Savvy investors know to just hold on during the bumpy ride
Subscribers to Chart of the Week received this commentary on Sunday, March 14.
Two weeks ago, Wall Street had just wrapped up its best quarterly performance in years and stretched its monthly win streak to five. The market outlook appeared rosy at best and manageable at worst, with Schaeffer’s Senior V.P. of Research Todd Salamone identifying S&P 500 Index (SPX) support lining up, all while investor sentiment remained negative enough to fuel additional unwinds. The vaunted goldilocks economy for traders looked within grasp.
Alas, we’re not there yet. The first domino to fall was a tepid personal consumption expenditures (PCE) price index for February that dropped on March 28, which prompted hawkish comments from Fed Chair Jerome Powell the next week, then followed by a host of other Fed presidents weighing in, adding fuel to the ‘higher for longer’ fire. More discouraging inflation data ensued that supported such a narrative, bond yields spiked, and in a span of 10 trading days, Wall Street is now mired in two-straight weeks of red tape, with the onset of a volatile earnings season looming.
Looking within the lens of how this volatility disrupted the performance of our Top 2024 stock picks, per the table below, consider how the final column underscores how jarring the last 10 trading days have been. For a lot of these underperformers, a chunk of their year-to-date deficits are the direct result of this false start to Q2.
Samsara (IOT), in the red year-to-date as of now, finished the first quarter up 13.2%. Intuit has ceded its year-to-date breakeven level in the last two trading weeks. The steep losses seen from Walgreens Boots Alliance (WBA), Gilead Sciences (GILD) and UiPath (PATH) look a lot more palatable on March 27 when factoring out their second quarter drawdowns.
For better or worse, the two-worst performers, Unity Software (U) and WBA have drifted deeper into the red amid a channel of lower lows, instead of suffering any steep post-earnings bear gaps. Looking at the winners, cybersecurity and semiconductors continue to be major conduits of investor gains. It’s also notable that the second-quarter weakness from Cintas (CTAS), Cloudflare (NET) are contained, it seems, amid recent bouts of consolidation.
That fourth column is not meant to serve as an excuse or asterisk. But it is a reminder that sudden, sharp corrections are a tale as old as time on Wall Street, and savvy investors know to just hold on during the bumpy ride. Many of the same technical or contrarian drivers we liked Chewy (CHWY), Dropbox (DBX), and PATH to start 2024 still stand.
CHWY and DBX remain heavy shorted, and while that’s no surprise given every notable timeframe is in the red, it only takes one post-earnings pop to catch those bearish bettors off guard. PATH meanwhile, has a large buildup of put open interest (OI) at the 25 strike, and with the stock consolidating around $25 the last few weeks, could hold this level. There are paths to gains for most, if not all of the laggards.
The table below looks at the monthly performance of our picks this year. It underscores how U and WBA have never really gotten it going, while Chewy (CHWY) could be poised to dig out of its steep January 24.6% deficit with a few more solid months or post-earnings pops.
As far as the outperformers, there are some takeaways to glean. DoorDash (DASH) has cleared a 23% Fibonacci retracement of its 2023 peak, while 17 of the 27 brokerages covering NET still maintain “hold” or worse ratings. Taiwan Semiconductor (TSM), meanwhile, looks like it won’t relinquish its stranglehold on the artificial intelligence (AI) sector anytime soon.
Those three names in particular seem most equipped of our top picks to handle the volatility that comes with Fed fatigue. And now that CME’s Fed Watch Tool has shifted to a 26.1% chance of an interest rate cut in June, the surprise factor is baked in, and markets won’t be as caught off guard by hot inflation data. But if data cools during the summer, all eyes will shift to September, and many of our favorites are in pole position to add to their gains.