Macrodosing bears

LevelFields Weekly Analysis, Feb. 26, 2023

Macrodosing

The stock rally for 2023 was dampened by an unexpectedly high inflation report, causing the indexes to decline for the week. The core inflation rate surged 0.6% in January compared to the previous month, resulting in a 4.7% increase year over year. This could lead to the Federal Reserve increasing rates for a more extended period than anticipated to curb the heated U.S. economy. As a result, low-profit firms may have a discounted net present value of their future cash flows, leading to a decreased value today. The recent news caused a drop of 8% for the Ark Innovation ETF, which contains such stocks.

Bear Crawl

In other good/bad news, consumer spending rose 1.8% In January, breaking a trend of diminishing consumer spending. The greatest increase in spending was for autos and auto parts, as shown in the table above.

The bears marched their spokespeople across the news to declare the recent rally a “head fake,” and predict a downward slide from here. We discuss how far it can go in our Level 2 Weekly Analysis.

Return of the Bond Eye

As the market experiences a bullish trend, it faces stiff competition for dollar bills from T-bills and bonds, leading many investors to question the wisdom of risking their money in stocks. With bonds offering an annual risk-free return of over 5%, some money managers are advocating for a shift in capital allocation. This move away from stocks towards bonds is causing a decrease in demand, resulting in lower prices until the Fed changes course or concludes its hiking period.

The Politics of War

The current geopolitical situation is rife with tension and political maneuvering that could have long-term consequences. The recent withdrawal of Russia from a nuclear arms treaty with the U.S. has eliminated any cap on the number of nuclear weapons either nation can possess. This move was in retaliation for the U.S. sending weapons to Ukraine, sparking a conflict between the two countries that is reminiscent of events from the 1980s.

Meanwhile, China has been increasing its military presence in the South China Sea, prompting the U.S. to respond by building up military bases in the Philippines and supplying Taiwan with weapons and fighter jets. China’s apparent disregard for world peace is demonstrated by their continued purchase of oil and gas from Russia, despite European pleas to cease funding Russia’s attack on Ukraine.

These events point towards a future where power is divided between two major alliances: China-Russia versus NATO. This also suggests potential volatility in Chinese equities. If you want to understand the current situation better, consider watching Charlie Wilson’s War.

Does the House Always Win?

Investors will gain further insight into the state of the housing market as pending home sales data is released early Monday. We issued some guidance on how to play it and the sector in our Level 2 weekly analysis.

Noteworthy Events

The Race Continues

The recent announcement by Russian President Putin to suspend their participation in the strategic offensive arms treaty and the increased support by US President Biden for Ukraine’s war efforts against Russia indicate a growing need for advanced weapons. This trend can benefit companies like Lockheed Martin, which has recently secured a contract worth $1.1B to integrate hypersonic strike capability on surface ships and provide various weapon control, missile components, and platform integration systems. Moreover, Lockheed Martin Space was awarded $1.18B due to a modification in a previous contract, which further highlights the company’s growth prospects.

Walmart Reports Strong Earnings Amid Consumer Pressure

Walmart, the renowned retail giant known for its discounted products, recently reported better-than-expected earnings and revenue for the three-month period ending February 21. However, the company’s Chief Financial Officer, John David Rainey, expressed caution during the earnings call about the uncertain macro environment and the “considerable pressure on the consumer” for the upcoming fiscal year.

According to a report by LendingClub, 64% of Americans are currently living paycheck to paycheck, which is a significant increase of 61% from one year ago. This drastic rise highlights the need for consumers to re-evaluate their spending habits as they start the new year.

Despite the positive news, WMT’s stock price fell nearly 2% in the past week. Keep reading for more information on Walmart’s earnings report and how the company plans to navigate the current economic landscape.

