What a heatmap shows us about returns… our technical experts see the market stabilizing… tech stocks rack up huge returns… Luke Lango’s Market Predictions
This morning brought a surprise jump in the number of jobs added to the economy in July.
While the economists interviewed by The Wall Street Journal had forecast 258,000 new jobs, the number more than doubled to 528,000.
As I write this midday, stocks are selling on the news. Indeed, a stronger workforce suggests that the Fed will have to continue its hawkish policy longer than expected.
Looking at the big picture, despite today’s massive sell off, the market has been strong over the past month. And if our technical experts John Jagerson and Wade Hansen are correct, we are likely to see more of this uptrend in the coming weeks.
Let’s jump right into their Wednesday update of Strategic trader:
From a technical analysis perspective, it’s safe to say that the stock market has bottomed out for now.
Unless the fundamentals of the global economy change drastically, the stock market should remain stable throughout the second half of 2022.
Given this relative market stability, John and Wade suggest there is a new question to ask…
Which stocks will outperform?
In answering this, they point to an old Wall Street guy who says, “Stocks are like rubber bands: the more you stretch them, the harder they snap.”
In other words, the stocks that took the worst hits in the first half have a good chance of being the best performers in the second half.
***How to see this visually using a heat map
In their update, John and Wade refer to a fantastic visual aid that helps investors digest this worst-to-first concept.
Here with the details:
Below, [we look at] a heat map of S&P 500 stocks.
The size of each block represents the market capitalization of the stock and the color of each block represents the performance of the stock over the period shown.
The blocks become brighter green the higher the stock price rises, and they become brighter red the lower the stock price.
We’ll start with the S&P heatmap over the past six months.
There’s a lot to learn here, so take your time browsing through the various feedback.
When you’re done, the general conclusion is that the stocks that performed terribly in the first half of the year came from the technology, communication services, consumer cyclical and financials sectors. It’s a sea of red.
The bullish bright spots were healthcare, energy and utilities. Lots of green.
But if we reduce our schedule, will that change?
Back to John and Wade:
Going back to our comparison, stocks in the technology, communication services, consumer cyclical and financials sectors were the most stretched because they fell the most.
So, are stocks rebounding now that the stock market has bottomed out and is starting to rally?
Indeed, they are.
To illustrate, John and Wade provide a second heatmap, this one only covering the last month of S&P returns.
What jumps out at you?
Almost all of the stocks that were bright red in the six-month heatmap are now bright green.
Technology and cyclical consumption performed particularly well.
back to Strategic trader update:
We expect this trend to continue.
As we move through the rest of the earnings season, we’re looking for the stocks that fell the most in the first half of 2022 to start rebounding the hardest.
*** Luke Lango subscribers are already all too aware of what a massive rubber-rand gathering looks like
The heatmaps we just looked at showed that the tech sector took the brunt of the market headwinds in the first half of the year, while outperforming in recent weeks.
But this heatmap doesn’t capture the mind-boggling size of some of these recent technological gains.
To help illustrate, let’s turn to our hypergrowth expert Luke Lango.
Below I’ll rattle off Luke’s recent feedback Early-stage investor recommendations. These are all technology-based hypergrowth stocks.
I won’t choose – we’ll be looking at the performance of each stock in Luke’s “1000% Divergence” portfolio since July 1 (Luke holds more sub-portfolios within this service, but it would take us too long to profile each return).
Here we are:
That’s the whole sub-portfolio.
Not only have there been no negative returns since July 1, but there have only been two stocks that have not risen by double digits.
This is what an elastic snap-back rally looks like.
To drive the point home, let’s look at another one of Luke’s newsletters, Innovation Investor.
Below, we outline the returns of what Luke calls the “top 10 picks” from this investment service. These are the best of his “strong buys”. Again, returns are from July 1:
Ten shares. Zero negative feedback. A single double-digit return. Eight of the 10 stocks up more than 25%. Five are up more than 40%.
*** Please understand I am not trying to promote Luke’s services
Yes, I think Luke is a world-class analyst and all types of investors could benefit from his research and market knowledge.
But Luke himself would be the first to say that many of his favorite stocks were hit hard earlier this year. It’s the cyclical nature of being a tech investor.
Given that, what I’m trying to show by highlighting Luke’s recent comebacks is that the cycle seems to be changing – and quickly.
Here’s Luke’s take on what’s going on, from his recent Early-stage investor Daily notes:
In our view, the bear market is over. A new bull market is forming.
Historically speaking, the most money is made in the stock market during times like these – when bear markets turn into bull markets.
Our portfolios [of cutting-edge tech companies] understand the exact type of high-growth stocks that tend to make investors rich during these bear-to-bull market transitions. To that end, we believe the next 12 months will be fabulous for our stocks.
That said, we would like to continue to be cautious about the near-term price action. Our stocks have gone very far, very fast – almost too far, too fast. We expect a significant short-term pullback in the range of 5-10%.
Such a pullback will be very healthy – and followed by a bigger rally.
***Keep in mind that Luke is not a perma-bull with an economic view of Pollyanna – he thinks we won’t be able to pull off a soft landing
Luke calls for a recession, even though he expects a relatively mild recession. This is the price to pay to kill inflation according to him.
But even with a recession, Luke sees gains coming for the market.
back to sound Daily notes:
…Even if we don’t get a soft landing and instead see a shallow recession (our base case), we still think the broader market will rally strongly over the next 12 months. The gains will simply be less pronounced than in a soft landing scenario.
The only way the market continues to crash in 2023 is if we see a deep recession or if inflation stays high in a stagflationary scenario.
We view both outcomes as highly unlikely and therefore believe the odds today are overwhelmingly in favor of a large market rally over the next 12 months.
If you don’t know what to do with your money today, remember that the choice doesn’t have to be a binary “in” or “out” of the market.
As we pointed out in yesterday’s article Digestwading through the market with smaller position sizes is a fantastic way to avoid regret – whether it’s regret to buy or not to buy (based on the size of recent tech gains, regret to “do not buy” is firmly in the lead).
We’ll give Luke the last word to send us off this weekend on a high note:
Stay the course. The future is very promising.
The era of big wins has just begun.
Have a good evening,