August 1st, 2022

Don’t Call It A Recession

Before we get into the week ahead, I woke up on Sunday to a handful of articles now saying something to the effect of, maybe we’re not in a typical recession.  I find that interesting since John already wrote about that and we published his take on the topic this past Friday.  Once again, he was ahead of the curve.

The ex-CEO of Home Depot came out and said, yes, we’re in a recession based on GDP numbers, but it’s an unusual one (not a direct quote).  While there is a contraction in GDP, we’re seeing spending remain relatively high and haven’t (yet) experienced a major downturn in the job market.  That said, there have been 9 consecutive months of high inflation.  Factors aren’t normal.  

While several people say a recession is defined by two consecutive quarters of GDP contraction, the National Bureau of Economic Research (NBER) measures a recession as a significant decline in economic activity that lasts more than a few months.  So far, the NBER has no intention of throwing out the “R” word for the first half of 2022.  

That begs the question: if the market is forward-looking, why do we put so much attention to GDP numbers that are identified and then reported after the quarter is complete?  

And if you want to go down a rabbit hole, why is GDP the measurement we use? Does an economy always need to be growing to be successful?  What about doing good for the community, or making sure customers and employees are living good, healthy, and happy lives?  

Imagine if we had goals around that instead.  One day I’ll tell you all about a COO that I used to work for at a privately held company and what I learned from him about the power of creating some corporate goals not tied to financial growth.  That’s a topic for another day.

For now, let’s take a look at the key levels in the S&P 500 that you need to know before trading this week.

Here are the key levels in the S&P 500 ETF, SPY.  I know there are a lot of lines, but right now we’re heading into a major resistance level at 416, and with most technical indicators showing an overbought market, I wouldn’t be surprised to see us pull back from here.  That said, there’s support at 390 and we may be stuck in that trading range for some time.  We still have several companies that have to report earnings so if we break through 416, we could see a move up to 430.  

On the downside, we have support at a psychological level of 400.  We have other lines of support at 390, 375, and then the recent market low set in mid-June of 362.   

Remember, we’re still in full earnings mode this week.  While some of the heavier weighted companies in the S&P 500 already announced earnings last week, we still have some major players in the semiconductors, travel, and energy sectors reporting this week.

 

We know that travel has been a nightmare as of late, but we also know there’s been an uptick in travel amid rising prices.  We could see some blowout numbers in this sector this week, but what I’ll be listening for is what they say about the future.  If the travel stocks come out and say they are expecting a slowdown in the third quarter, we could see the market rotate out of these companies. 

 

The trade idea today comes more from a story surrounding a company than fundamentals or technicals.  It is a high risk, but potentially a high reward idea.  Alibaba (BABA) is sometimes referred to as the Chinese Amazon (AMZN), and it has a long, complicated history.  As the founder and CEO Jack Ma slowly steps away and cedes control, it paves the way for BABA to be back in good standing with the Chinese government.  

 

Things were looking up, but then last week the news broke that BABA is on the list of companies to possibly be delisted by the SEC.  That news sent the stock down over 10% in a day.  BABA is seeking a primary listing in Hong Kong that would enable it access to capital and liquidity from Chinese investors.  This isn’t the first time they’ve gone through delisting fears and each time they have recovered. They could also go through the process it takes to be back in good standing with the SEC and all of this fear would disappear.

 

BABA has earnings coming up this week and I typically don’t like to trade directionally around earnings, but a 10% drop in a stock price overnight on delisting fears at the same time Jack Ma is ceding control and giving the Chinese government what they want is a juicy story.   

 

Here’s BABA’s daily chart. 

If the blue and purple trading ranges hold, this could be a good time to get in and ride the stock back up to $120.