What a heatmap shows us about returns… our technical experts see the market as stabilizing… tech stocks are racking up huge returns… Luke Lango’s market forecast

This morning brought a surprise jump in the number of jobs added to the economy in July.

Whereas economists polled by The Wall Street Journal had forecast 258,000 new jobs, the number came in more than double that at 528,000.

As I write mid-day, stocks are selling off on the news. This is because a stronger work force suggests the Fed will have to continue its hawkish policy longer than previously hoped.

Looking bigger picture, despite today’s selloff, the market has been strong over the past month. And if our technical experts John Jagerson and Wade Hansen are right, we’re likely to see more of this bullishness in the weeks to come.

Let’s jump straight to their Wednesday update of Strategic Trader:

From a technical analysis perspective, it is safe to say that the stock market has put in a floor for now.

Unless the fundamentals of the global economy change dramatically, the stock market should remain stable through the second half of 2022.

Given this relative market stability, John and Wade suggest there’s a new question to ask…

Which stocks are going to outperform?

In answering this, they point toward an old Wall Street saying: “Stocks are like rubber bands: The farther you stretch them, the harder they snap back.”

In other words, the stocks that took the worst of the beating in the first half of the year stand a good chance of being the best performers in the back-half of the year.

***How to see this visually using a heatmap

In their update, John and Wade reference a fantastic visual aid that helps investors digest this “worst to first” concept.

Here there are with the details:

Below, [we look at] a heatmap of the stocks in the S&P 500.

The size of each block represents the market cap of the stock, and the color of each block represents how the stock has performed during the illustrated time frame.

Blocks turn brighter green the more the price of the stock rises, and they turn brighter red the more the price of the stock falls.

We’ll start with the S&P heatmap over the past six months.

There’s a lot to take in here, so take your time browsing the various returns.

When you’re done, the big-picture takeaway is that the stocks that performed terribly over the first half of the year came from the Technology, Communication Services, Consumer Cyclical, and Financial sectors. It’s a sea of red.

The bullish bright spots were Healthcare, Energy, and Utilities. Plenty of green.

But if we narrow our timeframe, is this changing?

Back to John and Wade:

Going back to our simile, the stocks in the Technology, Communication Services, Consumer Cyclical, and Financial sectors have been stretched the farthest because they have fallen the farthest.

So, are those the stocks that are snapping back now that the stock market has found a floor and is starting to recover?

Indeed, they are.

To illustrate, John and Wade provide a second heatmap, this one covering just the last month of S&P returns.

What jumps out to you?

Almost all the stocks that were bright red in the six-month heatmap are now bright green.

Technology and Consumer Cyclical have done especially well.

Back to the Strategic Trader update:

We expect this trend to continue.

As we move through the rest of earnings season, we are looking for those stocks that fell the farthest during the first half of 2022 to start rebounding the hardest.

***Luke Lango’s subscribers are already all-too-aware of what a massive rubber-rand rally looks like

The heatmaps we just looked at showed the Technology sector suffering the brunt of the market pain in the first half of the year, while outperforming in recent weeks.

But this heatmap doesn’t capture the eye-popping size of some of these recent tech gains.

To help illustrate, let’s turn to our hypergrowth expert Luke Lango.

Below, I’ll rattle off recent returns from Luke’s 

Early Stage Investor recommendations. These are all hypergrowth, technology-based stocks.

I won’t cherry-pick — we’ll look at the return of every stock within Luke’s “1,000% Divergence” portfolio since July 1 (Luke holds more sub-portfolios within this service, but it would take too long for us to profile every return).

Here we go:

24%… 4%… 57%… 30%… 6%… 52%… 11%… 35%… 36%… 33%… 56%… 22%.

That’s the entire sub-portfolio.

Not only have there been zero negative returns since July 1, there have been only two stocks that aren’t up double-digits.

This is what a rubber-band snap-back rally looks like.

To drive home our point, let’s look at another one of Luke’s newsletters, Innovation Investor.

Below we profile the returns of what Luke calls the “Top 10 Picks” from this investment service. These are the best of his “strong buys.” Again, the returns are from July 1:

49%… 6%… 52%… 28%… 27%… 11%… 42%… 41%… 39%… 56%.

Ten stocks. Zero negative returns. Only one return under double-digits. Eight of the 10 stocks up more than 25%. Five are up more than 40%.

***Please understand, I’m not trying to hype Luke’s services

Yes, I believe Luke is a world-class analyst and all types of investors could benefit from his research and market-savvy.

But Luke himself would be the first to say that many of his favorite stocks were hit hard earlier this year. That’s the cyclical nature of being a tech investor.

Given this, what I’m trying to show through highlighting Luke’s recent returns is that the cycle appears to be changing — and fast.

Here’s Luke’s take on what’s happening, from his recent Early Stage Investor Daily Notes:

In our opinion, the bear market is over. A new bull market is forming.

Historically speaking, the most money is made in the stock market during times like these — when bear markets turn into bull markets.

Our portfolios [of cutting-edge tech companies] comprise the exact type of high-growth stocks that tend to make investors fortunes during these bear-to-bull-market transitions. To that end, we think the next 12 months will be fabulous for our stocks.

Having said that, we would like to continue to express caution about near-term price action. Our stocks have come very far, very fast — almost too far, too fast. We expect a sizable near-term pullback on the order of 5% to 10%.

Such a pullback will be very healthy — and followed by a bigger rally.

***Keep in mind, Luke isn’t a perma-bull with a Pollyanna economic view — he believes we won’t be able to achieve a soft landing

Luke is calling for a recession, although he expects a relatively mild one. That’s the cost of killing inflation in his view.

But even with a recession, Luke sees gains coming for the market.

Back to his Daily Notes:

…Even if we don’t get a soft landing and see a shallow recession instead (our base-case assumption), we still think the whole market will rally big over the next 12 months. The gains will just be less pronounced than in a soft-landing scenario.

The only way the market keeps crashing into 2023 is if we see a deep recession or if inflation stays hot in a stagflationary scenario.

We view both outcomes as highly unlikely and, therefore, believe the odds today are overwhelmingly in favor of a big market rally over the next 12 months.

If you feel torn about what to do with your money today, remember, the choice doesn’t have to be a binary “in” or “out” of the market.

As we highlighted in yesterday’s Digest, wading into the market with smaller position-sizes is a fantastic way to avoid regret — whether that’s regret from buying or not buying (from the size of tech’s recent gains, the regret of “not buying” is firmly in the lead).

We’ll give Luke the final word to send us into this weekend on a high note:

Stay the course. The future is very bright. 

The era of big gains has just begun. 

Have a good evening,

Jeff Remsburg