Overview

Market continues to be extremely volatile to close out the last full trading week of January 2022. At first pass, if you look at the weekly numbers, the S&P 500 printed a 0.77% gain between the open on Monday and the close on Friday, the Dow Jones Industrial Average printed a 1.39% gain, and the Nasdaq Composite printed a 0.01% change. However, the intra-week action was truly a roller-coaster ride for investors. At the open on Monday, the Nasdaq Composite traded down as much as 5% (would be the biggest intra-day loss for the Nasdaq since March 2020 Covid scare), before reversing the loss and ended the day up 0.63%. For the remainder of the week, indices trade within Monday's range.

The strong reversal from Monday's low could be seen as a positive note, however we advise subscribers to not read too much into it. We're simply at very oversold conditions, and at Monday's low, it was too good of an opportunity for big moneys to go fish for opportunities. As we've laid out in last week's round-up, we need a period of consolidation to find a truly bottom, a period that is unlikely to last just a couple of days. During such period of consolidation, bulled-up traders will likely get trapped when they think the bottom has been in; vice versa, beared-up traders will sell too late when they fear there's more downside. We believe next week there will be positive actions that will likely trap long traders, meaning traders who see upside actions next week will think that we've bottomed and go heavily in, but in fact the upside would reverse. What we're doing next week will be to consider lightening up some positions (only on the upside), so that we have dry powder when ugly actions come into play again (they will come). 

A note about trading, particularly options

During this volatile time (quantitatively, that's when the CBOE Volatility Index - VIX - is elevated above 20), leveraged trading using options and/or margins can be a double-edged sword. Some use the terms risk and volatility interchangeably, and in these leveraged markets, a sharp decline can cause your options to expire worthless or the broker to sell your stocks in a "margin call." In fact, many of the measures we have to calculate risk-adjusted returns, such as the "Sharpe ratio" which uses volatility as a proxy for risk. For example, the premium of an option during high volatility period is elevated compared to when volatility is low. Even if the stock moves in your anticipated direction, your option price may not appreciate proportionately. If the stock does not move, such as what happened this week, then the volatility "eats away" your option premium.

How to come out in one piece: Focus on high quality, profitable companies

Instead of trying to trade around and potentially be hurt by volatility, we want to focus on high-quality companies whose stocks get bruised in this market, because dislocation between company vs stock performance is the number one way for us to make money (when the stock is underappreciating how well the company is doing). If you are a longer-term investor and focused on owning the stocks of the highest quality companies, then you should think of volatility as opportunities. More on our philosophy of dislocation, the best buys are not made when the stock price reflects the strength of a great business, they're made when the stock price and the underlying business become dislocated/ disconnected — like we saw with Ford (F) late last year.

Earnings and the economy

Here's a quick look at some of the broader market measures we like to keep watch: The U.S. dollar index was advanced to above the 97 level. Gold pulled back to the upper-$1,700s region. WTI crude prices were holding in the mid-$80s per barrel. The yield on the 10-year Treasury has increased to the 1.78% level, though it did break above 1.8% at one point during the week.

Within the portfolio, we got earnings this from Microsoft (MSFT), Boeing (BA), Apple (AAPL), Nucor (NUE) and Chevron (CVX) whose write-ups will follow in the coming days.

We also got a few key macroeconomic updates:

• 4Q21 Gross Domestic Product (GDP): 6.5% annualized vs. 5.5% expected

• Weekly initial jobless claims: 260,000 vs. 265,000 estimate

• Core PCE Price Index YoY: +4.9% vs +4.8% expected

What we're watching ahead

Fourth-quarter earnings continue next week. Within the portfolio, we will hear from Advanced Micro Devices (AMD) on Tuesday after the close; Facebook-parent Meta Platforms (FB); Eli Lilly (LLY) on Thursday before the open; Ford (F) on Thursday. As a reminder, we often provide our full analysis of every earnings report for the companies held in the portfolio. However, due to next week being Lunar New Year holidays, we will delay those reports.

Actions we've taken this week