Last week ended positively as better-than-expected earnings reports continued to stream in. Three of the past six weeks have been positive, which feels downright luxurious compared to what we have all had to deal with since the beginning of the year.
While it seems unlikely that this is the beginning of a new bull market, the market should have a much easier time avoiding further declines.
Traders sometimes refer to a market like this as “range-bound” or “flat,” as stock prices oscillate between the recent highs and lows. Of the last few bear markets, the market was range bound in 2010, 2011, and 2015. A sudden reversal back to the highs, like 2020, is much less common. A range-bound market can be a little scary for new investors, but they are a great time to add risk on the lows and pause when the market experiences a temporary bounce.
This week is a critical one for investor sentiment. We are cautiously optimistic that prices will stay relatively stable, but we are assuming the big reports coming up will look like the early reports we have seen so far. If we avoid any big disappointments, we may even want to start planning for an upside breakout later in the fourth quarter.
Reports We’re Watching
- Tuesday, Jul. 26
It’s unlikely that earnings will be higher than they were last year on average, but that’s mostly priced into the market right now. What we are looking for is the inflation outlook from these companies. If the outlook is bad, it won’t matter what the profit numbers are – investors will sell. However, if management teams remain relatively sanguine about the impact of inflation, stock prices should be OK.
- Wednesday, Jul. 27
The Fed is going to raise the target interest rate again on Wednesday. Traders in the bond market overwhelmingly expect that the Fed will raise the target rate by 0.75%. We don’t think the rate hike itself will affect the market, since traders already know it’s coming.
What we don’t know is what the Fed will say about future hikes. There is a press conference right after the announcement where the Fed Chairman will try to set expectations about inflation and rate hikes this year, and that event is usually a wild card. We think investors should avoid adding a lot of risk to their portfolio until that press conference is over.
- Thursday, Jul. 28
Like most days this week, there will be a flood of new earnings reports, but after the market closes on Thursday, the report from Apple Inc. (AAPL) will have the biggest impact on the outlook for this quarter. Expectations for AAPL have improved a lot since June, so the risk of disappointment is highest on Thursday.
- Friday, Jul. 29
The Fed’s favorite inflation measure comes out on Friday before the market opens, the Personal Consumption Expenditures (PCE) report. Last month, the PCE number was slightly better than expected, and the S&P 500 rose nearly 5%. We know the PCE will still be high, but if it’s just a tad lower than last month, it should ensure that stock prices won’t hit a new low in August.
What You Should Do
This is a pivotal week for the market. The Fed will be raising rates again on Wednesday and there will be market-moving earnings reports from big tech and consumer stocks. On average, profits will likely be down compared to last year, but what matters now is how these firms set expectations for the rest of 2022. This is a make-or-break week for the rest of 2022.
We have recommended cautiously adding positions in retail and tech stocks for the past few weeks. Those sectors were up 5.5 and 4.14% last week alone. We still think that is the right area of focus for now. However, because so many big tech firms like AAPL and MSFT will be coming out this week with earnings, we think investors should only consider new positions after those earnings reports are out.
John Jagerson and Wade Hansen
Editors, Trading Opportunities