Okay folks, we got a big week coming up and a lot to get ready for. And then I want to talk about one quickly emerging indicator that is approaching breakout levels that is honestly making me nervous. We'll talk about what this indicator is, telling us why it's moving up and what you need to know about it before the market reacts. Okay, first, I want to start with this piece from Schwab that puts into context the volatility that we're seeing right now.

They looked at the last 20 years and they found that pullbacks of 10 or more in the S P 500 occurred in 11 of the past 20 years, and that there are plenty of times where you got intra-year drawdowns of 10 or more, where the year actually ended up green as a whole, and if they ended up red on the year, the year after that actually ended up very, very positive. usually above average. but if you look at the last 10 years specifically, you had the median entry, your drawdowns being very close to 10. Yet over that decade you had huge, huge growth, and there was only one red year in that decade 2018 and that continues.

if you add 2020 and 2021 to that chart. The takeaway is that corrections of 10 or more are extremely common, and history says they tend to bounce back very quickly, and the periods of time where they don't bounce back fast. You actually I'm getting a higher rate of return than the periods of time where they just bounce and then come back really quickly. You add that to the stats that show that the higher the vixes, the more likely you are to get a bigger return over the next 500 forward trading days, and the stats that show that the small and medium cap market are historically oversold and well, there's enough reason to make your mouth start watering now.

Obviously, the S P 500 is the market average, and if you're in higher beta stocks, you've seen much, much bigger swings like in for example, the tech sector or the growth sector. The higher the beta, the higher and more extreme your swings are going to be in both directions. But if you look at the overall market as a benchmark, it does suggest that the higher the volatility, the more opportunity we have regardless of what we're looking at. Now let's talk about earnings for the past week.

So we were talking about how one of the big issues that we have approaching this early start to the year is that all of these companies are going to be reporting very, very hot data from the last year, the last quarter of the last year which was really, really strong, and then they're going to be guiding or being very, very evasive about guiding for the upcoming quarters because most people are expecting a slowdown in economic growth in the economy, and certainly for individual companies. So far, we're seeing very, very strong Q4 numbers. or at least calendar Q4 numbers. They all report on different fiscal calendars.

In terms of the mega caps that reported last week, the big ones were Microsoft, Apple, and Tesla and all of them reported very very strong. Beats Applestock. Had a nice reversal. after its earnings, they reported very, very impressive numbers.

I gotta admit, I was impressed. They said basically every area of their business saw growth year over year except for the ipad segment. They are still opting out of providing guidance, which is telling in and of itself, but they did say they think that supply chains are improving. Microsoft also bounced nicely after the original drama Drop on Its Earnings.

This one was probably the least overwhelming of the three reports, but still pretty damn strong. Tesla stock, arguably in terms of expectations, blew people away the most. Of course, Tesla stock also had the most negative reaction of the three, but hey, I think that most people were very, very much in agreement. This is a very, very bullish earnings report, but with Tesla stock, you're simply factoring in a lot more future than you are with something like an Apple or a Microsoft, and you're in a market that quite frankly wants to discount more and more of that future.

The more this inflation scare and monetary policy tightening narrative plays out, the less forward people are willing to look, And Tesla has been very, very much immune to a lot of this growth crisis over the last six months, really. But now you're starting to see people say hey, wait a second. This is factoring in a lot of multiples. We're trying to crunch multiples right now.

let's sell off. with Tesla. you have this long-term fundamental value expanding and Tesla the company is getting more and more valuable. But the problem is that the stock is getting more and more multiple crunched and as people crunch multiples, Tesla goes down regardless of how good the company is doing.

That is a very big inefficiency in the long run, but in the short to medium run could provide a lot more discount opportunities. I was watching another Youtuber that I respect a lot say that you should be buying Tesla in the 800s because this could be the last chance that you have to buy it in the 800s. I would be very, very careful with that because Tesla could easily go down to 7, 6, or even 500 in a larger, risk off, multiple crunching environment. If you get more rate hikes than the markets, pricing in this is going to go down a lot more because more of that future is irrelevant.

