Last week was rough, but by Friday, sentiment seemed to improve a little. This is a critical month for investors, so a rough start puts us on the back foot. We need to be careful; this week’s performance is even more critical than it would be normally.
Last week, we discussed the January barometer — the tendency for the market to have a good year if January ends positively. We aren’t off to a great start; the reaction to the Fed’s announcement last Wednesday was bad. The Fed and investors are both concerned about inflation (as they should be) and how that will constrain growth.
Could be like catching the internet boom in the mid-90s, or Bitcoin 10 years ago…
Here’s what you should do in light of this news:
Although we were disappointed with last week’s market losses, the real bright spot was performance in the energy sector. The S&P 500 lost 1.87%, but energy was up 8.32%!
Rising energy prices indicates that investors still expect economic growth to drive demand for commodities, which bodes well for stock prices if investors can put inflation worries aside.
At this point, we don’t expect a rebound this week in the major indexes, however, that could amplify gains in energy stocks as capital flows target that bullish momentum. We recommend taking advantage of that by looking for good opportunities in the energy sector.
Right now, we’re big fans of ConocoPhillips (NYSE:COP).
We’ve recommended several very profitable trades in the stock in our Strategic Trader service, namely…
- 8.10% in just over two weeks…
- 9.34% in six days…
- 3.26% in less than 14 days…
- And 3.95% in one week.
We still like this stock as a long position for investors if share prices come back to $78 or less.
COP’s focus on expanding its operations in the Permian Basin should help margins continue to grow and insulate the company from future volatility that may hurt other upstream companies in the sector.
Refiners and other downstream companies usually lag the breakouts in the sector. This is good because it gives us a little breathing room to get into an undervalued stock before it skyrockets.
From that perspective, we like Phillips 66 (NYSE:PSX) for new buys at $81 per share or less. Although we like PSX for new buys, we recommend watching it closely as the stock reaches $90-92 per share. Investors were selling at that level last October, and there may be some profit-taking at that point in the short term.
We don’t usually issue a negative recommendation, but this week deserves a little extra caution. Although we like upstream companies and refiners in the oil sector, we think that services firms like Halliburton (NYSE:HAL), Baker Hughes (NYSE:BKR), and Schlumberger (NYSE:SLB) should probably be avoided. Rising labor costs and premium prices are probably going to hold that part of the energy sector back this quarter.
Bottom Line
Clearly, we have a more cautious outlook for the coming week. Market fundamentals look good, but investors may still be erratic this week as we get ready for the avalanche of earnings reports that will kick off on Thursday and Friday.
The big reports you should be watching are JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) on Friday morning. Bank reports will help us understand whether demand for lending is still strong from businesses and consumers.
We are especially interested in Citigroup’s report because they have the largest exposure in lending to energy companies among the big banks. If borrowing is still strong, that means confidence is high sentiment should be good for oil stocks as well as the rest of the market.
Now, the early reports for fourth-quarter earnings season look good, but we think investors will still be skittish until the banks start to report this Friday. Our expectations are that growth will remain very high and the outlook will be positive.
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Because the Fed’s news last Wednesday threw the spotlight back on inflation concerns, we don’t expect retail and tech stocks to be ready for new entries this week, but oil and other basic materials stocks should maintain their momentum.
Lastly, we’re airing a video on our YouTube channel, Learning Markets, called “What to Do If Stocks Crash” tonight.
Tune in at 7:00 p.m. to see our game plan — we hope to see you there! Click here to set a reminder for the video.
Sincerely,
John Jagerson & Wade Hansen
Editors, Trading Opportunities