Chemical Disaster in Ohio

Norfolk Southern Faces Federal Class Action Lawsuit and EPA Clean-Up Charges Over Ohio Derailment

Norfolk Southern is facing a federal class action lawsuit filed in the U.S. District Court for the Northern District of Ohio over the recent East Palestine, Ohio derailment and toxic spill. The lawsuit represents local residents and business owners impacted by the incident, as well as a class of similarly affected individuals. With several class action lawsuits underway, both federal and state authorities are investigating Norfolk Southern’s liability, and insurance companies are expected to demand the company pay substantial costs. The U.S. Environmental Protection Agency has charged the company with the cleanup of the chemicals and derailment site, with potential daily fees of $70,000 for insufficient cleanup, costing up to a billion dollars. Although Norfolk Southern has agreed to comply with regulators and donated $25,000 to the town, it is likely to face further lawsuits from states, locals, and insurers. The company’s stock, NSC, has fallen by 7.5% in the last month, with little indication of improvement.

KNOWLEDGE CORNER: THE TREND IS YOUR FRIEND

We’ve setup the scenarios to find event catalysts. But it’s important to know there are other events happening that could get in the way of the stock price moving in the expected direction. Last week, we talked about earnings announcements. This week, we’ll talk about the market indexes and futures.

In the same way that really crap weather puts us all in a bad mood, a bad day for the stock market in general can affect the impact of events on individual companies. If the market is in a selloff from bad economic news like we got last week, the price action from events will be off. Sentiment on those days is gloomy and bullish trade volume driving bullish events will be lower.

This is why we add win rate for each scenario — so you can be aware of the confounding events.

If you’re trading the events and not using them to invest longer term, look at the futures for the market indexes prior to trading. If they are way down, that will put a damper on bullish scenarios unless the market sentiment reverses during the day. If there is a selloff, it’s best to use bearish scenarios to ride the negative trend.

This is very much a look before your leap warning. It doesn’t take long, but it can be costly to forget to go with the market trend.

Every brokerage platform should show the futures for the S&P 500. If they don’t, it’s on Yahoo Finance’s home page.

CASE STUDY: Fiserv Buyback

Fiserv, Inc., together with its subsidiaries, provides payment and financial services technology worldwide. The company operates through Acceptance, Fintech, and Payments segments. FSRV (pictured above) announced a the authorization of a large (75 million shares) buyback last week and shares popped in response.

LevelFields AI sent an alert at 830am, February 23th. The stock rose 3% on the event, with most of the move occurring late in the day after 1pm.

As is usually the case, volume was low premarket and jumped at the open following a short downturn in price.

The stock opened at 114.71 per share and rose from there to a day high of 117 per share at 3:30pm ET. The gain from the alert was +3%.

Fiserv got an analyst upgrade on the news, with a price target of 154/share.

Key Earnings Announcements This Week

February 27

• LendingTree (TREE)
• Other Notable Earnings:
• Li Auto (LI)
• Groupon (GRPN)
• Zoom (ZM)
• Workday (WDAY)

February 28

• Target (TGT)
• Other Notable Earnings:
• 3D Systems (DDD)
• Advance Auto Parts (AAP)
• Celsius (CELH)
• Blink Charging (BLNK)
• Clean Energy Fuels (CLNE)
• Duolingo (DUOL)
• First Solar (FSLR)
• GoodRx (GDRX)
• Virgin Galactic (SPCE)
• Rivian Automotive (RIVN)
• Bulder’s First (BLDR)

March 1

• Dollar Tree
• Other Notable Earnings:
• Snowflake (SNOW)
• Jack In The Box (JACK)
• Salesforce (CRM)
• Splunk (SPLK)
• Smith & Wesson Brands (SWBI)

March 2

• Broadcom (AVGO)
• Other Notable Earnings:
• Anheuser-Busch InBev (BUD)
• C3.AI (AI)
• Dell (DELL)

See More in the Earnings Calendar

Economic Reports:

2/28

• Consumer Confidence
• Housing Price Index

3/1

• Auto Sales

3/2

• Jobless Claims
• Productivity Rate (Q4)

3/3

• EU PPI
• Fed Bostic Speech

The LevelFields Team
support@levelfields.ai