Stocks Cling to Support as the Fed’s Hawks Go to Work. Growth Heads for Worst Month in 20 Years.

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Stocks clung to support last week as investors brace for a series of rate hikes by the Federal Reserve.

The S&P 500 spent most of the period in negative territory, but rallied sharply in the final 90 minutes on Friday, January 28. That resulted in a 0.8 percent gain for the week, continuing its volatility after breaking key support on January 18. Still, the index is on pace for its worst month since March 2020.

Investors have grown increasingly aware that central bankers will tighten monetary policy throughout 2022 to counter the worst inflation since the early 1980s. They initially dumped interest-rate sensitive growth stocks, but last week the pain spread to cyclical groups like industrials and consumer discretionaries.

Supply-chain issues, inflation and a weaker economic outlook seem to be having an effect. Companies like Caterpillar (CAT) and Mondelez (MDLZ) said higher costs are hurting margins. Tesla (TSLA) warned that parts shortages may slow growth. Separately, Factset observed that margins are narrowing in most sectors as inflation accelerates.

Last week also brought another potentially bearish trend: slowing demand. Semiconductor-equipment firms like KLA Tencor (KLAC) and Teradyne (TER) issued weak guidance, which could bode ill for another key part of the technology sector. CAT also warned of softness in China, whose construction industry is staggering.

iShares Russell 1000 Growth ETF (IWF) and the iShares Russell 1000 Value ETF (IWD), monthly chart, showing IWF’s relative strength at bottom.

Apple Saves the Day

January’s Biggest Gainers in the S&P 500
Halliburton (HAL)+37%
Schlumberger (SLB)+32%
Occidental Petroleum (OXY)+30%
ConocoPhillips (COP)+24%
EOG Resources (EOG)+23%
Source: TradeStation Data (as of 1/28)

Apple (AAPL), however, emerged unscathed. The most valuable U.S. company beat estimates in every category except iPads. CEO Tim Cook also predicted the supply-chain issues will improve. That lifted AAPL 7 percent on Friday, its biggest one-day gain in over a year.

Other growth names were less fortunate — especially if you look over the course of January. Vaccine make Moderna (MRNA) is set to be the S&P 500’s worst performer for the second straight month. Netflix (NFLX) crumbled on slowing subscriber growth. IT provider EPAM Systems (EPAM), which had rallied 500 percent since March 2020, had its worst month ever. (It was only added to the S&P in December.) Other high-multiple names like Etsy (ETSY) and Enphase Energy (ENPH) also plunged.

All told, growth stocks are headed for their poorest monthly performance versus value since March 2001 as the the dotcom bubble deflated. See the chart above, which compares the iShares Russell 1000 Growth ETF (IWF) with the iShares Russell 1000 Value ETF (IWD).

There was also dramatic weakness in the SPDR Consumer Discretionary ETF (XLY), dominated by Amazon.com (AMZN) and TSLA. It has not only dropped 13 percent so far in January. XLY is also lagging the S&P 500 by 6.3 percentage points — its worst relative performance since August 2000.

Energy is the only sector with a positive return so far this year.

Charting the Market

The S&P 500 spent last week holding support at the October low around 4280. The index formed some potential reversal patterns, like a hammer on January 24 and a bullish outside candle on Friday. Those could make some chart watchers look for a bounce. They may also target the December low around 4495. (Both of these levels were cited last week.)

However technicians may notice more bearish signs over the longer time frame. For example, prices have broken the rising trendline that began in late 2020 and the 100-day moving average. That’s different than the pattern over the previous bull run. In fact the S&P 500 is now all the way under its 200-day moving average after enjoying a historically long run above that line.

The Nasdaq-100 is also below the 14,500 area where it bounced last July and October.

S&P 500, daily chart, highlighting select patterns.

The Week Ahead

This week is the busiest in earnings season, with over 100 members of the S&P 500 announcing quarterly results. It also features a key OPEC meeting and economic data.

Today is relatively quiet, although Fed policymaker Esther George will speak.

Tomorrow begins with an OPEC meeting. The cartel (plus Russia) is widely expected to stick with planned oil-production increases. Tuesday also features earnings from major companies like Alphabet (GOOGL), Advanced Micro Devices (AMD), General Motors (GM), United Parcel Service (UPS) and Exxon Mobil (XOM). The Institute for Supply Management’s manufacturing index is also due.

ADP’s private-sector payrolls report follows on Wednesday, along with companies like Meta Platforms (FB) and Qualcomm (QCOM).

January’s Biggest Decliners in the S&P 500
Moderna (MRNA)-37%
Netflix (NFLX)-36%
Etsy (ETSY)-33%
EPAM (EPAM)-33%
Enphase Energy (ENPH)-32%
Source: TradeStation Data (as of 1/28)

Thursday brings weekly jobless claims and ISM’s service-sector index. Merck (MRK), Eli Lilly (LLY) and Ford Motor (F) are some of the big names on the earnings docket.

The Labor Department’s key non-farm payrolls report comes on Friday morning, plus results from Bristol Myers Squibb (BMY).

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