Last week the NASDAQ violated the March 14th seasonal low while the DOW and S&P 500 kept their February seasonal low intact. A typical stock market seasonal low can occur between February and March. All three indexes closed in a weak position at month end in April, which means more lows are to follow. The May Fed meeting is scheduled next week on May 3-4. Could the market have a relief rally immediately after the Fed May meeting?
The March 14th low was a result of the March Fed meeting rate hike meeting expectations, meaning the Fed didn’t shock the market by giving an extra large hike against their previous communicated rate hike projection. This time the market priced in at least two 50 basis point rate hikes, one in May and another in June. So if the Fed doesn’t hike 75 basis point next week, the market could see a relief rally as the market is getting more and more oversold. Right now 75% of the NYSE listed stocks are below their 200-day moving average. Yes, oversold can become more oversold. Being oversold is not a condition to get in the market, but if an oversold condition interacts with some catalysts, then it is a tradable condition.
The earnings season is not so bad, most of the companies are meeting expectations. But a lot of companies also forecast a slow down in Q2 due to supply chain challenges.
The FAANG group leadership is no more.
Facebook— is no longer facebook. It is pivoting to metaverse, a new growth company is in the making.
Apple— is doing great, except it has been impacted by supply chain issues.
Amazon— is decimated by its retail operation. Amazon’s digital business (cloud & advertising) is still growing very strongly, but the retail operation will continue to be a drag in many fronts.
Netflix— is destroyed by competition. Netflix will become a value trap, not a growth company any more.
Google— is doing great except Youtube not meeting expectations due to the war in Ukraine.
Microsoft— is doing excellent. The enterprise software business is very healthy and not affected by the macro challenges.
So now we can say that the old FAANG can be replaced by MAG, Microsoft, Apple and Google. You can see that the consumer facing business such as Apple and Google could be impacted more than enterprise businesses, as enterprise businesses would invest even more during downturn to improve competitive edge. The consumers may tighten their belt to survive downturns.
Is Metaverse a real future trend?
Facebook changed its name to Meta and has pumped billions of dollars into Metaverse development. Microsoft announced acquisition of Activision Blizzard, the biggest acquisition in Miscrosoft’s history to get involved with Metaverse. Nvidia is also huge on digital twin/simulation/enterprise metaverse. With big companies like Facebook, Miscrosoft and Nvidia strategically positioning in Metaverse, we can reasonably expect that Metaverse will be a big theme when the next bull cycle starts. We like Matterport ticker MTTR. Matterport is the leading spatial data company focused on digitizing and indexing the built world. Our all-in-one 3D data platform enables anyone to turn a space into an accurate and immersive digital twin which can be used to design, build, operate, promote, and understand any space. MTTR went public via SPAC in 2021. It has so far sold off about 85% off its 52-week high during this market correction. It could go down even more to 90% off its 52-week high because of the macro environment. MTTR forecasts about $130 million revenue in 2022 and the balance sheet is strong with lot of cash and no debt. MTTR is not like those SPACs that’s pre-revenue. MTTR is making money and the addressable market is huge. So if you don’t mind hold a little bit, MTTR is a good pick for a Metaverse play.
Even though the crash in the growth stocks space has the hallmark like the DOTCOM crash, but we believe this time that a company like Matterport will not take 10 years to break out. MTTR at 37.60 at the market peak in December 2021 was gross overvaluation, but at 3.76 is also a gross undervaluation. The market swings to extremes both ways. The key here is that the business fundamental of Matterport is sound. The market’s indiscriminate selling of all SPACs presents opportunities.
Inflation is bad for everyone. In a high inflationary environment, bonds and stocks both lose money. If you are not positioned in oil and or commodities in the beginning of 2022, if you are not shorting the market, you are losing money this year. The magic work in the stock market is rotation, a constant rotation to stronger relative performance.
We made the call for oil in the beginning of 2022. It looks like the high oil price will stay with us for some time because the fundamental challenges in oil supply is not fixable quickly. The Dollar is getting strong and is looking to take out a double top (formed in Dec 2016 and Mar 2020). If the Dollar can continue to rally above the double top, the oil price will come down, that would provide an opportunity for the equities to rally.
With the Fed’s determination to fight inflation without regard to the stock market volatility and perhaps recession, we suspect the second leg of the 4-year cycle will be very weak. The current all time high will be the current 4-year cycle high. When we come out this correction, we don’t expect the rally to make a new high, this rally will only be reactionary. A new all time high will have to wait until after this 4-year finishes in 2023.
Below is a S&P 500 cash index daily chart.
Based on Fibonacci price extensions (white lines in the chart), the downside target is 4084 to 3933 due next week. The downside target is only valid when the market turns from it. If the market ignores the downside target and continues to pass through the zone like nothing is there, then you can’t trade it. The whole purpose of forecast is to be prepared to act if the market is acting as the forecast. One can never be married to the forecast and demand the market to behave like the forecast. Be flexible.