Big-Cap S&P Stocks Will Soon Provide Tech-Like Returns, I Explain

The notion is rather simple really

This has been a bloody and painful bottoming process, as evidenced by Friday’s market performance. Even so, anthropomorphizing Mr. Market it sure feels like he is making a valiant effort to hold the line and not let the SPX break down to 3200. To me, that level still seems shockingly low, and I, of course, maintain that we are already bottoming. I must admit that technical analysts who I admire greatly are pointing to that extreme level as the ultimate support. I am reminded of a toon sequence where the protagonist draws a line in the sand and the monster on the other side unhesitatingly crosses it. So our hero draws another line, and on and on it goes. I recognize that I am describing myself as the one drawing the line and in my case, earlier this year I drew a line higher than we are at right now and declared that it can’t be crossed and yet it has. Still, one can look at that data and say that a bottom is forming. Did you know that this was an up week for both the NDX and the SPX? While the NDX was up less than a point for the week, bearing in mind it withstood a phalanx of negativity and withstood the onslaught. The SPX gain is high enough to be notable, and as I illustrate below, I chart out what I see as part of the bottoming process. Now let’s turn to the main topic…

Ok, so what do I really mean by slow growth quality big cap stocks will act like Tech stocks? Let me show you by way of example:

JPMorgan (JPM) the 52WH is 173, the 52WL is 104 and JPM is currently trading a point above. Very simply the stock is selling at a 40% discount to the ATH. I am sure the majority would agree that as the Fed stops tightening, or at least moderates the tightening to .25%. We are not too far off from the time everyone agrees that the Fed is turning the tide. When that happens JPM should make a hyperbolic return toward its old highs. In fact, once the beatings stop and the curve begins to flatten the NIM will grow and so will JPM’s overall profitability, along with a normally functioning stock market with IPOs, and acquisition fees to boot. Will it regain all 40% all at once? No, but the data backs me up, the majority of gains in recovery happen in the first few days. I wouldn’t be surprised if JPM bounces 20% in a week or two. Meanwhile, it’s yielding 3.7% while you wait. This could happen sooner than you think so the wait doesn’t engender that much risk. Let’s look at another.

Procter & Gamble (PG) hit a 52WL this week at 124, and the ATH was 165 so the discount is about 25% and it’s yielding almost 3%. Not as much upside, but it broke under its previous low Friday so it may have a bit more to fall. Still, if you have a long-term investment account and I hope you do, PG throws off nearly 3% right now. Also being a dividend aristocrat coming to you at such a discount will certainly recover a big percentage of this discount in short order. In fact, when there is a bit more visibility, I bet a significant portion of all these types of companies the buying will start in earnest. What I am advocating is to start now when it is scary, so you can take part in the juiciest returns. Remember what Virgil said, “Fortune favors the bold”.

Costco (COST) I am using as an example of being thoughtful on this one; the June low was 447 the current price is 468, and the high was 612 so currently, the possible upside is 24%, but only a .77% dividend. You might decide COST is a fantastic retailer (which it is) and is worth investing in despite of the low dividend. Since our way to investing in a stock in very small increments further downside in COST might be considered a welcome development. However, for our purposes, I would like to see a bit bigger dividend to protect the downside. In this crazy market COST could get driven down, perhaps if the COST dividend gets above 1% could get me over the line.

So let me summarize: 1) go through the S&P 500 look for established big-cap stocks that have fallen 25% or more, and make sure that the stock doesn’t have intrinsic issues. I am focusing on non-tech names because I spend more time with the “tech titans”. I think this can be a super conservative way to find non-tech names that are easier to understand than tech names but give “tech-like” returns. Also, we are constantly hearing that tech stocks are vulnerable to inflation and growing interest rates. While I strongly refute that – will Alphabet (GOOGL) be affected more than a non-tech type company? I don’t think so. That said, if you go through the SPX and find a well-known big-cap with a decent dividend and down 40% like JPM you could get “Tech” type alpha. This is because this bear market has overly punished great and established names. As part of my central premise of the last 2 weeks, we are bottoming. We see the end of Fed tightening becoming more of a reality is very likely. Finally, remember our friend Virgil’s “Fortune favors the bold” maxim, in this case, let’s take the modern meaning of the word fortune. Warren Buffett says, “Wealth is made during a recession”. In this case, wealth will be made during the fear of a recession. Let me try to explain why I think we are currently bottoming, and how we at Dual Mind Research are taking advantage.

Monday and Tuesday were another sharp bear market rally up almost 6% for the NDX and the SPX

Let’s consider that for a moment. Over the decades there were many times that the market gained 6% for the entire year. Volatility is not fun if you are not anticipating it. Most of you have been told that you can’t “time” the market. It is one of the articles of faith and if you challenge that you’ll end up with arrows in your back. Believe me, I know. We don’t consult goat entrails or tea stains, but in times like these, the market is hypersensitive to inflation-related data. We have seen trading activity related to the upcoming publishing of data and then react to the news afterward. The trick is to anticipate what the market reaction will be. Even better would be to have a trade set-up that will benefit whether the news is good or bad.

