In this weekly Jarvis Update, Left Brain’s Director of Research Brian Druss and CEO/CIO Nolan Langford review the market’s recent performance and debate whether the current risk‑on rally is sustainable. They start with a macro recap: the S&P 500 rose 3%, the NASDAQ 5.3%, the Russell 2000 3.6%, while the 10‑year Treasury rate fell from 3.5% to 2.75% before edging back to 3%, highlighting ongoing rate volatility. The hosts then dissect the rally, noting that the strongest gains came from previously beaten‑down sectors—biotech (XBI), ARKK‑style tech, homebuilders (ITB), cybersecurity (CIBR) and software (IGV). They question whether the upside is driven by short‑covering and sentiment rather than improving fundamentals, especially since many of the biggest 2022 losers posted the biggest weekly gains. They flag earnings season as the next major catalyst to test whether price moves align with business health. The conversation shifts to commodities, where the team has long‑standing conviction in oil & gas and base‑metal exposure. They point out that energy‑related indices (XLE) and copper have each fallen ~25% over the past month despite unchanged fundamentals, creating potential buying opportunities. Nolan emphasizes the strength of oil‑gas fundamentals—single‑digit forward P/E multiples, free‑cash‑flow yields north of 15%, and disciplined supply—making the sector “more convinced than ever.” Rio Tinto (RIO) is examined as a representative base‑metal play. After a drop from the high‑80s to the low‑50s, the stock still offers a 13% dividend yield, consistent free‑cash‑flow generation, and a sizable buyback program, suggesting value despite recession‑related demand concerns. A similar case is made for Cliffs (CLF), an integrated steel and iron‑ore producer with a 2× forward earnings multiple and exposure to a recovering auto sector. The hosts conclude by urging investors to watch for confirmation of fundamentals during earnings, consider the rally’s sustainability, and view the recent commodity price declines as potential entry points. Throughout, they promote their subscription service, new research reports, and encourage audience engagement.
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Plenty of green on the screen this week. Can we trust the rally? We answer that question and more in this week's Jarvis Update. I'm your host, Brian Druss, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.
Thank you, Brian.
All right, well, markets finally had a risk-on week. They were led by biotech and other technology stocks. As always, we're going to cover a couple of topics. The first topic is going to be the one, the risk-on rally, and the second topic is going to be commodities. That's one that's been giving us heartburn over the last month. So we're going to go ahead and cover that. Before we get started, a couple of announcements for our subscription service. We've got a new report from Garvit Bhandari on an aftermarket part auto parts retailer, and we've got another one in the hopper coming from Madhu Chaudhary on a construction supply distributor. And it's an on week for the newsletter. We're back, so check it out. We've got our new template, so, uh, would love your feedback on all that. And finally, get on the mailing list, uh, if you want to receive the newsletter, the Jarvis Update, and everything else that we produce in your inbox every Saturday. We'll jump right into the market recap. So again, we finally had a great week this week in the markets. S&P was up 3%, NASDAQ was leading at up 5.3%, and then we had the Russell 2000, the small cap Cap Index up 3.6%. So pretty strong across the board. We saw the 10-year Treasury rates drop all the way to 2.75%. They were at 3.5% just a few weeks ago, and then they're quickly back to 3%. So a lot of volatility in rates. Volatility is down a bit, but we're not totally back to normal by any means. With that all as a backdrop, Nolan, what are your general thoughts on what we've seen this week?
So it's good to see some green on the screen. You know, the downside volatility that we've seen has been breathtaking, but more of the same. It's kind of exhausting. You know, what we've seen today is, you know, the rally that we've had, the most powerful rally for those shares have been shares that have been beaten down the most. So it's hard to really make much of anything. It is good to see some buying. We're watching to see if it'll continue. We need some follow-through here, but no, it was good to see some green on the screen. It looks like the advance decline line was fairly strong.
Right. No, it's good you point that out. You know, this year when we've seen rallies, it's been one sector or another and it hasn't been broad-based. And I guess maybe this is a little bit of a change in the regime. We'll see if there's follow-through next week. And of course, we're moving into earnings season, our favorite time of the year, and we're going to learn from the companies themselves. Are they actually doing better or has it just been kind of a head fake on the stock price? So and with that, we'll move on to topic 1. So topic 1, we're calling the risk-on rally. If you take a look at what's done the best in the last week or two, uh, we looked at XBI, that's the biotech index, that's up 15% each of the last 2 weeks. So a huge move there. We're also seeing strength in ARKK, ARKK, that's an index that carries a lot of small-cap, mid-cap type of tech names. Home builders, which have been down quite a bit, we're looking at the ITB here, we're, we're strong this week. Also had some strength in cybersecurity, CIBR. I'll put that on the screen. And then finally, software, IGV. Of course, as Nolan had mentioned, these are a lot of the most downtrodden sectors. So, you know, we're questioning whether we think this is a rally for real or just a kind of a head fake. What do you make of this overall rally, Nolan? Are we bottoming?
