Stock Portfolio Update: Mid-December is Key By: Christopher Mistal | December 08, 2022 | Email | Print

Next week is going to be a busy week for the market. Not only is the Fed meeting for the last time this year, but it is also quarterly options expiration week. Before the Fed meets PPI will be released tomorrow followed by CPI on December 13. Expectations for both inflation reports are for a continuation of the moderating trend that began in Q3. It seems most plausible that there will be no significant surprise in either inflation report and the Fed will proceed with its well telegraphed 0.5% increase in the Fed’s fund rate to a new range of 4.25-4.50%. 

 

At that point, all eyes and ears are going to focus on the press conference and the updated rate dot plot. Any sign of higher and/or longer for interest rates is not going to be well received by the market. However, we believe the Fed is likely to continue to shift towards a more dovish stance with monetary policy which could be sufficient to reignite the rally into yearend and beyond.

 

Seasonally speaking, mid-December has also been a major inflection point for the market. Over the last 21-years, the market typically begins its march higher on or around the tenth trading day of December. This year the tenth trading day is December 14, the same day as the Fed announcement. It is also around this point in December that tax-loss selling pressure begins to abate. We remain bullish and look for additional confirmation for this stance from the market next week. 

 

 

Over the last five weeks since last update through yesterday’s close, S&P 500 advanced 4.7% while Russell 2000 climbed 2.6%. Over the same period the entire stock portfolio was 0.7% lower, excluding dividends and any fees. Overall portfolio performance was weighted down by declines in numerous energy related positions as energy prices declined. After adding the 16 new positions presented in early November, the cash balance in the portfolio is still around 40% of total holdings. We are not targeting a specific amount of cash, but we do want to retain some to participate in this year’s upcoming “Free Lunch” basket that we will be emailed to members before the market opens for trading on December 19.

 

Energy’s continued weakness appears to be driven by China’s ongoing Covid-19 lockdowns and renewed domestic recession concerns. China does appear to be easing up on some of its most restrictive measures following recent protests. And despite the seemingly relentless calls for a recession sometime next year, economic data has remained relatively firm. There have been numerous layoff announcements, but overall employment numbers have held up so far. Economic growth forecasts also appear to be improving with the Atlanta Fed’s GDPNow model projecting Q4 growth of 3.4%. Absent a significant increase in domestic energy production, the current decline in energy prices is not likely to continue for much longer.   

 

Comstock Resources (CRK) was stopped out on December 5, when it closed below $15.75. CRK was closed out of the portfolio the following day at its average daily price of $14.81 for a 18.1% loss. Declining natural gas price and the conversion of preferred shares to common shares are the most likely causes for the decline. CRK was down again today even as natural gas bounced higher. Diamondback Resources (FANG) closed below its stop loss today. It will be closed out of the portfolio in the next update. All energy positions are on Hold. 

 

Outside of energy, many existing and new positions have performed rather well given the choppy trading so far this month. MGP Ingredients (MGPI) recently traded at a new all-time high above $125 on December 1. Accounting for the sale of half the original position in MGPI when it first doubled, the overall gain was 141.7% as of the close on December 7. MGPI is on Hold.

 

Northwest Pipe (NWPX) is another notable standout, trading at a new 52-week high earlier this month. As its name suggests, NWPX makes steel pipe and precast piping solutions used in a variety of applications. Its primary application is water related infrastructure products which is another area of U.S. infrastructure that needs upgrading and improvement. Hopefully some of the federal infrastructure funds do get allocated water system projects. NWPX is on Hold.

 

In the Mid-cap portfolio, five of the six newly added positions had modest gains at the December 7, close. Digi International (DGII) was the only position with a mild loss of 0.5%. All six positions presented on November 10, can still be considered on dips below their respective buy limits or at current levels.

 

Large-cap positions, on average, held up best over the last five weeks. Amdocs (DOX) traded within a few cents of its 52-week high earlier this month and is up 39%. Recently added Steel Dynamics (STLD) also had a solid five weeks gaining 10% since addition to the portfolio. All new trade ideas presented on November 10, excluding energy related companies, can be considered on dips below their respective buy limits or near current levels.

 

Please see table below for updated advice, suggested buy limits and stop losses.