The S&P 500 reached 4,724 for the third time in three months — and failed to break higher last week.
When traders see that sort of behavior, they call it “resistance.” It can start to become part of a self-fulfilling prophecy.
Each time the S&P 500 has reached 4,724, investors worry that other traders will start selling again; they don’t want to be stuck holding the bag, so they sell — which can turn into a feedback loop when the market rises to that key level.
As annoying as this can be, it’s not all bad news. As long as market fundamentals remain positive, it gives us a chance to load up on some stocks that have been overlooked during the back and forth. As you will recall, last week we said investors should focus on energy stocks that had been overlooked over last month. That sector rose another 5% on average during the week.
We still like the energy and basic materials sector this week.
Beyond some technical issues the market is dealing with, this is a big week for earnings reports. Most companies in the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite will be reporting their profits for the fourth quarter of 2021 from now until early February.
The influx of quarterly reports (called “earnings season”) is usually a trigger for volatility. Volatility tends to be worse when the stocks that are reporting are near their yearly or all-time highs. Last week, we warned that because the big banks were near their highs, it would take a lot to make traders happy, and they were likely to fall after their reports.
Starting with JPMorgan Chase & Co. (NYSE:JPM)’s report on Friday morning, the banks are down. In fact, JPM dropped more than 6% following their report. There were a variety of small issues the banks were dealing with, the most worrisome was rising costs from inflation.
However, don’t get us wrong… the financial sector took a hit last week, and there are some weak spots, but overall the sector is doing extremely well, and that is actually setting us up for some interesting opportunities this week.
For the most part, the banks dropped on what we call a “technical issue” — meaning that prices had been rising and traders were looking for any excuse to sell and take some profits off the table. The JPM report was bad, but Citigroup Inc. (NYSE:C) and Wells Fargo & Co. (NYSE:WFC) also reported on Friday and recovered quickly after that selling had a chance to settle down.
Because inflation and economic growth are both pushing interest rates higher, we have a chance to turn a negative into a positive by using that to our advantage with banks and broker-dealers.
Here’s What to Do
After reading the reports and evaluating the sector, we think there are some unique opportunities in the banking sector.
We like Morgan Stanley (NYSE:MS) at prices under $96 per share. The big bank dropped after JPM’s report disappointed, but the stock appears oversold. Rising rates will add directly to MS’s bottom-line profits in 2022, but this recommendation comes with a caveat: Investors shouldn’t add a position just before its earnings report is released. So, you should wait until Wednesday morning, once the MS report has been released.
Raymond James Financial Inc. (NYSE:RJF) is also an interesting stock that many small traders overlook. RJF’s fundamental and price performance has been stellar but they have been lagging other brokers like The Charles Schwab Corp. (NYSE:SCHW). We think SCHW stole the limelight last year as they went on a buying frenzy (gobbling up TD Ameritrade recently). RJF should catch up in the short term, and rising rates will help.
We had recommended the regional banker, Regions Financial Corp. (NYSE:RF), earlier last year in anticipation that consumer loans would continue to grow despite rising rates. That has worked out and the stock is back in another buy position; we like prices at $24 per share or less. This is another company reporting next week, so we recommend waiting until Thursday morning before making a play for the stock.
The official start of earnings season was off to a mostly expected choppy start. The good news is that economic growth is still very positive, and that should send stocks higher towards the end of January.
Besides earnings, the big X-factor right now is rising interest rates. Long-term rates are high enough to slow growth, but it will probably keep tech and retail stocks in the dumps for a few more weeks. However, higher rates will work in our favor in the financial sector, which should be our focus this week.
We’ll be back with you on Friday.
John Jagerson & Wade Hansen
Editors, Trading Opportunites