Date: February 3, 2022

Textbook Rally – Is It Over?

Between a crazy earnings season and a steady stream of economic data, it’s like a constant strobe light show, or as someone else tweeted, like being a dog on a squirrel farm. As you know, I thought 2021 would close with very strong economic data that would weaken in 2022. Q4 GDP came in super powerful at +6.9% which was more than a full point ahead of estimates. It is almost impossible for politicians and others to argue that the economy needs even more stimulus, especially with inflation at 40-year highs. Come on people; this is not rocket science.

Q1 corporate earnings have also been coming in nicely and could be up 20% on average. But if that’s the case, why has the stock market taken it on the chin? Let’s remember what I have been preaching for 32 years. The stock market discounts future activity 3-9 months ahead. In other words, all this great news was baked in the cake in Q4 which is why stocks were so strong. With the Fed ending their insane bond buying program and likely to raise interest rate 0.25% next month, the markets are squarely fixated and obsessed with that. My forecast for a rocky and volatile year remains firmly in place. Please don’t confuse that statement with a stock market rout or something that resembles 2008 or 2002.

Lots of popular stocks recently reported earnings. Apple, Google, Tesla, Microsoft and Facebook are all done. And for the most part, they have exceeded expectations with the exception of Facebook which was an unmitigated disaster. Google threw in a 20:1 stock split for good measure. As you know, I am not positive on mega cap tech to begin the year and until proven otherwise. I think many of these stocks are “sell the rally” for now. Plenty of other places where reward far outweighs risk.

The last week of January I wrote about the stock market’s internal or momentum bottom on the 24th with confirmation last Friday on the 28th. We certainly added a significant amount of exposure and risk. On Wednesday and Thursday (the past two days) we started reducing exposure and risk with a major reversal at Thursday’s close where three strategies went to heavily net short, looking for lower prices in the short-term. Many indices and sectors had rallied to the areas where they should meet resistance from the bears. I do not have strong conviction whether the stock market will see a mild pullback or something more significant. And, it could just blow higher and in my face. I don’t think that’s the case, but we will see soon enough.

Over the past three days We sold all semiconductor, internet and discretionary sector, small cap growth, leveraged positions in the NASDAQ 100 and Russell 2000. We bought gold stocks, mid cap growth, leveraged inverse positions in the S&P 500, NASDAQ 100, Russell 2000.


Paul Schatz, President, Heritage Capital