Here's why it's time to bet against a key sector of the market ahead of the coming recession
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Phil Rosen
Jan 23, 2023, 17:58 IST
Spencer Platt/Getty Images
Good morning. I'm senior reporter Phil Rosen, writing to you from a fast-warming winter in Southern California.
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I see betting on something to win as an optimists' ideal path to wealth. The investor makes money, the company makes money, and the asset becomes more valuable.
Win-win-win.
But plenty of investors have made a career betting on something to lose. (Think about the hedge funds that sparked the epic meme-stock battle of 2020).
Sure, there's profits to collect if you can correctly guess when a thing is about to crash in value, but there's a bleaker undertone to winning that call. There's no win-win-win here.
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I always think back to the scene from "The Big Short" when Brad Pitt tells the two young traders to stop dancing after making a massive bet against the US economy.
If their bet hits, others will invariably feel the pain. Win-lose.
Today, I'm sharing a research note from one analyst who's eyeing a new bet to place against a corner of the stock market that offered refuge last year.
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1. The bubble is about to burst in consumer staple stocks, according to TheoTrade's chief market technician, Jeff Bierman. The finance veteran is also the former chief technical analyst for TD Ameritrade.
"The greatest opportunity to short on Wall Street, according to risk/reward, is consumer staples. This is the beginning of the breakdown in consumer staples, for the long term," Bierman wrote in a note highlighted by my colleague Carla Mozeé last week.
It's an ETF that tracks 33 stocks in the sector, and has more than $17 billion in assets, with the most weight going to household brand Procter & Gamble.
That fund saw a 0.8% slide in 2022, far outperforming the 19% dip in the S&P 500.
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"Every sector of the S&P [500] needs to come to a single-digit multiple before it signals a market bottom," Bierman wrote. "Semiconductors, oil, and retail (in certain parts) are there. Consumer staples - not even close."
He pointed to Coca-Cola, a favorite of Warren Buffett's that Bierman views as overvalued because its trading at a 26 multiple, a level misaligned with its earnings and revenue.
"It's a bubble. This stock can…be cut in half before it's attractive," he maintained.
In his view, the consumer staples sector, which served as a haven last year, presents a bubble about to burst. The signal comes in the form of a key chart pattern called the Marubozo, which in this case he sees as a strong indicator of a correction.
"We're heading into a recession," he noted. "And consumer staples are priced like growth stocks when they're actually value stocks."
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How much credence do you give to chart analysis for stock market outlooks? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.
In other news:
2. US stock futures fall early Monday, as investors weigh a potential slowdown in rate hikes at the Fed's upcoming February meeting. Meanwhile, cryptocurrencies continued to rise, with bitcoin trading around $23,000. Here are the latest market moves.
3. Earnings on deck: Axis Bank, Baker Hughes, and Brown & Brown, all reporting.
5. The stock market is about to be flipped upside down, according to Bank of America. The mega-cap tech trade that has dominated markets since the Great Recession will underperform in the coming years, analysts wrote Friday. In their view, a rebound in inflation will hit ahead of a recession.
8. Meet a former equities trader who now invests in real estate full-time and cash flows $45,000 per month. James Berkley has spent the majority of his career on Wall Street but said he now realizes that properties offer far more upside from a risk-reward standpoint. He explained four ways to make money in real estate.
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9. Wall Street is missing an oncoming drop in earnings that could contribute to another 20% sell-off in stocks. But a top UBS strategist explained how investors can avoid the pain.
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