2023-04-10 11:22:23 ET
Summary
- The S&P 500's recent rally has been mostly propped up by a rebound in big tech.
- However, now that many tech stocks have topped out their potential, other areas in the market are showing cracks.
- While I'll add to my core tech positions on dips, many financials, industrials, and other crucial stocks likely have significant downside in the coming months.
- My base case is a revisit of the 3,500-3,800 zone, but the market could drop lower in a worst-case outcome.
The SPX ( SP500 ) remains remarkably resilient here, and upcoming earnings announcements will likely play a crucial role in determining the stock market's direction, especially in the near term. Major corporations, including high-profile banks, could report market-moving earnings in the coming weeks. Unfortunately, regional and more minor bank exposure to "riskier" investment vehicles may cause the financial sector to continue weighing on overall market sentiment.
If smaller banks begin showing increasing losses, it could imply that the contagion effect will continue, and other banks could start seeing more losses in their "bond portfolios" as well. Also, it's more than bond portfolios people should look at. There has been an enormous amount of accessible capital for decades, and the derivatives market has grown to massive proportions.
Bank Earnings - Could Be A Disaster
Note: Tesla ( TSLA ) will report on the 19th of April, and other essential companies will report in the coming weeks. Tech should look much better than financials.
I don't mean that JPMorgan ( JPM ), Goldman Sachs ( GS ), and other major Wall Street banks should miss their marks by too much. However, unfortunately, some smaller banks could get crushed in the initial wave of defaults and poor risk management practices. Many specialists ( including the Fed ) claim we could see a significant default and credit crunch cycle. In fact, this is the most important "such" event since the great recession.
This dynamic may cause the upcoming selloff to accelerate, bringing the SPX lower from current levels. My near-term base case target for the SPX is 3,800. However, the major average could cascade toward a re-test at 3,500 or lower in a worst-case scenario outcome. We need to watch for early signs of earnings deterioration or signs of significant losses in the banking sector in the coming quarters.
The SPX 3-Year Chart
We saw a remarkable climb from the coronavirus-induced lows, as the SPX gained more than 70% in fewer than two years during this short time frame. The SPX hit an intermediate or a possible long-term bottom approximately six months ago. Now, the $64,000 question is where the market is heading next. Let's consider that the SPX has rallied by about 19% from its "bear market" lows and is now around a crucial inflection point from a technical, fundamental, and psychological perspective.
The leaders, of course, were our favorite tech stocks:
The "Nasdaq 100" ETF ( QQQ )
QQQ had a run-up of approximately 125% in about a 1.5-year time frame, but as the epic bubble burst, many stocks came down significantly. QQQ's bear market lasted about 11 months and caused the major average to drop by a staggering 40% in this time frame. Furthermore, many prominent, high-quality tech stocks got crushed, becoming highly oversold, leading to substantial buying opportunities.
My Favorite Tech Stocks Remain
- Up by 30% from the October low.
- Yet still 28% below its ATH.
- Forward P/E my est: $7 in 2024
- Forward P/E ratio: 15.42
Google looks excellent from every perspective and is my portfolio's second-largest stock holding. The stock's downtrend concluded during the October bottom, and GOOG has made constructive higher highs and higher lows since. This technical dynamic implies that a new bull market has been reestablished. There will be corrections, and we could see plenty of pullbacks, but the lows could be in for stocks like GOOG, Amazon ( AMZN ), and other tech titans.
Tesla : Near-term Turbulence - Higher Long-term
Tesla's stock has been a wild roller coaster ride in recent years. Ultimately, the stock became remarkably overbought during the tech-top in 2021. Then, the epic drop came, and Tesla collapsed by more than 75%. However, I'm skeptical that We'll see the $100 bottom again , and I will consider adding to my position if the stock rolls back toward the $150 zone. While there will likely be more volatility in Tesla shares in the near term, its stock will move much higher in the long term.
