Two weeks ago, I visited with my mother (91 years old) in Phoenix while on a business trip. On our way out to dinner with close friends, we passed a small Circle K gas station with an irresistible offer. It was only Wednesday, and the Mega Millions lottery jackpot was already up over $1 billion. For a measly $2 ticket, I could earn a significant return on my small investment, and I felt comfortable with the risk associated with the potential drawdown.

My mother said, “people usually win from small gas stations like this,” further building up my expectations that surely I could purchase the winning ticket. Truth be told, I invested $4 for two tickets to greatly increase my chances -- or so I thought. Of course, I know that buying 2 tickets doesn’t increase my chances, but it definitely feels like it does.

Friday night came, and I looked with anticipation for the numbers to match my winning tickets. I think I had 1 of the 6 numbers. I was as disappointed as if I had put all my money on Nvidia or Facebook at the beginning of 2022 (well, $2 to 0 is worse on a percentage basis, I reckon).

Secrets to A Good Investment Outcome

I rarely play the lottery, but it made me start thinking about a few important concepts that resonate with everything we do at MarketGauge and Market Gauge Asset Management today. These include:

1. You have to be in it to win it. Since I rarely play the lottery, why would I ever think I would win? It is probably those faithful people who are consistently dedicated and purchase lottery tickets every week. They are in the best position to reap the rewards from having been at it for so long. (This may or may not be true).
2. The lottery is a game of luck with odds that are astronomically against you from the start.
3. Investing is about having a plan or a discipline, and then working through that plan diligently.
4. Part of your plan might include using technical indicators, evaluating earnings and conducting fundamental research, possessing some sort of risk evaluation (i.e. gauges), or watching the charts and knowing exactly when it is safe to go in the water.
5. Using risk management for your investments is mandatory. It may be more important than how you picked your investment.
6. Implementing diversification. Incorporating disciplines that employ various investment edges to optimize investment results among various asset classes, capitalization weightings, and disparate sectors and industries.
7. Probably the most important thing is reducing your expectations. That might mean not stopping off at the out-of-the-way gas station with hope and prayer that you are the winner among millions of participants.

Do yourself a favor, and evaluate the our strategies over the long-term. All of them have outperformed their respective benchmarks by not just a little, but a large amount.

In the spirit of “New Year” resolutions, here’s a 4-step resolution checklist for improving your investment returns in the market, using an example of executing such a resolution with our strategies. It’s simple, but not always easy.

1. Decide: Decide to take control of growing and protecting your wealth, and choose a strategy (or strategies) to give you the tools to achieve your goals.
2. Diversify: You can start with one of our strategies because most provide at least some level of diversification. Then as you grow, you can gain additional advantages by using several strategies together as a so-called “tactical blend.” We have pre-set tactical blends to satisfy every reasonable level risk/return goal.
3. Discipline: Follow the strategies with determination.
4. Delegate: The one thing you can’t make more of is time, and navigating the markets requires time and expertise. Fortunately, you can delegate the time-consuming process of identifying and analyzing tactical, active trades by following a strategy you can execute yourself. You can also delegate the entire process to an advisor who will help you with all of the above.

Earnings Season is Upon Us

Earnings are the engine that drives stock prices more than any other indicator. Numerous times throughout 2022, we provided formulas for figuring out what the stock market might do based on the three most important factors: inflation, interest rates, and earnings. They are all interdependent on one another.

Last year, both Michele “Mish” Schneider and I put out earnings expectations. Mish’s were more skewed to being range-bound due to the emergence of a “stagflation” environment. Mine was straight-up arithmetic.

Mine centered on using $210-$220 a share at a 17-20 multiple. Multiples (or P/E ratios) come down as interest rates and inflation go up. As I said then, it is even possible that S&P earnings could come down to $200 a share. Some analysts are calling for $190 a share in 2023.