Wednesday gave us some cause for optimism

Wednesday’s price action was significant. The stock market had every reason to sell off hard today on the news that OPEC is cutting supply by 2 Million Barrels (really 500K). At first, the market did sell off hard but close to the end of the day it bounced into the green only to give up the gains in the last 15 -30 minutes. Even though it retreated it closed nearly flat. Price is truth! What I am saying is that underneath the constant roiling of the market wants to go up. Thursday and Friday obfuscated Wednesday’s price action and gave us all belly aches. In my mind, much of the selling, especially the steep drop toward the end of the week, was panic over what will be coming next week. There are 3 items coming this week, 1) the minutes of the last FOMC meeting that resulted in that .75% rise. Sometimes there are hints of future changes, and in our case more likely to see continued hawkish statements. 2) PPi and 3) the CPI.

So how can I say the market is bottoming when the market was down so hard? Would it surprise you that this week ended up positive? We finished with the S&P 500 was up 1.5%; the Dow Jones Industrial Average was up 2.0%; the Nasdaq Composite was up 0.7%. Yes, we did go under June’s low, and by a tiny bit. Let’s look at the S&P 500 ETF (SPY)

The blue line is trying to purport that we are bouncing from a base. Even though it’s against my own case I am showing the black horizontal line which shows we broke June’s low. The case I want to make is that a lot of the selling yesterday was looking toward the very important CPI. In fact, I wouldn’t be surprised if the Futures tomorrow morning (at the time of this writing 4:53 pm the futures aren’t open yet) are positive. Because the Dual Mind Community adheres to the cash management discipline we will be trimming into that pop if it does happen. I have several reasons why I say we are bottoming. First is time, as the year comes to a close, the Fed’s ability to keep raising is limited. The extreme volatility is not something just noted by me, it is starting to be repeated in various corners of the financial community. The last thing Jay Powell wants to be known for is starting a credit liquidity crisis here that goes global. This is especially true because there are clear signs of the economy slowing, and inflation coming out of employment, housing, used autos, food, and energy (for now).

A large part of my reasoning to be optimistic is very strong seasonality

Strong Seasonality Whenever you have a very steep sell-off in September as with the SPX 9.3% down this year, starting in October 91% of the time the return is 16.6%. This is based on data going back to 1928 and in the midterm election year.

Market Participants sold off the market hard on Friday, financial media assumed it was the unemployment number. I’m not sure.

Let’s take a moment to drill down on the numbers; total nonfarm payroll employment increased by 263,000 in September. Monthly job growth has averaged 420,000 thus far in 2022, compared with 562,000 per month in 2021. In September, notable job gains occurred in leisure and hospitality and in health care.

So there has been a distinct fall off in the size of job growth this month. Very interestingly, more people going back to the service fields will lower inflation. Especially in the leisure and hospitality sector, where we have constantly heard that it is impossible to get workers. As far as healthcare, the need is so dire that I am unsure if salaries can fall down, nor should they. I will say that more people in that field will ameliorate further sharp rises.

The Federal Reserve is raising rates to battle epic inflation, and that is weighing on stocks. Yet anyone who followed Wall Street’s traditional advice to buy bonds because they add diversification and reduce risk likely feels nauseated. Bonds are experiencing their worst year—in history. Cash was the only asset class that gained alpha last quarter – up over 1%.

We believe that a weekly pattern is forming

This is a key to how we are approaching the market we have today. Market participants are selling by the bushel, or more likely it is short sellers at this point that is running the table. Once they feel they have pushed the market down as much as they can risk, they start to cover. That’s what makes these bear market rallies such rippers, if you are late on the draw you sell at any price and hopefully come away with a little alpha but at least you are whole. So as much as what we are doing at Dual Mind Research seems risky, it is a lot less risky than letting the shorts toy with our hard-earned dinero. Our assumption is that by the time Thursday rolls around the shorts will have exhausted the downside and will likely cover at that point. If the CPI actually improves the bounce will be even stronger. Our Dual Mind Research community will work on a trading plan based on that premise. At times we actually organize a group trade together. It’s fun and it is encouraging in such situations.

My Trades

Being tactical the last several weeks have shown that health stocks from biotech to health services are outperforming the rest of the market, second only to oil names. I have been accumulating shares in my plodding way of bluebird bio (BLUE), Cano Health (CANO), Haleon (HLN), Exelixis (EXEL), Progyny (PGNY), Biohaven Ltd. (BHVN), Illumina (ILMN), Seattle Genetics (Seagen) (SGEN), Sarepta (SRPT). I have small positions to start, and if we have the inevitable selling going into the CPI announcement I will add to these names. If some of my oil names which you all should know by now get pressured, I will add to them too. As far as my tech titans I will only add if they are significantly below my average price for each position. I will be looking at the S&P 500 for at least one well-known big cap that has a good dividend and is down at least 25-30% from its 52-week high. I look forward to sharing what name I snag using this method.

Remember “Fortune Favors the Bold”