The Week Ahead – July 25, 2022

Stocks Show Modest Weekly Gains

MODEST WEEKLY GAINS… Stock indexes gained some ground this week, but not enough to reverse downtrends. They continue to remain below overhead resistance levels. The daily bars in Chart 1 show the Dow Industrials rising to the highest level in six weeks and clearing their 50-day moving average. The two upper lines show overhead resistance drawn over the June high and below the March low. Friday’s selloff suggests that the weekly rebound lacks solid footing. Chart 2 shows the overhead resistance line for the S&P 500 drawn over its March low and June high. The SPX would have to clear that line to indicate a potentially stronger rebound. Chart 3 shows a similar chart picture for the Invesco QQQ Trust. All three stock indexes ended the week above their 50-day averages. *See my recent article on QQQM HERE.

But Downtrend is Still in Effect

WEEKLY SPX CHART…The weekly bars in Chart 4 put the SPX downtrend in perspective. They show the SPX ending the week above its 50-day moving average for the first time in three months, which is encouraging. In addition, its 14-week RSI line in the top box is bouncing from oversold territory near 30. That line needs to clear its midline at 50 to signal upside momentum. The weekly MACD lines in the middle box remain negative, but have been converging over the last six weeks; this is indicative of improvement as well. The two MACD lines, however, need to turn positive to signal the likelihood of stronger price action.

All of which suggests that the S&P 500 may be probing for a short-term bottom within the context of a major downtrend. A drop in bond yields may be helping stocks.

Pullback in Bond Yields

One of the factors that may be boosting stocks to a six week high has been a drop in bond yields. Chart 5 compares the 10-Year Treasury yield (green bars) to the S&P 500 (black bars) over the past six months; and shows the two trending in opposite directions. Rising bond yields between March and June coincided with falling stock prices. Over the past five weeks, however, a drop in bond yields has coincided with a rebound in stock prices (see arrows). The green bars show the TNX having fallen to potential chart support along its May low (green line). What it does from there may help determine the short-term direction of stocks.

Learning Point:

If inflation is increasing (or rising prices), the return on a bond is reduced in real terms, meaning adjusted for inflation. For example, if a bond pays a 5% yield and inflation is 4%, the bond’s real rate of return is 1%. In other words, the higher the current rate of inflation and the higher the (expected) future rates of inflation, the higher the yields will rise across the yield curve, as investors will demand a higher yield to compensate for inflation risk.

It’s a Huge Earnings Week on the Tech Front

The week we will hear from these big names:

Microsoft (MSFT)
UPS (UPS)
Meta Platforms (META)
Boeing (BA)
Pfizer (PFE)
Apple (AAPL)
Amazon (AMZN)

The economic calendar includes updates on new homes sales, consumer confidence, durable goods, Q2 GDP and the PCE price index.

The two-day FOMC meeting will be the major event of the week.

The Federal Reserve is expected to raise the target range for the federal funds rate by another 75 points to 2.25% to 2.50%.

Reducing inflation is the top priority at present.

The Fed’s preferred financial market recession predictor, the near-term forward spread – the spread between the 10-year and 3-month Treasuries, remains upward sloping. Remember that the Long-term yield spread—notably, the yields on 10-year government bonds versus yields on 2-year bonds—is commonly seen as an indicator of impending recession. In particular, when the yield curve inverts and short-term yields are higher than long-term yields, fears of a recession intensify.

Despite a massive growth deceleration this year, which may indicate that the US economy is heading into a recession, a hard landing can be avoided, in my view – but its a close call.

Earnings

Earnings spotlight: Monday, July 25 – NXP Semiconductors (NXPI), Whirlpool (NYSE:WHR), and F5 (FFIV).

We like NXPI. NXP Semi. continues to power forward on strong auto demand while the sector still lacks for supplies. The most interesting part of NXP Semi. is that the automotive business is the driving force of the chip company. The company obtains about 50% of total revenues from the automotive sector with growth rates in the 10% range. The sector is seeing booming demand due to higher technology content in general and especially with modern electric vehicles. The company remains a prime acquisition target, but a deal with the likes of Samsung is unlikely. The stock is cheap at ~12x EPS targets while the company can repurchase cheap shares further boosting EPS growth.

The key investor takeaway is that NXP Semi. is far too cheap here with the company riding the automotive semi. demand higher. The company continues to repurchase tons of shares with the free cash flow being generated from a strong business with growth drivers to power through a recession.

