February: Is the bull in charge?

February bull against the January torero...

January was a tough month. Santa Claus failed to deliver a rally. Omicron continued its deadly spread, and inflation went up and decided to stick around. Fed confirmed its commitment to tapering and indicated a more aggressive approach to higher rates. S&P 500 went down and broke the 4,300th level, (a drop of 10% from the highs indicates correction). This correction made safe-heaven mega caps in the Tech sector fall like old trees in a forest.

However, the 10% drop was quickly bought and, by the end of the month, the S&P 500 somewhat recovered. The heavy lifting during the recovery was done mostly by retail investors, with institutional money remaining risk averse. As retail investors are momentum driven and much faster than the institutions, this trend points to more volatility ahead.

We believe that the Fed's recent announcements regarding tightening and future increases in rates are priced in. We do not expect more unwelcome news in February, even if inflation will remain high (which is also expected). The recent quarterly results reported by companies indicate that the US economy will hold its ground at least for the near future.

So far, February has produced a nice recovery. Even though the possibility of another drop in the market remains high, there is growing evidence of a continued buying of the dip. It looks like there is a chance that the February bull market will overpower the January torero. Some strategists like Tomy Lee from Fundstrat are quite bullish and expect a rally. “When institutional investors are cautious, retail basically priced in a bear market and sentiment’s worst in eight years, you could have a huge rally. Recoveries from fast sell-offs are typically symmetric, meaning you should expect a violent rally.”

With no recession on the horizon, a recovery seems likely to us too, especially for the companies with businesses related to reopening. Since June of the last year, airlines and cruises remain in bear market territory (a drop of more than 20%), however over the same period, hotels performed in line with the S&P 500. With Omicron showing relatively mild symptoms and with the number of new cases declining globally, we expect this sectors to regain strength.

If unexpectedly the correction returns, it is likely once again to put pressure on the Technology sector including both expensive mega caps and small growth companies with low profitability. Due to the recent rally and the oil prices exceeding $90 per bbl for the first time in more than seven years, we expect downsiderisks to the Energy sector at least until the end of Beijing Olympics onFebrusry 20. We continue to like CRUZ in ETFs and Delta Airlines (DAL) as well as Alaska Air Group (ALK). We also see upside potential for cruise companies such as Carnival Corporation (CCL), Norwegian Cruise Line Holdings (NCLH) and Royal Caribbean Cruises (RCL).

This blog does not provide investment advice. Please do your own research and talk to professionals before investing.

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