The Epic Rebound Could Continue

2022 was a rollercoaster year. The S&P 500/SPX (SP500) lost about 28% of its value when it reached the mid-October low at 3,500. However, the market has rebounded by about 15% since then, and there’s more juice to fuel the rally. The recent CPI reading confirms that inflation is continuing to moderate, and the Fed could implement a more dovish stance at future FOMC meetings. The deal is essentially sealed for a 25bps point increase at the upcoming Fed meeting, and all eyes are turning to earnings now. Big banks could set a constructive tone, and many bellwether companies should surpass badly beaten down and depressed estimates. Positive earnings should be the next catalyst to push the S&P 500 into the 4,200 – 4,300 range. Once in our target range, we can step back, reassess markets, and deploy an appropriate strategy for the rest of Q1 and the months ahead.

Favorite Rebound Stocks

Many stocks have rebounded significantly off their lows, but several of my favorite portfolio names include:

• Nvidia (NVDA) – 55% gain.
• AMD (AMD) – 30% gain.
• Meta Platforms (META) – 53% gain.
• Amazon (AMZN) – 20% rise.
• Tesla (TSLA) – 23% rise.
• Warner Bros. Discovery (WBD) – 65% increase.
• Alibaba (BABA) – 92% surge.
• Baidu (BIDU) – 83% surge.
• Pinduoduo (PDD) – 145% skyrocket.

The Takeaway

While SPX has gained approximately 15% from its recent low, many companies have appreciated by significantly higher amounts in similar time frames. Moreover, we should continue seeing specific stock outperformance in several areas. There are significant opportunities in the market, and there should be more appealing buying possibilities as we advance in the coming months.

SPX 1-Year Chart

Technically, the SPX appears more constructive than it did several months ago. We may have reached the intermediate-term bottom at 3,500 in October, and this rally should have more upside ahead. 3,800 support held up recently, marking a significantly higher low. We also have a bullish reverse head and shoulders pattern developing now.

SPX is not overbought here, and technical indicators like the RSI and full stochastic appear very constructive. Moreover, the 50-day MA is about to cross above the 200-day MA, another bullish technical indicator illustrating that price action has improved and should continue improving as the rally progresses.

Next, we need a move above 4,000 – 4,100. After this range, the SPX can run into the 4,200 – 4,300 range. A move to 4,200 would amount to a 20% gain from the 3,500 low. However, the upside beyond that may be limited in the near term. Therefore, my target is to reduce risk positions, increase dry powder, and hedge around the next target point at approximately 4,200 – 4,300 SPX.

Crucial CPI Inflation Data – Better Than Expected

YoY the CPI increased by 6.5% (as expected). However, MoM CPI decreased by 0.1% instead of coming in flat. Moreover, we see a significant improvement over the prior month’s positive 0.1% reading. The most recent CPI data provides evidence that inflation continues to mitigate, enabling the Fed to be more flexible.

The CPI Report Sealed The Deal

The likelihood of a 25 bps rate increase surged to more than 93% post the recent CPI announcement, essentially sealing the deal on the upcoming FOMC decision. We should see a more dovish Fed as we advance here. The Fed’s plan is working, and inflation is coming down. However, the agency needs to walk a fine line to engineer a soft landing and not cause a significant recession as economic conditions tighten and inflation falls.

All Eyes are on Earnings Now

Now that the market has more clarity on the future interest rate trajectory, all eyes are turning to earnings, and we need strong results that can propel the current rebound even higher from here.

We have JPMorgan (JPM), my favorite big bank reporting this Friday, the 13th (today). Also, Bank of America (BAC), Wells Fargo (WFC), Citigroup (C), and other critical financial companies will report earnings today. Next week will be the first busy earnings period with more financials and other significant market-leading companies kicking off the earnings season. The coming weeks will bring the bulk of crucial earnings, including tech titans like Microsoft (MSFT), Alphabet (GOOG), (GOOGL), Tesla (TSLA), and others.

I’m looking for big banks to set a relatively optimistic tone early in the season. Top and bottom line estimates have decreased significantly over the last 12 months. Therefore, many companies could surpass depressed beaten-down EPS and revenue estimates. This phenomenon should be the primary catalyst to elevate stock prices in the coming weeks. A constructive earnings season coupled with a modest 25 bps benchmark increase could provide the necessary power to fuel this rally to around 4,200-4,300 SPX.

Portfolio Strategy

The AWP is off to a strong start this year. The AWP is up by 11%, more than tripling the S&P 500’s return thus far this year. Tech has been a top segment with about a 10% return YTD. China is even hotter, up by 17% already this year. The energy segment is up by 10%, and the materials, metals, and GSM space is up by approximately 8% YTD. The best-performing segment in 2023 has been the cryptocurrency basket, increasing by around 30% in these first two weeks of the year.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.