What we learned this week and our investing strategy into next week

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American Eagle clothing and accessories retailer American Eagle store seen in Tokyo.

Budrul Chukrut | SOPA Images | Light Rocket | Getty Images

(This article was sent first to members of the CNBC Investing Club with Jim Cramer. To get the real-time updates in your inbox, subscribe here.)

The S&P 500 edged higher this week and moved within striking distance of its all-time highs while the tech-heavy Nasdaq notched a new record. The more economically sensitive Dow Jones Industrial Average pulled back, however.

Driving the action was renewed lockdown fears and worries about the global economic recovery amid a rebound in COVID cases that has resulted in somewhat of a rotation out of the reflation/reopening trade and back into secular growth stories.

Our strategy

Despite the rotation, we would not turn our backs on the reopening trade. Between the approval of vaccine boosters, the development of highly effective antivirals, and the wide availability of rapid tests, we have more tools at our disposal to combat this pandemic than ever before. At the end of the day, our approach to the market right now is to continue to monitor the rotation, maintain diversification and our portfolio “barbell” of reopening plays and secular winners, and search for bargains in special situation stocks. 

Under the hood this week, the S&P 500 was led by consumer discretionary stocks followed by information technology. Energy was the largest drag on the index this week followed by financials and materials.

What we learned this week

Here is a quick look at some of the broader market measures we like to keep an eye on: The dollar index strengthened to near the 96 level. Gold is holding in the mid-$1,800s region. WTI crude prices have pulled back to the mid-$70s per barrel region. And the 10-year Treasury yield slipped to the lower 1.5% level.

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Within the portfolio we heard from WalmartCisco Systems and Nvidia. (Click the company names for links to this week’s club updates.)

In addition to earnings, we received a few notable macroeconomic readings this week starting on Tuesday with the U.S. Census Bureau reporting that retail sales increased 1.7% in October, ahead of estimates and following a 0.8% advance in September. The reading speaks to the strength we saw in the consumer discretionary sector this week (as noted above). Excluding autos, sales were up 1.7% versus expectations for a 1.0% increase; excluding autos and gas sales were up 1.4%, also ahead of the 0.7% expected. Note, we like to look at these ex-auto and ex-auto and gas readings to get a better sense of the underlying trend as energy and high ticket items such as automobiles can introduce a high level of volatility to the monthly numbers.

Under the hood, on a monthly basis we saw strength in sales at nonstore retailers (+4.0% MoM), gasoline stations (+3.9% MoM) and electronics & appliance stores (+3.8% MoM). On an annual basis the leaders were gasoline stations (+46.8% YoY), food services & drinking places (+29.3% YoY), and clothing & clothing accessories stores (+25.8% YoY).

Also Tuesday, the Federal Reserve reported that industrial production advanced 1.6% in October, well above expectations for a 0.9% advance while capacity utilization increased to 76.4%, exceeding expectations of 75.9%. Driving the industrial production number was a 1.2% increase in manufacturing, compounded by a 4.1% advance in mining and a 1.2% increase in utilities. As for capacity utilization, we saw a 0.9 percentage point (pp) increase in manufacturing, a 3.1pp advance in mining and a 0.8pp increase in utilities. With October’s results, industrial production is up 5.1% YoY while capacity has increased 0.3% from the same time last year. This is an important reading that many use to gauge future inflation as the signs will start to show up higher in the supply chain with input costs, especially if capacity is being stressed as indicated by high utilization rates, before trickling down into the cost of finished goods.

On Wednesday, the U.S. Census Bureau reported that housing starts fell 0.7% in October to a seasonally adjusted annual rate of 1.52 million, missing expectations for a rate of 1.58 million. Compounding the miss, September’s reading was revised lower to indicate a 1.53 million seasonally adjusted annual rate, down from the 1.56 million rate previously reported. As for building permits, units authorized rose 4.0% in October to seasonally adjusted annual rate of 1.65 million, edging out expectations for a rate of 1.63 million. With October’s results, housing starts are up 0.4% annually, while building permits are up 3.4% versus the year ago period.

On Thursday, the U.S. Department of Labor reported that in the week ending Nov. 13, initial jobless claims were 268,000, representing a weekly decline of 1,000, though it was above estimates for 260,000. Moreover, this was the lowest level of initial claims since March 14, 2020, the early days of Covid, when it was 256,000.

The prior week’s reading was revised higher to 269,000, up from 267,000 previously reported. Importantly, the four-week moving average, used to smooth out weekly volatility, came in at 272,750, representing a decline of 5,750 from the previous week’s revised average of 278,500 (revised up from 278,000 previously reported). Similar to the weekly number, this represents the lowest level for the moving average since March 14, 2020 when it was 225,500.  

What we are watching ahead

Looking ahead, earnings season continues next week, within our portfolio we will be hearing from American Eagle Outfitters on Tuesday, before the opening bell.

Here are the earnings in the week ahead we’ll be monitoring:

Mon 11/22

Open:  Avaya Holdings (AVYA)

Close: Agilent (A), Urban Outfitters (URBN), Zoom Video (ZM), Jack in the Box (JACK), Arrowhead (ARWR)

Tues 11/23

Open: American Eagle Outfitters (AEO), Best Buy (BBY), Medtronic (MDT), Dollar Tree (DLTR), Dick’s Sporting Goods (DKS), Analog Devices (ADI), Burlington (BURL), JM Smucker (SJM), Abercrombie & Fitch (ANF)

Close: Dell (DELL), HP (HPQ), Gap (GPS), Nordstrom (JWN), VMware (VMW), Autodesk (ADSK), Pure Storage (PSTG), Nutanix (NTNX)

Wed 11/24

Open: Deere (DE)

Close:

Thurs 11/25

Thanksgiving
Fri 11/26

Open: Pinduoduo (PDD)

Close:

On the macroeconomic front, in addition to keeping an eye on the geopolitical sphere, we will be watching out for the following releases (all times ET):

MONDAY          

8:30 Chicago Fed

10:00 Existing Home Sales 

TUESDAY         

9:45 PMI Composite 

10:00 Richmond Fed Index

WEDNESDAY            

8:00 Building Permits

8:30 Jobless Claims 

8:30 Durable Orders 

8:30 GDP (Revision)

8:30 Inventories 

10:00 Michigan Sentiment 

10:00 New Home Sales

10:00 PCE Deflator

10:00 Personal Consumption Expenditure

10:00 Personal Income

14:00 FOMC Minutes

THURSDAY

Thanksgiving

FRIDAY             

(1 pm  Market Close)

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 (Jim Cramer’s Charitable Trust is long AEO.)