Any time you invest in a company based on its fundamentals instead of the chart you have to say in your mind, Well, the market doesn't always care about the fundamentals, it only cares about it over the long run. A lot of people look at a stock. They're like, okay, the stock and the company are the same thing. If the company's scaling up 50 100, 150 percent, year over year, the idea is, well, the stock should be the same.

But you also have that problem of, well, if the stock is already factored in a lot of years of growth and then all of a sudden the market doesn't want to pay for forward years, then you get into the situation where it starts crutching while the company is still earning more actual valuation. That's a medium to short-term risk for any company right now, but it's also a huge inefficiency. And with Tesla, I believe that you're going to have a very, very good opportunity. If this is a stock that you weren't able to write, the Other Bull trends in to buy a dip.

I just don't think it's here yet. Now in terms of earnings reporting this week we have a nice mix. Some of the most notable ones are: Exxon, Paypal, Amd, Gm, Starbucks, Microstrategy, Alphabet on Tuesday, Meta, Qualcomm, Spotify, Waste Management, T-mobile on Wednesday, Amazon, Snapchat, Ford, Unity, Honeywell, and Shell on Thursday and then Friday you got Royal Caribbean, Regeneron and so forth. Big representations from Energy Chips, Mega Tech, Manufacturing, Travel and Leisure, Consumer cyclical as a whole, and so forth.

You've also got a nice combination between mega caps, large caps, medium caps, and small caps, which we haven't really seen in previous weeks. You've seen a lot of representation from big Caps, but not so much from the smaller centers. In terms of what you want to be very, very careful around is Alphabet and Meta. These are two that have been very, very quiet.

You haven't heard a lot about them or a lot of anal speculation on them, but at the same time they have a huge impact on where the Nasdaq and the overall S P are trading. The problem with Mega Caps right now is if they report a huge beat, Maybe if the stocks are lucky, they'll go up a slight bit and then they'll get bludgeoned again. But if they report a disappointment and they underperform, they're going to get pushed to hell. And with that, they could take the overall indices and that's what you saw with Netflix a couple weeks ago.

So certainly very, very cautious with Alphabet and Meta. You also have a huge representation for how the advertising segment is going. Now, in terms of the overall market, you had a pretty nice bounce back day on Friday. Dow up one point six, Five percent S P up two point four, three percent Nasdaq up three percent Very, very strong day.

And it always confuses people why we see such strong bounce back days after such an aggressive sell-off Remember a lot of funds hedge against inflation and monetary policy tightening by doing what well shorting hire multiple stocks and especially tech stocks which are usually higher multiple. but oftentimes and the more aggressive the selloff is. the more risky it is for shorts to hold their positions over the weekend. So what happens when you have some going and covering their short positions? Covering of short positions causes some buying pressure which then causes more buying pressure as Algos that ride momentum switch from short to long and that causes a nice bounce which then can easily reverse the next couple trading days.

On one hand, the more extreme the green Fridays, the more people are covering their short positions over the weekend, which means the more risk that short sellers think we have at bottoming out. On the other hand, during the downtrend, the more extreme short positions are taken. the faster things are going to drop so you kind of have that push pull. But the more frequent and heavier these green bounce back days are throughout the overall downtrend, the more likely we are to have hit a bottom.

If you think about it, right now, we're in a euphoria market for short sellers as bulls. The more something hits 52-week highs without breathing, the riskier the position becomes. But as short sellers, the inverse is true. The more something has hit a 52-week low, the more risky it is for them to short it.

Right now, we're at a new peak in euphoria. for short sellers, they think that these stocks are just gonna keep going down and down and down and they're never going to bottom. But the more that they push them down and the more these equities are sold, the higher risk it is to keep shorting them if you short a company to the ground and it has a lot of cash on its balance sheet and there's no chance of it going bankrupt. Well, at a certain point, you've realized almost everything you could possibly realize as a short seller and anything else is an insane risk.

And that's the point where short sellers are like, okay man, we gotta start backing off. But anyways, in terms of indicators that are making me nervous, it's these energy indicators. Take a look at New York Exchange crude oil prices. A week or so ago, we passed October Peaks and we are on the verge of another break.

