Key Test Reveals Market Failures: Understanding the Impact

LevelFields Weekly Report, Feb. 19, 2023

Look Out Below

Markets Fail Test

Last week, the stock market experienced volatility and remained flat, with the S&P 500 unable to surpass a crucial resistance level of approximately 4150. As we had previously anticipated, there has been a shift in the perception that the Fed will decrease interest rates in 2023, with investors realizing that the Fed is focusing on the long-term and intends to keep rates elevated for a longer period.

The revisions to the anticipated interest rates have resulted in investors reassessing the likelihood of a recession and the impact of higher rates on stock prices. This is primarily due to higher than anticipated inflation readings for January and elevated wholesale prices.

In addition, federal officials and influential figures in the market have stated that the fight against inflation is far from over. Therefore, brace yourself for a bumpy ride as this could be the main event.

Choking on Debt

According to the latest Quarterly Report on Household Debt and Credit, the U.S. is facing a huge problem with debt. Total household debt has risen by 2.4 percent to reach a whopping $16.90 trillion, which is a cause for concern. In particular, credit card balances have increased by $61 billion, surpassing the pre-pandemic high of $927 billion.

Unfortunately, this means that more people are struggling to pay their debts, with the share of current debt transitioning into delinquency increasing for almost all debt types. It’s concerning to see that people are having to rely on debt to cover the rising costs of things. This trend is expected to lead to more defaults in the future.

Balloon Boys Exact Revenge

China has taken action in response to the U.S. shooting down its spy balloons. The retaliatory move has involved imposing sanctions on two American companies, Lockheed Martin and Raytheon. These companies have been targeted because they are involved in military sales to Taiwan, with Lockheed responsible for making the planes used to shoot down the balloons, and Raytheon producing the missiles.

The sanctions are intended to limit the companies’ ability to do business and invest in China, but many experts believe that this move is more about political posturing than having a significant impact on their operations.

KNOWLEDGE CORNER: MIND THE EARNINGS

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 — the most frequent being earnings announcements.

Companies sometimes announce a bad earnings quarter at the same time as they announce a positive event, like a big dividend increase. An earnings announcement that fails to meet the expected amount can take the share price down, so it’s important to keep an eye on whether the stock is reporting earnings the same day.

This is why we add the next earnings date in the event alert — so you can be aware of the confounding event. We also have the earnings dates on the application in the calendar section.

For bullish scenarios, the win rate is typically affected by the earnings announcements and sometimes by the guidance the CEO provides for how they think the company is going to perform in the coming quarters. Keeping on eye out for these negative factors will leave you with a much higher group of winning trades.

The flip side here is that many times, the reaction to a slight earnings miss is overdone. The traders, not the investors, are controlling the price action and they dump the stock at the first sight of the words “missed earnings estimates.”

For companies operating with positive cash flow, growing revenue, increasing earnings, and other positive event catalysts, this overreaction can mark a great entry point for a swing trade or longer term hold.

CASE STUDY: BLMN DIVIDEND INCREASE

Bloomin Brands (pictured above) announced a monster dividend increase last week — a 71% increase. Shares popped in response to the restaurant stock’s announcement which came at 7am, February 16th. We sent an event alert soon afterwards.

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

The stock opened at 25.63 per share and rose from there to a day high of 27.94 per share at 1pm ET. The gain from the opening price was 8%. The gain from the alert was +5.4%. And the 1-Day Impact, calculated as the closing price prior to the event to the closing price after the event was +8%.

It’s important to note the company reported earnings that slightly beat estimates as well. However, perhaps more important to note is the fact there are multiple entry and exit points throughout the day here as well as a variety of different trade setups.

The second day of trading also shows an interesting pattern, with the stock losing most of its gains by afterhours on Day 1, then rebounding on Day 2 +4%.

Why does this happen? Sometimes the stock gets oversold following a big move, as investors look to sell of profits. This creates a new entry point.

News outlets also cover stocks at different intervals. Often the same event will get coverage for up to a week after the event. Each mention can continue driving share price movement as those who aren’t LevelFields users read the dated news.

Note the date on this Yahoo Finance article, written and published 3 days after the event as though it just happened. The web is riddled with older news stories of events. If you received our alerts, you knew about the event not just hours before the bulk of the market, but days before many others heard about.

Key takeaway: just because you heard about the event and the company announced it doesn’t mean others have learned about it yet. Most of the market’s investors aren’t able to move quickly enough or read through news fast enough to keep up with AI, or you now.

They are feeding their kids breakfast. They are sitting in their cars in traffic. They are in meetings. They are doing work. They are surfing for concert tickets. They are asking ChatGPT creepy questions. They are doing a lot of things besides monitoring 6300 stocks for news as our system does for you for 63 cents a day. Yes, that is the daily cost of LevelFields’ AI (and these news analyses).

Key Earnings Announcements This Week

February 20

• The market is Closed in observance of Presidents Day

February 21

Home Depot (HD)

• With demand for home improvement staying strong through 2022, investors will be looking for an outlook for 2023 as interest rates are rising and the sentiment for the housing market becomes increasingly dim.

Walmart (WMT)

• As the consumer becomes more distressed, WMT earnings could reveal strong revenue.

Coinbase Global (COIN)

• The crypto market has faced mounting pressure due to heightened regulatory scrutiny.

Other Notable Earnings:

• Diamondback Energy (FANG)
• Public Storage (PSA)

February 22

Nvidia (NVDA)

• Factors to watch: Outlook on spending, performance in their data centers, gaming software, and supply chain issues.

Lucid Group (LCID)

Other Notable Earnings:

• Extra Space Storage (EXR)
• PDC Energy (PDCE)

February 24

Notable Earnings:

• Carter’s (CRI)
• Cinemark (CNK

Economic Reports:

2/23

• US GDP
• Initial Jobless Claims

2/24

• PCE Index
• Core PCE
• New Home Sales
• Consumer Sentiment

The LevelFields Team
support@levelfields.ai