Hey, Ross here:
Yesterday’s inflation report gave stocks another problem.
Annual inflation came in at 3.7%, above the 3.6% expected. Core prices rose 0.3% for the month, versus a 0.2% forecast.
The S&P 500 fell 1.11%. The Nasdaq lost 1.88%.
And another rate hike is still very much on the table.
This snapshot puts the odds of rates being higher by December at roughly 86%.
That’s a tough backdrop. Higher borrowing costs put more pressure on businesses and on what investors will pay for their earnings.
But there’s a stock-picking problem here that goes well beyond the next Fed meeting.
Chart of the Day
Before yesterday’s selloff, the S&P 500 was up 14% for the year in this chart.
Yet 203 of its stocks were down.
Another 120 were up, but still trailing the index.
So you could have called the market’s direction correctly at the start of the year…
And STILL lost money in a whole lot of its stocks.
Now look at this second chart.
It compares an equally weighted S&P 500 with the usual version, where the biggest companies carry the most weight.
When the line falls, the equal-weight version is falling behind.
That ratio is now near its lowest levels in roughly two decades.
The biggest stocks have had an enormous influence on the index’s performance.
And yesterday’s selling hit the tech stocks that have been doing much of that heavy lifting.
If those leaders keep weakening, I don’t want my next trade to depend entirely on an index rebound. I want a company with a reason of its own to bring in buyers.
Insight of the Day
When the index is weak, independent catalysts become more valuable.
Right now, we want to be looking for stocks that can attract buyers without needing the whole market to recover first.
Take a business that wins a major contract.
If that contract adds substantially to its profits, investors have a reason to raise what they’re willing to pay for the stock.
That improvement doesn’t require the Fed to cut rates.
The same goes for a company finally turning a struggling division around.
Its earnings outlook can improve while other businesses are getting squeezed.
Those are the opportunities I want to find – companies where something is changing enough to bring in buyers despite the weak market.
They can still get dragged down in a selloff. But their potential upside has support from the business itself.
As earnings season gets underway, I’m watching for evidence of those improvements and how buyers respond to them.
I’ll share more about my #1 earnings season strategy tomorrow morning…
So keep an eye out for that in your inbox.
In the meantime, did you hear about the massive opportunity arising from SpaceX’s $8 billion move.
Customer Story of the Day
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The educational content, market insights, and trade ideas are well-researched, and the customer support team has always been responsive and professional.
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Embrace the surge,
Ross Givens
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