It's easy math. $210-$220 a share for 2022 at a 17-20 multiple. My guesstimate last year was the market would end near 3,500 to 4400. We ended around 3800, smack dab in the middle.

You might say to yourself (in hindsight) that was just common sense. Perhaps, but here is what the biggest firms on Wall Street believed to be their best estimate of where the market would end 2022. Note the time stamp from Jan. 3, 2022.

Most of them, if not all, were not even close. Please note, Morgan Stanley was the closest to our estimates. More importantly, Mike Wilson of Morgan Stanley came out this week forecasting that the market will hit 3,000-3,300 before the market begins to recover, which he sees happening toward the end of the year.

Earnings Announcements Began Over the Past Two Weeks.

The big banks kicked things off two weeks ago with disappointing numbers and big misses. This was followed by this week’s announcement of layoffs from Goldman Sachs (GS), which also echoed the tough environment resulting from higher interest rates.

There have been a few bright spots, however. The airlines reported blowout earnings due to increasing capacity and lower estimates. United Airlines (UAL) was the big star here so far.

Due to higher costs in raw materials, transportation, and labor, the consumer products companies may be showing some slowing growth in revenues and earnings. This was the case with giant Proctor & Gamble (PG), which recently reported disappointing earnings and forward growth projections.

Recently, Netflix (NFLX) reported an earnings miss, but it surprised with significant growth in new subscribers. This bodes well for the future earnings of the company. Wall Street cheered these results, which helped raise the overall stock market on Friday. NFLX was up over 8% for the day and is up over 15% year-to-date.

But remember to win, you have to be in it.

We happen to own Netflix in two of our large-cap stock strategies (Large-Cap Leaders up over 6% year-to-date and Nasdaq All-Stars up over 7% year-to-date). It is no coincidence that our Quant/Algo models had selected NFLX in December and then again at the beginning of January.

How Dependable are Earnings Estimates?

According to FactSet, 11% of S&P 500 companies have reported their Q4 2022 results (fourth quarters tend to be among the best, keep that in mind). 67% of companies have beaten their earnings estimates, with 64% reporting revenues above estimates. Please note that due to inflation and rising interest rates, earnings estimates have been consistently lowered over the past year, so beating estimates is, in some way, “baked into the cake.”

As we mentioned above, the overall market’s earnings expectations are key. Over the past few years, we have seen earnings as a whole drop from $240-$250 a share to recent estimates of $190-$200 a share. This is what investors must keep in mind when evaluating individual stocks and the markets. 

The January Effect Updated

In our Jan. 8 piece, we reported on the Stock Trader's Almanac’s January Effect statistics covering three distinct different time periods. The combination of all three is known as the 'January Trifecta,' and it illuminates so insightful market patterns.

• The first time frame is the Santa Claus Rally (SCR), which begins right before Christmas and ends after the fourth day of January. This SCR was positive.
• The second January indicator is the First Five Days (FFD), which was also positive.
• The final measure is the January Barometer (JB), which is the performance for the entire month.

The January Trifecta seems to suggest that a return of 17.5% for 2023 would be just “average,” considering the last 31 times the Trifecta has occurred. Furthermore, history’s 28 wins vs. 3 losses in Trifecta years suggests a 90% chance of an up year. The Trifecta is impressive, but beware of the “devil in details,” as shown in the table below.

As you can see above, a January Trifecta doesn’t mean you should assume February will be a great month. It’s been positive slightly more than 50% of the time, with an average gain of 0.5%. However, a little more research found that the average return for the S&P 500 for all February months dating back to 1950 is -0.14%, with 41 up years and 32 down. That’s a 56% win percentage.

Nonetheless, 0.5% up for the Trifecta years is better than average, and the comparison would have been much more impressive if only we considered non-Trifecta years.

More importantly, if you consider the data’s implication of February’s performance, you’ll see that if you ignore the bullish Trifecta indicator in years when February is negative, you’ll avoid being bullish in two of the three years that the Trifecta was wrong and have a near-perfect track record.

