Lawmakers To Grill Robinhood, Reddit, And Feign Anger At Hedge Funds

The S&P 500 finished the session fractionally lower, but seven of the eleven sectors closed in the plus column. Energy continues its magnificent 2021 rally, and banks continue to live up to the hype. Both sectors are enjoying the benefits of higher inflation that could provide support for multi-year rallies.

I appreciate sessions like yesterday, where the broad market is slightly under pressure, and market breadth underscores more selling than buying.   

It’s what was being sold that was the storyline of the session.

Selling Grand Slams

Yesterday’s pressure came from profit-taking in the hottest stocks in the market. The good news is it looks as if most of the funds rotated into other sectors and industries. The question is what sparked the move. I’m convinced it’s the narrative of spiking bond yields. 

The S&P 500 has 328 winners this year, enjoying an average gain of 11.84%, with the top twenty winners average gain edging to its highest point of the year to 39.0%

To see the chart, click here.

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The NASDAQ Composite has 777 winners against only 216 losers, with an average gain of 21.2%. The top twenty enjoyed an average gain of 131.2%, down from 137.5% on Tuesday and 145.0% a week ago.

To see the chart, click here.

Riding the Waves

The fact the biggest winners of the year are leaking helps to explain how so many amazing earnings results are being greeted with selling. Think about the dream financial release:

• Strong top-line organic growth, driven by pricing power that beats consensus: check
• Gross margins expand: check
• Costs held inline without sacrificing product pipeline leads to higher operating margins: check
• Strong cash flow: check
• Higher net than revenue growth: check
• Earnings that blow away the Street: check
• Management offers strong guidance that hints at market share gain: check

The above scenario has played out often this earnings season, and perhaps the initial move is higher, but during the session, the stock sells off. As an investor, you have to decide to bend to the whims of the crowd or focus on your modeling and value proposition.

Even when the checklist is not perfect, knee-jerk selling probably undermines your personal long-term goals. 

Portfolio Review

We took profits in Financials and added to Consumer Discretionary yesterday.

Today’s Session

The Ringling Brothers and Barnum & Bailey Circus have been on the road since 1871 but were declared defunct on May 21, 2017. The circus delighted fans of all ages with the Greatest Show on Earth. For those that missed the circus or never got a chance to go, you might get the next best thing as the circus comes to Washington, D.C. today. 

The House Financial Services Committee is set to grill the primary actors of the Reddit Retail Investor Revolution. There will be fireworks. Lawmakers will act as if they are angry with hedge funds but somehow drop the bucket of water on the heads of individual investors.

There will be unintended moments of embarrassment as folks that were just briefed on paying for order flow, shorting, synthetic puts, naked shorting, failure-to-deliver (which is a huge, perhaps nefarious, problem), and the difference in obligations between a fiduciary and a broker.

To see the chart, click here.

I am not sure who will clean up the mess when it’s all said and done but grab your popcorn and  be prepared to be amazed.

Earnings

Walmart (WMT) posted earnings and stated it will raise the wages for 425,000 employees after it reported strong holiday sales.

• EPS $1.39 VS $1.51 consensus
• Revenue +7.3% y/y $152.1B; consensus $147.02B
• Q4 Walmart-only US comps 8.6%; 5.8% consensus
• Q4 Sam's Club U.S. comparable sales ex-gas 10.8%; consensus 8.3%
• Number of transactions -10.9% y/y
• Average purchase +21.9%
• Ecommerce +69%, with strong results across all channels.

 Segment Revenues

• Walmart US +7.9% $99.59B; Consensus $97.53B
• International +5.5% $34.87B; Consensus $33.72B
• Sam's Club +8.1% $16.59B; Consensus $16.33B
• Membership Income +2.9% $1.09B; Consensus $1.05B

Guidance

To see the chart, click here.

On the economic front, February Philly Fed came at 23.1, beating consensus for 20. New orders and shipments are down but still expanding.