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It was another wild week of fast moves in the stock market indices as we remain in the middle of earnings season.

This past week some of the largest stocks, including Google (GOOGL), Amazon (AMZN), Qualcomm (QCOM), Exxon Mobil (XOM), Visa (V), Comcast (CMCSA), Bank of America (BAC), and Nike (NKE), reported an earnings beat. Most not only increased revenue on the top line, but also had significant net earnings per share beats on the bottom line and rosy guidance going forward.

There were also quite a few disappointments, including Meta (FB), Honeywell (HON), McDonalds (MCD), Ford (F), Adobe (ADBE), Salesforce (CRM), and JP Morgan (JPM). Interestingly, the National Media did not care to comment on all the positive beats, but instead decided to highlight the largest one-day loss of approximately $230 billion in Meta stock, a historical first.

Similar industry stalwarts reported vastly different earnings (Bank of America & JP Morgan, or Facebook & Snap). What gives? Most of the companies with earnings disappointment cited a few meaningful reasons summed up in two areas: supply chain disruptions and increasing labor costs (wage inflation).

A Ruthless Market

So why such large rewards for earnings beats and why such decimation for others? We have mentioned it in our previous Market Outlooks, that the market dynamics began changing in the fourth quarter of 2021. There has been a large amount of sector rotation and leadership changing in the markets.

Most of this is due to a number of factors, including a) rising inflation which has spawned rising labor costs; b) rising raw material costs making the output of products more expensive; c) global supply chain interruptions; d) rising energy costs which factor into rising production expenses; e) remaining COVID-19 infections and a disruption of human capital available to work; f) geopolitical turmoil and tension causing business anxiety and enhanced cyber security risk; g) rising interest rates; h) recalculation of multiples assigned to stocks.

Another contributing factor is money flows. There is still a tremendous amount of investor capital deeply entrenched in the stock market. However, as an indication to the fragility of the market, this past Monday (Jan. 31) the $407 billion SPY ETF saw its biggest redemption since launching in 1993, according to data compiled by Bloomberg. Approximately $7 billion exited Monday alone, the largest daily outflow in four years.

The January exit was not contained to the S&P 500 fund. The $191 billion QQQ ETF (which follows the Nasdaq 100 of tech names) posted its largest exodus since the dot-com collapse (2000-2002), as about $6.2 billion departed the ETF during the month.

All of this enhances the frailty and liquidity of the stock markets and its components. In fact, the amount of money to move key US stock indices by just 1% is extremely low.

When US Treasuries rates are exceptionally low (negative real returns for investors after accounting for inflation), investors reward the high Price to Sales and Price to Earnings stocks and expand multiples even further, a self-reinforcing dilemma -- until the easy money stops.

This environment is shifting, and the end of a 40-year cycle of lower rates supporting highly speculative tech companies might be approaching.

Hence, growth stocks (VUG) are underperforming value (VTV) this year, reversing a more than a decade-long trend. Do not get me wrong here, as there could be some serious rallies that can fool one into believing growth is still the right play.

This type of market causes “impatience.” Quality-consistent, long-term earnings begin to be blessed by the market, and investors begin to be punished by the ones that disappoint. Such is this earnings season.

What Might We Recommend Now?

Surprisingly, even though we are getting plenty of companies disappointing on earnings, there are enough earnings surprises and beats that it will prop up the market and keep a floor underneath.

Our own Mish believes that we are caught in a trading range that could expand and last for some time. The S&P 500 could be building a solid floor (4200) and a hard to break through ceiling (4700), and we may find ourselves oscillating between these two numbers for a while until there is some catalyst one way or the other to break through these ranges.

You may have noticed the exposure to energy and agricultural commodities. Do not get too wrapped up in technology issues or small-cap stocks, which are in bear phases right now. Here are this week’s market highlights.

Risk On/Bullish

• The SPY and DIA regained their 200-day moving averages, while all 4 key indices continued to mean revert and all move up an average +1.5% on the week.
• TSI went positive for both the DIA and SPY, but not QQQ or IWM.
• For the first time in over a month, the number of accumulation days in the 4 indices exceeded distribution days, which is a meaningful improvement.
• Speculative sectors led the rally this week, which included consumer discretionary (XLY) and semiconductors (SMH), while Risk-Off plays like consumer staples (XLP) and utilities (XLU) lagged.
• Energy related stocks, including energy (XLE) +5%, clean energy (PBW) +5.2%, and solar (TAN) +4.8%, moved higher on the week
• The Nasdaq Composite is showing marginally positive market internals across the board.
• The New High/New Low ratio for both SPY and QQQ shows signs of bottoming out.
• Risk Gauges improved, and are currently showing neutral levels.
• Volatility Ratios (one-month versus three-month) bounced off extremely oversold levels and set up for more upside action.
• The number of stocks above their 10-day moving average are bouncing from oversold levels.

Risk Off/Bearish

• Cash Volatility held onto a bullish phase despite the market’s rally, and it is still showing Risk-Off sentiment.
• Interest rates (TLT) got hit hard, especially with strong employment numbers.
• Small-caps continue to lag with the TSI showing a reading of -5.72, a big divergence from the Dow Industrials and the SPY.
• Growth stocks are still lagging value stocks, as VUG is stuck below both its 50 and 200-day moving averages, while VTV is above both.
• 4 of the 6 members of Mish’s 'Modern Family' are still having issues beneath their 50- and 200-day moving averages, excluding regional banks (KRE), which are actually in a bull phase thanks to favorable interest rates.
• Foreign equities including emerging markets (EEM) and foreign large-caps (EFA) have both given up their short-term attempt to assume some leadership over US equities. However, EEM outperformed on a relative basis over EFA.
• Soft commodities (DBA) roared, closing on multi-year highs on Friday.
• Oil (USO) is compressing and appears ready for a run to over $100 a barrel.

Neutral Metrics

• Gold (GLD) closed just below its 10- and 200-day moving averages in a sideways compression range and looks poised on a longer-term basis to break out either way.
• Despite the rise in rates, the US dollar got hit pretty hard this week and went into a warning phase against the euro.
• Market internals worked off of oversold readings and are in slightly negative territory still, according to the 10-Day Advance/Decline and the McClellan Oscillator for SPY.

Crypto Corner

• On Friday, Bitcoin (BITCOMP) saw its largest daily percent gain since Feb. 2, 2021, jumping +11.5% and surging back above the $41,000 level, with only the 50-day moving average serving as resistance before further price exploration.
• While we did see a rally in the key stock market indices, the cryptocurrency market clearly outperformed across the board, with other major coins significantly outperforming even the best stocks.
• This week we’ve seen reports from international Binance exchange users of phishing scams directly targeting their login credentials, while major blockchain-bridge provider Wormhole was hacked and exploited for over $320 million worth of Ethereum.