Nvidia ( NVDA ) has skyrocketed by more than 165% since I called the bottom in the $110-100 range. Now, Nvidia is extremely overbought again. However, looking back, this chart illustrates how remarkably low Nvidia's share price collapsed during the recent great tech and chip stock decline. Nvidia's share price tumbled by around 70% and displayed signs of capitulation and panic selling during specific times. I took profits in Nvidia and will consider adding back on a pullback to the $200-220 range.
I continuously write about Palantir ( PLTR ), my All-Weather Portfolio's most extensive stock holding. The market seems behind the curve on Palantir. The company can move substantially higher in the next leg of its development cycle, coinciding with a robust bull market in its specialty field.
PLTR: 2-Year Chart
Palantir's stock got brutalized during the recent downturn, and that's precisely when you want to buy a great company like Palantir. Of course, it's much better to buy after the carnage than before it begins. Palantir's stock remains about 80% below its ATH and will probably head toward its highs in the coming years. Therefore, Palantir is my most significant portfolio holding as I own the stock for the long term. Palantir gets my future top stock award, strong buy conviction rating, and a price target range of $35-50 by 2025.
Here's Why Banks Could Continue Suffering
We should watch the upcoming banking results very closely because if smaller banks begin showing increasing losses, it could imply that the contagion effect could continue. Other banks could start seeing more losses in their bond portfolios as well. Also, it's more than bond portfolios people should look at. There has been an enormous amount of accessible capital for decades, and the derivatives market has grown to vast sums. The shadowy derivative field is estimated to be worth a mind-blowing quadrillion dollars or more.
Furthermore, we should keep a close eye on rising default rates at significant banks also, including JPMorgan, Bank of America ( BAC ), Citigroup ( C ), and others. Of course, companies like Capital One ( COF ) and similar, more oriented "credit card" organizations have increased risk exposure, and future defaults could impact their bottom lines far more than is currently anticipated by many market participants, in my view.
Therefore, we could see a much greater credit squeeze due to increased defaults, leading to a substantial slowdown in institutional and individual lending. Furthermore, this dynamic could be exacerbated by a seizure in bank-to-bank lending, leading to potential market panic and widespread capitulation in areas of the stock markets. This potentially tricky financial atmosphere challenges the future of stock markets in the near term. Nevertheless, I have a bank shopping list for when the uncertainty begins fading.
The Top Three Banks on My Watch List
1. Goldman Sachs - The most brilliant guys in the room. I like Goldman Sachs because there's a high probability that the bank will continue to make significant profits during an economic downturn. Moreover, Goldman is the bank likeliest to benefit from a default cycle due to their experience with credit default swaps and other insurance debt vehicles. Thus, we may see continued volatility in Goldman's stock despite the company accumulating profits, creating an ideal buying opportunity in the coming months.
2. JPMorgan - While JPMorgan's stock may remain volatile or move marginally lower in the near term, the company's risk management is typically top-notch, and it's unlikely that JPMorgan will sustain any significant losses due to the recent turmoil. Therefore, JPMorgan should present a buying opportunity at lower levels as the banking sector adjusts to the new reality in the coming months.
3. KeyCorp ( KEY ) - Key is just a regional bank, but as a long-time customer, I stand by my local bank. I know Key has solid management and excellent customer service, and I see no evidence that suggests the company has toxic assets on its books. Therefore, I see no reason not to own Key, especially after its stock dropped by 50% just from the beginning of the year. The company has an excellent balance sheet and no pays a dividend approaching 7% .
Warning: The SPX Could Roll Over Here
Despite some bullish posturing in my All-Weather Portfolio , I'm very cautious here. The SPX could roll over any time, dropping decisively below critical support at 4,100-4,000. If SPX cascades below 4K, it will be very bearish, and the major average will likely retest support at 3,800 and possibly lower at 3,500. Furthermore, SPX could drop to new bear market lows in the worst-case scenario. On the upside, we need the SPX to move above the 4,100-4,200 resistance zone. However, there may need to be more short-term catalysts to power the market significantly higher in the near term.
For further details see:
Buy Big Tech: Sell The Banking Crisis