Year-End Preview for 2022
The final quarter of 2022 is significant in a few ways. Statistically, October is a notorious month for many of the market bottoms for various reasons. This captures our full attention as we draw near the end of the year.
From our last newsletter, we concluded that market leadership should be predicated on the financial sector’s performance (using XLF as a proxy) due to its sensitivity to interest rates. As of October 21st, 2022, the sector rotation has not changed much since our last update in April. Energy leads the pack while Tech and all other sectors lagged. The message is that the inflationary effect is exerting pressure on all sectors of our economy.
The Market as A Discounting Mechanism
Many recognize that the stock market is a good discounting mechanism of the underlying economy. We also agreed that the market looks ahead and discounts what would happen about 9-12 months ahead.
What does it mean?
Does it mean that the economy will worsen in the next 3 quarters?
That is probably what will happen. However, let’s look at it in a different way. We are looking at the stock market nine months ago to see how it discounted the economic situation of today!
According to the economic data, from the last two-quarter of GDP data, we are technically in a recession although is mild in magnitude.
Well, ninth months ago, the market started to reflect the economic weakness we see today. In January 2022, the market broke a three-month top and started its downward descent. We can see from figure 2, the last top for QQQ was on January 3, 2022. Subsequently, the equity rating system, Meter, has turned negative on January 7th for the Daily (Short-term), and on April 14th for the Weekly (Long-Term) charts confirming the deterioration of these critical market internal changes. Looking backward, we can recognize from Figure 3, that some of the cycle highs and cycle lows, as well as the rhythm of timing in the Nasdaq index prices as reflected on QQQ.
A few years ago, when the stock rating system, Meter, was developed, we recognized that it is a useful system however lags in timing as required for a trading system. The Intelligent Decision for Equity Analytics called IDEA has a few enhancements in this regard. Here is the market assessment by IDEA as of October 21, 2022.
Example of IDEA at work for QQQ
All three systems of IDEA suggest that the downtrend is still intact.
As we are busy and eager to look for the market to find the bottom, there might be some time in between. It is productive to think ahead about what stocks are best for long-term holding should the market return to its normal bull market. To be simple and efficient, we borrow the wisdom of Warren Buffett. By following his picks, we might benefit from his life-long success in value stock analysis. Here are the top 10 holdings of Berkshire Hathaway, Inc. at the end of the second quarter of 2022. (BRK-B). According to Motley Fool, these top 10 holdings consist of 86% of the total fund.
The other benefits following these top 10 are, they also represent the overall market healthiness. Should the market reverse to the upside, I am confident that the Berkshire Hathaway portfolio also would behave similarly, assuming Mr. Buffett does not suddenly change his investment style or the underlying holdings.
Below is the Meter reading of the top 10 stocks of Berkshire Hathaway (excluding BYDD.F) as of 10/21/2022.
*Meter and BBI are the proprietary indicators and properties of onvest.com.
As observed from our Meter reading, more than half of the stocks including BRK-B are at or below 0 reading, even though they have improved over the last few months. Negative reading is bearish for the portfolio as well as for the overall market. As we wait for the market to improve, we would like to see Meter become positive for all sectors, especially for the Financials. It will take a little more time.
As far as the growth stocks are concerned, we have some early signs of improvement. The latest performance of NFLX (Netflix Inc) and ISRG (Intuitive Surgical, Inc.) shed some positive light to indicate the early beginning of the end, of the value re-adjustment which hit hardest among growth stocks this year. For the mega growth segment, we still need to wait for a little while (We use VUG to represent the US mega growth stock segment as a proxy).
In successful investing, these are some of the most important decisions to make
1. What to buy and sell? 2. When to buy and sell? 3. Growth or Value? 4. Passive or Active?
We adopted an active approach toward investing. We align ourselves in the right direction by learning from the greatest investors, and by following the market cues provided by IDEA (Figure 4).
For the next few months, we are looking for any buy alerts from IDEA (Figure 4) to indicate any potential reversal of the downtrend. Most importantly, the first Dark Green buy signals from the Mid-Term Chart (The last time the Dark Green buy signal appeared was on December 27, 2021).
Meanwhile, stay positive and stay healthy!
Daniel Wu | Chartered Market Technician | Email: firstname.lastname@example.org
Disclaimer: All investment strategies have the potential for profit or loss. Past performance is no guarantee of future profit or success. Stocks mentioned here is for informational and educational purpose, they are not a recommendation to buy or sell.