We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Are Investors Too Complacent Heading Into Earnings Season?
Read MoreHide Full Article
The last two days notwithstanding, stocks have started 2023 on a bullish note, with many technology companies reemerging after a tumultuous year last year. A potential shift in sentiment may be underway, as the Nasdaq has been outperforming its peers this year, in stark contrast to the Dow’s outperformance in 2022. The gains have been welcomed by bullish investors with open arms as the major indices attempt to claw back some of their lost ground.
Still, this week’s market action is cause for concern. The VIX Index, commonly referred to as the “fear gauge”, has spiked more than 15% since hitting a yearly low just last week. The VIX generates a 30-day forward projection of volatility. It is derived from the prices of SPX index options and represents expectations for short-term price changes in the S&P 500. We can see below that the VIX entered a range where we have seen sharp reversals over the past year:
Image Source: StockCharts
The VIX is now up three days in a row as markets appear jittery heading into earnings season. In other words, the market is expecting price ranges to widen in the near-term, which is a common theme when stocks are falling. While not always the case, normally volatility trends higher as stocks fall. The old market adage speaks to this - stocks take the stairs up and the elevator down.
Another sentiment measure is the CNN Fear and Greed Index, which is a way to gauge stock market movements and determine whether stocks are fairly priced. The index is based on the logic that excessive greed tends to drive up share prices, which eventually marks a turning point and sends stocks lower. The index is a compilation of seven different indicators that measure market behavior, such as momentum, breadth, and volatility. As of earlier this week, the index was registering at a ‘greed’ level, indicating investors were complacent. It has since moved back to a more neutral level.
Since the beginning of the year, it’s been interesting to see what has led the way back up as equities have regained some of the lost ground. The most oversold names that were hit hardest last year displayed relative strength and directed this leg back up. The question remains if this is just another bear market rally, with this week’s price action certainly falling into the bearish category.
While it may be tempting to nibble at the more oversold pockets of the market, a much more prudent approach in terms of new trade initiations is to target stocks that are leading the way and are breaking out to the upside.
Keeping track of leading industry groups can help us identify stocks that are poised to skyrocket. It's no secret that investing in stocks located within the top-performing industries can provide a boost to portfolio returns.
This phenomenon has been well-researched and documented, consistently illustrating that about half of a stock’s future price appreciation is due to its industry grouping. Our own Zacks proprietary study has shown that stocks contained within the top 50% of Zacks Ranked Industries outperformed the bottom 50% by a factor of more than 2 to 1.
The Zacks Mining – Iron industry group is currently ranked in the top 1% out of approximately 250 industries. Because this group is ranked in the top half of all Zacks Ranked Industries, we expect it to outperform the market over the next 3 to 6 months. This industry has been a step ahead of the market at nearly every turn over the past year:
Image Source: Zacks Investment Research
Also note this group’s favorable valuation characteristics:
Image Source: Zacks Investment Research
One company within this leading industry group that is showing relative strength is Vale, S.A. (VALE - Free Report) . VALE is a diversified mining company that produces about 5% of global platinum group metals volumes each year. The company is a top global producer of iron ore, nickel, copper, and thermal coal. Shares have risen more than 50% since bottoming out in July of last year. Despite the impressive move, the stock is relatively undervalued, trading at just a 6.98 forward P/E.
Image Source: Zacks Investment Research
A Zacks Rank #2 (Buy), VALE has delivered a four-quarter average earnings surprise of 31.43%. The company has beaten estimates in three of the past four quarters, most recently posting Q3 EPS of $0.98/share – a 63.33% surprise over the $0.60 consensus estimate. VALE is slated to report Q4 results on February 23rd.
Investors appear to have been complacent heading into the action this week. Make sure to keep an eye on leading stocks like VALE as volatility picks back up.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Are Investors Too Complacent Heading Into Earnings Season?
The last two days notwithstanding, stocks have started 2023 on a bullish note, with many technology companies reemerging after a tumultuous year last year. A potential shift in sentiment may be underway, as the Nasdaq has been outperforming its peers this year, in stark contrast to the Dow’s outperformance in 2022. The gains have been welcomed by bullish investors with open arms as the major indices attempt to claw back some of their lost ground.
Still, this week’s market action is cause for concern. The VIX Index, commonly referred to as the “fear gauge”, has spiked more than 15% since hitting a yearly low just last week. The VIX generates a 30-day forward projection of volatility. It is derived from the prices of SPX index options and represents expectations for short-term price changes in the S&P 500. We can see below that the VIX entered a range where we have seen sharp reversals over the past year:
Image Source: StockCharts
The VIX is now up three days in a row as markets appear jittery heading into earnings season. In other words, the market is expecting price ranges to widen in the near-term, which is a common theme when stocks are falling. While not always the case, normally volatility trends higher as stocks fall. The old market adage speaks to this - stocks take the stairs up and the elevator down.
Another sentiment measure is the CNN Fear and Greed Index, which is a way to gauge stock market movements and determine whether stocks are fairly priced. The index is based on the logic that excessive greed tends to drive up share prices, which eventually marks a turning point and sends stocks lower. The index is a compilation of seven different indicators that measure market behavior, such as momentum, breadth, and volatility. As of earlier this week, the index was registering at a ‘greed’ level, indicating investors were complacent. It has since moved back to a more neutral level.
Since the beginning of the year, it’s been interesting to see what has led the way back up as equities have regained some of the lost ground. The most oversold names that were hit hardest last year displayed relative strength and directed this leg back up. The question remains if this is just another bear market rally, with this week’s price action certainly falling into the bearish category.
While it may be tempting to nibble at the more oversold pockets of the market, a much more prudent approach in terms of new trade initiations is to target stocks that are leading the way and are breaking out to the upside.
Keeping track of leading industry groups can help us identify stocks that are poised to skyrocket. It's no secret that investing in stocks located within the top-performing industries can provide a boost to portfolio returns.
This phenomenon has been well-researched and documented, consistently illustrating that about half of a stock’s future price appreciation is due to its industry grouping. Our own Zacks proprietary study has shown that stocks contained within the top 50% of Zacks Ranked Industries outperformed the bottom 50% by a factor of more than 2 to 1.
The Zacks Mining – Iron industry group is currently ranked in the top 1% out of approximately 250 industries. Because this group is ranked in the top half of all Zacks Ranked Industries, we expect it to outperform the market over the next 3 to 6 months. This industry has been a step ahead of the market at nearly every turn over the past year:
Image Source: Zacks Investment Research
Also note this group’s favorable valuation characteristics:
Image Source: Zacks Investment Research
One company within this leading industry group that is showing relative strength is Vale, S.A. (VALE - Free Report) . VALE is a diversified mining company that produces about 5% of global platinum group metals volumes each year. The company is a top global producer of iron ore, nickel, copper, and thermal coal. Shares have risen more than 50% since bottoming out in July of last year. Despite the impressive move, the stock is relatively undervalued, trading at just a 6.98 forward P/E.
Image Source: Zacks Investment Research
A Zacks Rank #2 (Buy), VALE has delivered a four-quarter average earnings surprise of 31.43%. The company has beaten estimates in three of the past four quarters, most recently posting Q3 EPS of $0.98/share – a 63.33% surprise over the $0.60 consensus estimate. VALE is slated to report Q4 results on February 23rd.
Investors appear to have been complacent heading into the action this week. Make sure to keep an eye on leading stocks like VALE as volatility picks back up.