Investors should use the weakness in the semi. sector stocks to buy NXP Semi.

Earnings spotlight: Tuesday, July 26 – General Motors (GM), General Electric (GE), Microsoft (MSFT), Alphabet (GOOG), Visa (V), Coca-Cola (KO), McDonald’s (MCD), UPS (UPS), Unilever (UL), Texas Instruments (TXN), and Chipotle (CMG).

I continue to hold Unilever. Unilever’s brands are positioned well to navigate whatever is to come economically, it has already grown 7.3% in Q1 in response to inflation. The impact of inflation will reduce profits, but on a relative basis, Unilever will become more attractive. 5 years of stagnation has left Unilever average at best compared to its peers, operations outside of EMEA could change things, however. Looking longer term, we are very bullish on Nelson Peltz coming in. Unilever is average compared to its peers, but that is after 5 years of stagnation. With the US, India and China operations performing well, the foundations are in place for a renaissance.

Earnings spotlight: Wednesday, July 27 – Humana (HUM), Boeing (BA), Meta Platforms (META), Qualcomm (QCOM), Bristol-Myers Squibb (NYSE:BMY), Shopify (SHOP), Ford (F), Qualcomm (QCOM), and Kraft Heinz (KHC).

I sold Shopify in January 2022 and won’t be back in any time soon.

Heed my advice and buy Ford. Ford will be a long-term winner. Ford’s June sales look good on paper but there is more than what meets the eye. Ford seems to be successfully executing its turnaround strategy, but more roadblocks are ahead. Fighting inflation is easier said than done, and Ford could end up facing both demand and supply challenges in the next few quarters.

Ford has been a part of our portfolio for over a year now, and I believe investors will have to stomach some short-term pains before things get better for the company in the long run. I feel comfortable adding to my long position at these stock prices, but I am not comfortable going all-in given that more troubles are likely in the coming quarters. Even after incorporating all the challenges faced by today, I still believe Ford stock is the best bet to ride the expected boom in EV sales.

The future looks bright for Ford and I’m a buyer. My 12-month price target is $23. With the world heading into an economic environment where a potential recession may occur, Ford is actually positioned very well to handle it. Typically, dealers would be stocked up with large inventories with already high incentives, and be increasing incentives to try to move vehicles. Now, inventories are very lean and they actually have a backlog of more than 300,000 units with no incentive.

Furthermore, the auto giant is going to begin splitting out earnings by business segment next year which I see as a huge positive for the stock and company. There will be five separate segments; E, Blue, Pro, Credit, and Next. The clarity of purpose and focus for each of the teams should increase drastically. The distinct mission focus of each group should drive a much quicker clock speed allowing Ford to make decisions much faster creating a more efficient design and cost structure.

Earnings spotlight: Thursday, July 28 – Valero Energy (VLO), Pizer (PFE), Anheuser-Busch InBev (BUD), Mastercard (MA), Southwest Airlines (LUV), Barclays (BCS), Pfizer (PFE), Merck (MRK), Intel (INTC), Altria Group (MO), Southern Company (SO), Apple (AAPL), Amazon (AMZN), and Comcast (CMCSA).

The Southern Company remains a solid dividend play. Southern Company looks favorable from an income perspective compared to most of its peers. It offers a solid dividend yield of close to 4% and reliable dividend growth. Shares look reasonably valued and should offer a high-single digits total return in the long run.  With shares trading around fair value today, Southern Company is a solid hold as a long-term investment. For those that want to maximize their total returns, waiting for a better entry point could pay off. In February, SO traded 15%-20% lower compared to where it trades right now. Waiting for such an opportunity would not only result in a higher initial dividend yield and thus a more pronounced income stream, but it could also lead to more meaningful share price appreciation in the long run.

Earnings spotlight: Friday, July 29 – Exxon Mobil (XOM), Procter & Gamble (PG), Chevron (CVX), AbbVie (ABBV), and Charter Communications (CHTR).

I sold my energy names last month at a HUGE profit. If I were to hold one, however, it would be Exxon. The world is experiencing a massive energy crisis. Markets are very tight for oil, natural gas, LNG, and refined products. XOM will thrive in this environment, as its profits and cash flow are soaring. Investors can expect huge payouts, as XOM has to put its cash to use. The energy crisis is bad for the world but good for XOM and its owners.

IPOs

Esports platform developer Mobile Global Esports (MGAM) is expected to start trading next week. The company is focused on the emerging esports market in India.