Is It Value or Growth?

I spent over 35 years trying to educate large institutional pension funds and individual investors about the difference between a growth or value stock. Russell indices are often used by institutional investors and consultants.

It appears that the most often-used are the Russell 1000 Growth and the Russell 1000 Value Indices. They are made up of the top 1,000 companies by market capitalization. Would you be surprised to learn that many stocks are in both the value and growth indexes? You can also purchase them through ETFs. Here are the Russell 1000 ETFs:

• IWD (Russell 1000 Value Index, over $50 billion in assets) 2022 performance: -9.7%.
• IWF (Russell 1000 Growth Index, over $50 billion in assets) 2022 performance -29.9%.

The past few years, Exxon Mobile (XOM) ranked among the biggest stocks in the Russell 1000 Value index, but it was also not as big a percentage in the Russell 1000 Growth index. This is also the case for companies like Apple (AAPL), Oracle (ORCL), and Microsoft (MSFT). The list goes on and on.

In my education, I always conveyed to investors that it is the way or the process by which the investment company or mutual fund picks the stock that is the significant part. Looking forward with earnings estimates is a growth strategy. Taking apart the company’s inherent value (Book, Enterprise, and other valuation factors) and looking backwards is a value strategy.

Yes, there are industries more prone to a value stock orientation. In the past that these included energy, utilities, and consumer products. But many of the companies in these industries are seeing accelerated growth rates and are now being purchased by growth managers.

Here is a good description of how traditional growth stocks have played a role in value’s appreciation within the S&P 500.

Risk On

• Three out of the four US indices were down for the week, yet the Nasdaq 100 ended up over 1.3% for the week and crossed above the 50-day moving average into a recovery phase on Friday.
• Friday’s price action was extremely bullish, with all four US Indices closing higher.
• Another plus is that the risk gauges rebounded from a sell-off earlier in the week and improved to a neutral position.
• Volume analysis points to a continued bullish theme, with volume patterns confirming Friday’s positive price action.
• Risk-off defensive sectors like utilities, consumer staples, and healthcare had the worst performance and finished down for the week. Semiconductors (SMH) were up for the week, but 10 out of the 14 sectors tracked daily were also negative.
• The McClellan oscillator readings were all positive for the Nasdaq and NYSE. They worked off short-term overbought levels, but they remain very strong.
• The 52-week new high-low ratio for the NYSE and Nasdaq remains positive, but these were less positive readings than what were seen a week ago.
• The cumulative advance-decline line hit its highest level since September 2021.
• The number of stocks over key moving averages improved the most for IWM.
• Small-to mid-cap stocks are driving the market with clear leadership over large-cap stocks.
• Growth stocks (VUG) have recovered short-term leadership over value stocks (VTV), and this is another indication of risk-on sentiment.
• The strength in the market is being led by foreign equities, with EFA leading the way and continuing to be in a strong bullish phase and EEM closely following.
• Copper looks explosive, and it appears to be in a bull phase in the real motion indicator and in price action.
• The US dollar (UUP) has continued closing near recent lows and remains under pressure. A death cross has formed overhead, indicating a continued risk-on environment.

Neutral

• Over a weekly basis, oil, metals, and select emerging markets dominated market returns. Oil and oil services led the markets with metals closely following behind, pointing to continued inflationary pressure.
• The bond market has stabilized, and the Fed might ease on future rate hikes.
• Agriculture (DBA) is at a significant inflection point near the July lows, and it quietly continues to lead over the SPY.
• Gold is in a bullish phase on the daily and weekly charts. Although short-term gold GLD is overbought, positive price action continues is and pushing against key resistance levels in the real motion indicator and price.
• Oil and metals led this week, and this is a sign of persistent inflationary pressure.

More By This Author:

The Stock Market Is Looking Better But Caution Is Still Advised
What's In Store For 2023?
Fair Warning! Looking Forward Into 2023