One of the deflationary factors in the last report was that in the beginning of December you had this massive drop off in oil prices and crude oil prices specifically, which took the entire month to rebound, which led to the Cpi report being a bit more timid than it otherwise would have, even though it was still hot overall. But this next report for January is going to be in a situation where it's not just significantly hotter than December, but it's been hovering around October highs as of recently, and now heading into February it's prime for a bigger breakout. This will be an extremely inflationary pressure for the cost of goods and services across the economy. You look at Brett Crude prices on the European exchanges.

you're above November highs. You're above 2018 heights. You look at natural gas. Even when natural gas went into free fall, it found support at a high range of the average of the last five years.

And now you're trading right around late 2018 heights. So why are energy prices going up? One is that inventories are depleted and there isn't much incentive to increase production dramatically to drop prices. During the pandemic, you had record low levels of oil demand. Oil producers dropped production to basically nothing and kept heavy inventories.

during the recovery. In late 2020 and 2021, those inventories were rapidly depleted as demand came back, but producers during that same time were in no rush to bring back production. Many producers had to accrue huge losses during the coveted shutdowns, and they wanted prices to recover a lot faster. And so now that we have demand back in some cases higher than pre-covered you have production well below what it was pre-coveted In December, Opec added 254 000 barrels daily to its combined production, which was extremely short of its 400 000 target.

By adding less barrels, they are restraining global supply. and by restraining global supply, you get a push in pricing pressures. next. And this is especially true in the U.s and Western countries.

There's been a ton of financial pressure on oil companies to switch from investing in infrastructure and investing in expanding production capacity to instead switch to paying off debt and deleveraging. The projections from most analysts is that traditional forms of energy are going to have less demand over the upcoming years as people switch to what, well, sustainable energy. So you've seen a lot of producers spend less money on expanding their production capacity, in some cases, actually lowering their production capacity and then going and paying off debt. So what that means is that all of a sudden when you have a huge short to medium term spike in demand, what happens if you turn off your production capacity? you could just turn it back on when the demand comes back.

But if you don't have that production capacity anymore or you haven't invested in new production capacity, well, it's not that easy to serve new demand. So you have the situation where in a lot of areas there's just no production capacity to actually pump the oil needed for the global stage, and a lot of companies are unwilling to even build that production capacity because a lot of the capacity that they would build is just going to have to be shut again in a couple years when prices go back down. So essentially, companies are not really wanting to expand into more production at a time where they need to, and in the cases where they are willing, it's taking a long time because you have to build something next. You also, of course, have the push of geopolitical tensions.

You have the whole Russia and Ukraine drama where you have people speculating that Russia's oil and gas exports could be cut off, and that would reduce an already low supply of global energy. One third of the gas and crude oil imported by the Eu is from Russia, if Europe is somehow cut off from that supply. what happens while all that demand gets put onto the other supply chains, and if all of that demand is bid up all at once, prices are going to go through the roof. They could double or triple now.

Obviously it seems like most proposals are suggesting that energy would be kept intact, but there's always that risk if there's a full-on invasion. So people are trying to speculate that in the price to factor in the risk of that happening. And remember, in the U.s you buy the dip, but in Russia dip by you. So anyways, I guess the point that I'm trying to make is that the one thing that is really worrying me in terms of this inflation problem is the pace of energy prices.

This is not showing any sign of slowing down right now, and if this continues throughout the year, even if it stops, but it stays at these rates, you're going to see very, very strong inflationary pressures. If you're somebody like me who does think that supply chain issues are coming slowly under control and will continue to trend in the right direction throughout 2022, and that slower economic growth is also going to put a damper on consumer demand, and those things are going to be very, very deflationary, Then the one thing that you really should still be worried about though are these energy prices. Because these are picking up. and if these continue picking up, they could totally counterbalance the effect of a lot of those deflationary pressures that we're hoping will put inflationary pressures on at least a longer term, healthy nominal trajectory.

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