Let's hope so. You know, we came off the one of the worst first halves of the year that we've had, and modern history, and especially in recent memory. And I think most people anticipated when we get to the second half of the year, things would be better. We're also at the beginning of the month, and we've seen this pattern exist where new money comes into the market at the start of the month. And we have seen some inflation numbers and some inflation data that leads us to believe that inflation could be peaking. We also have to remember there are some upcoming catalysts that will be coming. Eventually, the war will end. The big one is earnings. That's a huge catalyst. And we start to get the numbers flowing in next week and then the following week. And so we'll get a chance to get a peek at how these companies are handling these conditions, uh, the tighter supply chains, they're increasing costs. But I think for now, the market, uh, the sun is out for the market, which is really good. And let's hope the increased improved sentiment, uh, let's hope it continues.
Absolutely. And a big fingers and toes crossed on inflation peaking. I think that'd be great for everyone. Whether you be a consumer or an investor. So that's something we'll be keeping an eye on. Follow-up, Nolan, you and I were digging through the micro and kind of some of the companies that were doing the best this week. We saw some huge moves, 10, 20, and 30% moves in a lot of stocks. But what we saw as a commonality between those is a lot of those are the biggest 2022 losers. So the fact that the biggest losing stocks, the most shorted stocks, are the ones that did the best this week, does that give you any pause that this might be a head fake?
Yeah, you'd have to have some suspicion, um, you know, but hey, look, the fact that shorts are covering their shorts, that's still buying. And so that is a good sign. We'd like to see it persist, particularly when we get to earnings next week. You know, from our investment philosophy, we need not only positive price movement, but we also need an improvement in business conditions and business fundamentals. And we haven't seen anything this week that told us that businesses were getting better. As a matter of fact, with some of these share price moves, we've seen the biggest moves in shares of companies that we're convinced that they're not very good. Bed Bath Beyond being up 22% or something. So that does cause some caution, but the fact that there's buying coming in, um, can lead to improved sentiment and that can sort of be self-fulfilling because we have seen this detachment from price and fundamentals. Case in point has been energy. Where these stock prices are moving and you have a hard time explaining why they're moving up or down because there is no news to speak of. The fact that we're getting some, uh, some buying will take us a good sign, um, and we'll look for confirmation when we get to earnings.
Yes, it's interesting you mentioned that, Nolan, and I've said for months now that everything seems pretty flow-based and a lot of decoupling from fundamentals. You know, we've seen a lot of, a lot of stocks going up that have bad fundamentals and vice versa. So it's hard to feel convicted on almost any move higher. So with that, we'll move on to topic 2. So topic 2 is commodities. This is something that's been giving us a lot of trouble in the last month or so. In 2022, in terms of ideas that we're most convicted on, it's certainly been in the oil and gas space and beyond that, materials, metals, et cetera. Just taking a look back at the last month, if you look at the XLE, that's a good index in a basket of energy-related stocks. That's down around 25% on a 1-month basis, as you can see from this chart here. And also a similar move, I'm going to put up the chart of copper, the commodity that trades at the Chicago Mercantile Exchange. It's had a similar move, down around 25% in a month. Again, as I said, a lot of what we're seeing lately does seem flow-based. Commodity trade was extremely popular in the first half of the year, given the inflationary pressures that we see in the marketplace. So obviously a lot of investors were gaining exposure to energy, oil and gas materials and things along those lines. So maybe the boat kind of got too heavy on one side and tipped over today. And that's Thursday the 7th. We saw a big bounce in energy materials and natural gas was actually up double digits in one day. So pretty breathtaking move there. First question I have for you, Nolan, is, are you still convicted on oil, gas, materials and the like?
Yes.
Yes. Why don't you tell us a little bit more about what keeps you convicted there?
