First point of the day is that futures are down and most of the credit is still being given to rising bond yields and a job report that came up short but led to one key question. Did it simply come up short or have many simply left the work force forever?
Either way Wall Street is convinced this will not stop the Fed from raising interest rates. In fact they now project 4 rate hikes by the end of 2022. The Nasdaq ($QQQ) futures of course are showing the greatest signs of stress as the 10-year yield ticked a bit higher this morning.
Word On The Street
A quote from this morning’s journals reads as follows. “U.S. stocks set to open lower, with technology underperforming again. Higher interest rates raises the opportunity costs of bets on companies with only long term profit prospects, and the turn in long term rates has cruelly exposed sky-high valuations of many such companies”.
Earnings will begin on Friday and I’m not sure the usual promises are going to work. Of course the Financial Sector ($XLF) is trading green in the pre-market, but on the other end Bitcoin and other cryptocurrencies are in the red this morning. Bitcoin is down nearly 1% at the time of taking these notes , with a death cross approaching in 24-48 hours on the daily charts.
Defensive sectors seem to be holding up as best as they can in the pre-market with Utilities leading the charge, likely because of their higher yield in relation to bonds. Healthcare is the lagging defensive sector despite being the most oversold coming into the week and the looming combination variant of the Omicron and Delta virus.
Can Value Still Be Found In Stocks?
In search of value during one of my personal client sessions on Sunday evening, I found that only 5.2% of the market did not fall under extreme valuations. I was not surprised only 447 companies remained in my typical weekly screen. Although many believe this minor pullback in the market has done damage enough. I know the true damage of high valuations is far greater and almost un-repairable without some major correction.
Still, a true value investor never stresses. We asses downside risk and analyze all opportunities. In our latest sessions at the Stock Market Academy we’ve been learning about the present value of growth opportunities. Something that was highlighted across financial media this morning as we weigh in on rising interest rates. This is an important tool to determine if a company’s market value is full of promise or work already completed. Be sure to sign up for the clubhouse app and become a member as we will continue this lesson plan in the weeks to come.
Also keep in mind that earnings season is about to jump off so be careful with your purchases. You don’t want to be caught up in the mix unknowingly. Some sectors like Technology ($XLK), Industrials ($XLI), Consumer Staples ($XLP), Consumer Discretionary ($XLY), Communications ($XLC) and Basic Materials ($XLB) have been under pressure but have led to some opportunities being presented.
There are less options for the Financial ($XLF) and Energy ($XLE) sectors than usual given they are the leaders coming into the year. Valuations in these two sectors may not be too far stretched but technicals surely are. Look for pull backs in these sectors before diving straight in. We expect there to be continued outperformance but nothing goes up in a straight line.