Intermediate Bottom forming... some stocks standing out.
I will be reducing blog content in the next couple months because I need to concentrate on other things, including a writing project as well as my health that I have been neglecting for the last couple months.
So I will be blogging on sporadically, only if something big occurs.
In the mean time, as I have been mentioning in the last couple blogs that we felt the intermediate bottom was coming, and saw some certain small cap stocks already turning up on intermediate momentum on crash valuations. This usually happens before the broad markets turn up.
We mentioned that big cap indices were not at recession prices yet, but some small caps were.
We note that many technical analysts are still waiting for that final capitulation before wanting to say there's an end to the bear market. This is conventional technical analysis and I too wish to see it happen. However, we have to note that the market is always evolving in which patterns tend to happen. When many analysts and technical analysts are waiting for that last capitulation, the last capitulation might not happen and we can get a "messy" price pattern instead.
Taking this probability, we have to invest / trade with the possibility that we might not get a final capitulation.
Recall that we mentioned a couple weeks ago two zones where accumulation should occur... between the 3700-3900 (nibble) and 3500ish region (bigger bite), this has turned out to be favorable advice.
The $SPX has been consolidating within that 3700-3900 region.
Based on what we see at the moment, we think an intermediate bottom could be forming between 3500 and 3900.
Using the weekly MACD as a momentum guage, we see that the SPX MACD line (black) is trying to turn up and cut upward. It's a convenient way (not perfect) to note an intermediate term momentum shift to the upside.
We see the process of buyers coming back in the market internals.
Already in some high growth, zero EPS stocks, their weekly MACD has already turned up. For example, SOFI. This is not an encouragement to buy this... that depends on your analysis of their specific story, but it is a signal that risky money is coming back.
Then, from the highly speculative SOFI, we also see money come back in the "riskier" but profitable companies like CROX. It's at 5x FW PE, with net debt to EBITDA of 3 (not great but not horrible); but it's not in the "no-brainer" box for the future. Will people still buy CROX 3 years from now? But that's not the point. The point is that it's weekly MACD turned upward.
NOW, here is what I find very interesting. I actually posted this realization LAST WEEK on my personal FB account but didn't post it here because I was very feverish with COVID sympthoms and totally forgot.
High quality chip or 5G companies have also turned up... like QCOM.
but not yet for Micron, MU.
Popular banks like WFC is about to turn up, but like MU, not quite there.
Finally, I want to show you a signal that is 90% historically accurate in signaling an end to the bear market (or at least for a couple of weeks or months).
WAITING FOR THE BEAR-KILLER BREADTH THRUST
Essentially, the first breadth thrust signal after the S&P500 drops 20%+ usually signals a longer term buy program in the broad markets. This is not here yet, but is soon! Of course, by the time this happens, you might miss out the first part of the recovery, but not by too much.
Conclusion: when this signal hits, longer term investors can have a greater comfort putting their money to work, but we see initial signs of this because some risky stocks have already turned on the weekly momentum, and now QCOM, which is a highly regarded semi stocks.
To coroborate, corporate insiders don't seem eager to sell their shares at these levels, and there has been a rising buying interest amoung sinders that has pushed to levels that historical signals a the starting of the bottoming process. In this case, we should be seeing what we are seeing now, that some risky stocks start to bottom first, before the more popular or safer broad market stocks bottom.
We note that on the short term, the smart/dumb money disparity is not at extreme as I like to it be. This will only occur if we get that "final flush" that many market analysts are hoping for.
More corroboration, the major bottoms in bearish markets occur when the Wall Street Analysts get to the mid-point of their earnings downgrades. Are we almost there?
1) We see signs that a bottoming process has at least started but we can't guarentee what the final low price might be (or if we have already seen it).
2) In terms of probability, we mentioned that between 3700-3900 should be the nibble zone, and a bigger bite closer to to 3500. We have been consolidating in the nibble zone already.
3) A breadth thrust is needed to have a 90% signal that an intermediate / longer term rally has started. Although we don't have that yet, we see signs that preceed it, like riskier stocks turning up. We think it's especially significant that QCOM, which is a popular semi-stock has turned up although others have not yet.
4) For longer-term investors that are dollar-cost averaging, it's favorable to start doing that now. Especially since we are likely in the second half of the bear market if not close to it.
5) For short-term traders, a tip would be to find stocks that are about to, or already have their weekly MACD upward cut already, and then have a paln to buy on short term dips.
6) As we started at the beginning of the year, 1H22 will be "weak and whippy" and 2H22 will be better. We still hold to this!
Extra Credits: If you need candidates to look into to, here are some stocks that are currently profitable, that have reasonable earnings visability in the next year and are at cheap valuations... AND that have corporate insiders buying very recently.
VST (utility): we all need electricity, even in a recession. P/FCFbG < 5x, extra boast of earnings due to recent capturing/hedging of forward NG curve.
CROX (the high margin footwear): we still need footwear. Some think its ugly, some swear by them. fw PE ~ 5x. Management said they will pay down debt this year till net debt / Ebitda < 2.7x and after that, will be "rewarding shareholders".
ET (cheapest midstream oil / ng): majority of revenues are on fixed fees contracts. fw PE ~ 6.7x, although net debt to EBITDA is on the high side of 4.3x, the EV/EBITDA ratio is 7.61x, roughly 1.5 turns below is five-year average of 9.17x, and the free cash flow yield is 17.20% compared to its five-year average of 14.17%.
CHK (direct natural gas producer): Goldman said Chesapeake (CHK) has increased its scale following the acquisition of Vine Energy in the Haynesville shale and Chief Oil & Gas in Appalachia with 15-plus years of attractive inventory, which the bank believes can support free cash flow yields of 26%, 24% and 15% in 2022, 2023 and 2024, respectively, vs. covered gas-focused E&Ps at 22%, 21% and 12%.
Combined with the strong balance sheet, Goldman says the acquisitions may allow Chesapeake (CHK) to deploy the bulk of its FCF towards a capital returns program comprised of fixed and variable dividends and share repurchases.
THO (recreational vehicles):
Of course, there are more insider buyings than these. However, I am only high-lighting companies that 1) are currently profitable, 2) are at cheap valuations on certain measures, 3) have management give good guidance in the foreseeable future, and 4) have said they are going to directly reward shareholders now (VST), or soon (ET, CROX, CHK), through increased dividends or buybacks.
Do remember to diversify to reduce single stock risk.
Also, I wished there was more insidering buying on a broader level to signal the "flush" in the broad markets, but these stocks are likely worth holding on to even in a recession because they are in great position to reward shareholders directly.
I will be taking a break going forward for a couple months, only posting from time to time.
God bless you all. I wish you great peace and prosperity in 2H22. I hope my posts have been beneficial to me. Wish me well on my writing project and health.
Perhaps get my book and spread the word when it comes out?