nice run over the last 10 years, up until last year, of having an irresponsible amount of growth exposure, particularly U.S. growth. Right. That sort of, like, aggressive positioning paid off very, very well. Now, investors in other countries perhaps, that didn't have that sort of exposure and instead had a ton of exposure to natural resource stocks and material stocks, you know, were at a disadvantage for a long, long time. Well, American investors took advantage of that, but there's a reversion to the mean taking place. So I think that as investors, we need to understand what's in the indexes, what's in the "passive holdings" that we have. And, is that really a diversified portfolio or do I have way too much growth exposure? So I think we need to think like this is the 2000s. It looks a lot more like the 2000s than the teens."

Caleb: 

"Great point. All right. Let's go to digital and let's go into the crypto universe, because I know you and your team track what's happening there as well. We've seen kind of a lot of sideways churn there as well, J.C., it's a lot of that risk kind of leaving the building and investors sort of not that interested as they used to be, at least in terms of money flow and at least in terms of momentum. But let's start with the big boys - Bitcoin, Ether. What are you seeing there?"

J.C.:

"What I'm seeing is the highest correlation with Bitcoin and Ether to the Nasdaq that we've ever seen. So if you think you're investing in bitcoin because it's a hedge against inflation, then hard real data must not matter into your equation. Because there's no evidence whatsoever that bitcoin is any sort of inflation hedge at all. We've never seen that. It might be one day, but up until now, it really just trades with the Nasdaq. And this wasn't always the case, Caleb. I remember in the old days, it's funny when we talk about the old days of bitcoin, in the old days of bitcoin, and back in my day, bitcoin did not trade with the Nasdaq. There was really no correlation between stocks and bitcoin. It was its own thing, which was fantastic. I love uncorrelated assets. But a funny thing happened a couple of years ago when these market caps started getting off the charts. You know, they became long duration risk assets just like software stocks. And that's just what it is. Personally, I wish it wasn't like that, but it is like that, so we can't invest in the world the way we wish it was - we have to invest in the world the way it is. And Bitcoin and Ethereum trade with the Nasdaq, and there's nothing we can do about that. That's number one. Number two, within the crypto space, within the crypto universe, I think relative strength is a really, really important characteristic to focus on. And you know me, you've been hearing me talk about relative strength. We've known each other a long time. I talk to you about relative strength a lot. And I would argue that even in cryptocurrencies it's probably even more powerful than it has been in the equities markets and other asset classes, like there's really good information there. But we're just seeing a ton of relative strength out of like Luna coin, for example, this is Terra. They're in the process of buying $10 billion worth of Bitcoin; when they're done buying, they'll be the largest holders of Bitcoin in the world. And I think it's Terra's that's above last year's highs. I think you own it right above 100. You know, if we're not above 100, then you're still in a messy range, but if we're above last year's highs? You know, I like Luna. I like the relative strength there. And then keep an eye on these new issues, there's some really interesting new issues popping up. One of them is the Apecoin. Those of you who are familiar with the NFT space are familiar with the Board Ape yacht club. I think board ships are the biggest crypto project of all time. You know, they keep going back and forth with crypto punks. But I believe currently, the market capitalization of the Board Ape of the largest, I look at that eight points and, you know, do your own homework on on how they're related. I encourage you to do that. And then also, you know, a fun one, Caleb, is the stepping. You know, this is the stubborn coin where I bought an NFT on the Solana blockchain, and I connect it to my app and I get paid to go running. I go running through the park and I earn GST coin, which is the utility token for Stebbin and if you go look at Stebbin, which is GMT, it's a new issue launched last month and you know it's already top 50 cryptocurrencies. You know, for me, things that attract me are when they're climbing up the charts, the rankings of cryptocurrencies and showing that relative strength, that gets on our radar, that shows up on our scans. And those are two interesting new issues that I don't hear a lot of traditional finance people talking about because it didn't exist a month ago, or two months ago. So these are some new issues that I think are worth keeping an eye on. And by the way, it's pretty cool, the Stebbin app that I get paid to go running. I mean, it's crazy, right?"

Caleb:

"Yeah, it is; we're living in a completely different galaxy and it's only getting more and more interesting like that. But that's the beauty also of technical analysis. You're looking at relative strength, you're looking at chart patterns you like. I know things J.C. that go up and to the right , and you like relative strength, J.C. That's your spinach, makes you stronger, so you like looking at those things. And folks, you could follow J.C. and check out his newsletter through AllStarCharts.com, but also our Chart Advisor now run by J.C. Perez and the team at AllStarCharts with Investopedia. OK, J.C., it's spring. You're a wine expert. I'm going to do some light cooking, some healthy eating this this spring. I need your recommendations. Give me a good read something to have at the nice Valdis chicken, maybe pheasant. Something like that for the spring. What are you recommending right now?"