So just the fundamentals. If you look at oil and we said this going back a long way, we'll get to the other commodities in a second. But the big one everybody thinks about is oil. Uh, you need oil as a feedstock for, for natural gas, uh, plastics, chemicals, and other things. So that's the sort of the big one. We said this a long time ago, even when oil prices were approaching $120 a barrel, the stocks themselves did not follow point for point. They lagged behind oil for a long time, and the stocks stayed cheap. You know, forward P/E multiples on a lot of these stocks are single digits, so they're still well below the S&P. And I told you that investors were not extrapolating the E part, the earnings being around very long. And so when oil started to come off its highs, these shares going down as much as they have is sort of a head-scratcher. That means the fundamentals for these businesses didn't change very much, but the stock prices became much, much cheaper. The big point here is that the fundamentals continued to stay very, very strong. A lot of cases you're getting free cash flow yields north of 15%. That is just very, very attractive in a world where 100 million barrels per day, um, is going to be the norm. And that is not even accounting for the Russian barrels off the market. So the first one on oil, yes, I'm more convinced than ever. The businesses are just as good, if not better, and prices are cheaper. I think one of the things that we may be missing as well, there was this, um, rumors that started to come out that Hey, these producers are going to get undisciplined. The longer oil stays, you know, $100 or more, the more tempted they're going to be to put some more straws in the ground and do more drilling. And one of the things that held up the oil price is the lack of supply and perceived discipline. I think with this quick downturn, a lot of these share prices, a lot of these shares, some of these oil and gas companies have not only erased their year-to-date gains, some of them are actually showing negative returns. You know, after that big smack upside the head over the last 4 to 6 weeks. So I think if they were tempted to start drilling more, I think this has been a stark reminder, uh, to take your hand off the stove. So, uh, yes on energy. And I think a similar analysis for these other commodities. I know we're going to talk about one of the names that we've liked all year, which is Rio. Very high conviction still on, on the oil and gas businesses. I think people are going to get interested again when they start reporting earnings and hear about all of this cash that they're producing. And investors are really going to be licking their chops when they hear about the cash that's coming their way and increase in dividend payments.
I'll just say it this way. When we see stocks dropping 25% and 30% with no change in the fundamentals, we consider that more of an opportunity than anything else. So definitely something to keep an eye on, possibly take advantage of in the oil market. And then, Nolan, as you kind of alluded to, we have interest in other commodities. And a particular company that we've looked at and talked about on this show a number of times is Rio Tinto. That's ticker RI. CIO. In the last month or so, definitely a big drop there, I think around 25% as well, maybe a little bit more. Nice little recovery today. Talked about recession, of course, and I think a lot of these commodities are responding to potential recession. And of course, copper's dropped more than 25% in a month. I think investors are concerned how that will fare if there is a recession. But if there isn't, or if there isn't such a deep recession, maybe these things are undervalued. Um, can you talk a little bit about Rio, what we like about it, and maybe the opportunity here down in the 50s?
Uh, let's talk about the, uh, the pain points first. You know, uh, these Rio shares, I know we highlighted them back in April on one of our shows that we did, and I think the shares were approaching 80, uh, at the time. And, uh, since then they've almost been a straight line down to the 50s where they were, they traded today. So they've erased their year-to-date gains. And as of, uh, today, last time I looked, they were down about 5% on a year-to-date. You know, Rio is a base metal producer, so they get their base metals from Australia— iron ore, copper, some diamonds, a lot of aluminum. So a lot of these base metals that you need for, for goods and products, a lot of that stuff is shipped to Asia. So I think there could be— there was a few things that happened that could explain the price movement. There's at least a few. A couple are fundamental and the others are technical. I think the thought is if we have a recession, we're going to need, you know, less copper and less aluminum and less iron ore. So that would be the fundamental part. And I think the other fundamental part is China, you know, when they relocked down, you know, they're a big importer of these base metals. A lot of them didn't have a place to go. So that could be the fundamental reasons. Again, I think those things are temporary. I don't think you could have the market rallying in anticipation of the recession not being as deep, but also have these base metals falling out of the sky like a 747. People need to remember, even with base metals, people look at commodities being unpredictable, and they are. But even this, with this lack of predictability, Rio has still produced free cash flow every single year in recent memory, even when base metals were priced much lower. So they have a huge stock buyback they're doing. And let's not forget that dividend at today's price, which equates to 13%. So I think that there's a lot to like, particularly in Rio. And there's another name we could have mentioned but we didn't, which is Cliffs, which is a U.S.-based, um, steel— integrated steel and iron ore producer. Kind of a similar stock pattern. Where it's been cut down a lot. At one point this year was up over 30% on the year, and now I think it's down close to 30. So, uh, it trades at 2 times forward earnings. A lot of their output goes into the auto industry, which most people think is poised to recover. So we think that there are some opportunities. Absolutely.
No, especially if you're an income investor, that 13% dividend does look really good. You know, we saw a much better week this week. We saw strength especially in the risk-on sectors, and a nice little recovery in commodities on Thursday's session after, um, pretty brutal month. But, uh, definitely seeing opportunity there. We'll go ahead and ask you to like, share, and subscribe to the video if you found it useful. Leave a comment, we'd love to engage with investors here. Thank you to all of you who have joined, and thank you to Nolan. Have a great weekend.