J.C.:

"Well, I didn't know you were going to say red because I was going to give you a white, but I will. I will give you a red also. So we're going to stay with Argentina today and what we're going to start out with is you're going to grill some chicken, marinate the chicken, not too aggressively, maybe more of like a dry rub, not too spicy, although you could make it spicy for this particular way. I take you back, add a little spice actually to your chicken, and you're going to get a Torrontes (wine). This is going to be a Torrnotes from Argentina, and you're going to go with a chicken with a dry rub and give it a little kick. There's nothing wrong with that because you're going to get a little residual sugar on that Torrontes. So on a nice Sunday afternoon, some grilled chicken and the Torrontes is going to be beautiful. And then, you know, stick with Argentina and get some Malbec - Argentinian Malbec. It was international Malbec Day last week and I was hating on Argentina. And I'm like, drink from Cohours, which is where Malbec is from in France. And I love that. And I was just giving Argentina some, you know, some crap. But Argentinian Malbec is delicious. The Argentinians do it right. So get some Torrontes and some Malbec and some grilled chicken, and you're going to be good to go."

Caleb: 

"Yeah, I'm a Malbec kind of guy. Love that. OK, now I'm going to do. I was saving the white for seafood because I know those two go together. You give me a little slap every time I cross the stream there, but I'm going to do maybe some seafood, maybe linguine clams with some nice, fresh herbs on it. What are you recommending on the white side?"

J.C.:

"So linguine and clams, I wouldn't go Torrontes with linguine and clams. I would go either French burgundy and do a chardonnay from Coutoures, or I would do a Muscadet (wine) from Nantes, you know, the Muscadet, because it's going to be creamy, right? So the Muscadet is gonna, you know, the way they make their wine there, in Nantes, is that it's called Sur Lie, so they let it age on the leaves. That's what that means. And the leaves are the cells. So you're going to get that viscosity and creaminess that's going to go great with your linguine and clam sauce, in my opinion."

Caleb:

"Yeah, well, I love that. I love that recommendation. I like to have a couple of glasses of that while I'm preparing the dish because I know that goes down real nice as you start to smell that clam rock, bubbling up and getting everything."

J.C.:

"And then use it, and by the way, use it when you're making your white wine sauce, use the Muscadet from Nantes and what's cool about Muscadet is that it's very inexpensive compared to other wines in France. So go ahead and use that in your dish, for sure."

Caleb:

"Great charts, great wine, great insight as always from our good friend J.C. Parets from AllStarCharts.com. Thank you my friend for coming back aboard the Investopedia Express. We need you and we're always glad to have you."

J.C.:

"Any time, Caleb. You know I love it."

Term of the Week: Wash Sale

It's terminology time, time for us to get smart with the investing and finance term we need to know this week. And this week's term comes to us from Tim in Georgetown, Kentucky. That's great bourbon and horse country. Tim suggests wash sale this week, and we like that term. Well according to my favorite website, the wash sale is a rule that the Internal Revenue Service regulates that prevents a taxpayer from taking a tax deduction for security sold in a wash sale. The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss and, within 30 days before or after the sale, buys a substantially identical stock or security, or acquires a contractor option to do so. A wash sale also results if an individual sells a security and the individual spouse or company controlled by the individual buys a substantially equivalent security. Why are we waxing on about wash sales? Well, given the steep drop in stocks this year, especially in the Nasdaq, which is in a bear market, a lot of investors may be tempted to take some losses, but if you try to wash them into a new buy hoping for the deduction, on the flip side, that's a no-no, and the IRS will flag it. Good suggestion, Tim. Sending you some stocks for those springtime walks up in the hollers of Georgetown, Kentucky.

Conclusion

We're going to let Charlie Munger take us out this week, the 98-year-old vice chairman of Berkshire Hathaway is still going strong. Here's Munger in a 2017 interview with the University of Michigan Ross School of Business talking about his ambition, always humble, always sincere:

"It's amazing how if you just get up every morning and keep plugging and have some discipline and keep learning and it's amazing how it works out OK. And I don't think - I don't think it's wise to have an ambition to be president of the United States or a billionaire or something like that, because the odds are too much against you. Much better to aim low. I did not intend to get rich - I wanted to get independent and just overshot..."

I think overshot is a light way of putting it. He's one of the richest people in the world. Guess what, I'll be seeing Charlie Munger and Warren Buffett next weekend as the Express is hitting the road. That's right. This train is headed to Omaha and the Berkshire Hathaway annual meeting. It's been about ten years since I went to what is affectionately called Woodstock for capitalists, and I'm excited to head back to Nebraska. I'll be bringing you the show from there, so make sure you tune in next week. Thanks for riding with us this week. And let's keep our heads on these slippery tracks. It's going to be this way for a while, and we'll talk again a little further on down the line.

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  1. Securties and Exchange Commission. "Twitter Schedule 13d."

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