1 Year Of Ukraine War and PCE Price Index

Whipsaw was the word of the day on Wednesday as we gapped higher at the open (up 0.68% in the SPY, up 0.46% in the DIA, and up 1.26% in the QQQ).  Then, after 25 minutes of finding their feet, the bears stepped in to drive a strong selloff that took all three major indices to the lows of the day (which was down 0.6% from the prior close) at noon.  From there, the bulls stepped in to lead a long, slow, steady rally that got us back to the opening level by 3:30 pm.  Finally, the last 30 minutes saw more selling in all three indices of note.  This action gave us black-bodied, indecisive, Spinning Top candles in the SPY and DIA as well as a black-bodied Hammer candle in the QQQ.  All three major indices remain below their T-line (8ema), but are close enough now that there is no question of over-extension at this point.

On the day, six of the 10 sectors were in the green as Energy (+1.78%) led the way higher (by eight-tenths of a percent) and Communication Services (-0.71%) lagged the other sectors.  At the same time, the SPY was up 0.53%, the DIA was up 0.35%, and QQQ was up 0.87%.  The VXX fell 3.52% to 11.79 and T2122 has climbed back into the mid-range at 45.40.  10-year bond yields fell again, this time to 3.888% and Oil (WTI) jumped 2.27% higher to $75.63 per barrel.  So, overall, we saw a back-and-forth day where we gapped up, faded the gap and continued the same distance lower, and then reversed course again to end up just below where we opened.  If that doesn’t say “INDECISION,” then I don’t know what does.  All this took place on a greater-than-average volume, in fact, much larger-than-average in the DIA.

In economic news, the second estimate of Q4 Gross Domestic Product came in lower than expected at +2.7% (compared to a forecast of +2.9% and the Q3 final reading of +3.2%).  This gave bulls the energy to gap higher at the open on the theory that slower Q4 growth will tell the Fed their measures are working and they can go with a smaller hike during their March meeting.  At the same time, the second estimate of the Q4 GDP Price Index came in above expectation at +3.9% (versus the forecast of +3.5% but still improved from the Q3 value of +4.4%).  Meanwhile, Weekly Initial Jobless Claims came in lower than expected at 192k (compared to a forecast of 200k and even slightly down from the prior week’s 195k number). Again, this all pointed to a goldilocks scenario in the bulls’ eyes.  GDP was falling, but still growing, inflation was trending in the right direction, and yet fewer than expected jobs are being lost.  To bulls, this suggests an economy that is not in serious trouble and a Fed policy that is still doing the job.

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In stock news, BA announced it will stop production of its F/A-18 fighter jet in 2025.  BA said this will free up resources to focus on winning the race to build the pentagon’s 6th generation fighter contract and building the MQ-25 autonomous refueling tanker.  (LMT and NOC are also competing for the sixth-generation fighter contract.)  Meanwhile, HUM announced it will exit the employer-based insurance business entirely to focus on government-backed programs such as Medicare and direct-to-individual insurance like medicare supplement insurance.  Later, NEM said it sees significant value created for its shareholders in a deal and is in talks to buy NCMGF.  Several of NEM’s competitors have said they are not interested in NCMGF, but the company still rejected NEM’s initial bid (which NEM said it is open to sweetening).  Elsewhere, NFLX said Thursday that it has cut the prices of its subscription plans in some countries in order to boost the number of subscribers.  The Wall Street Journal reported those cuts were in countries in sub-Saharan Africa, Latin America, the Middle East, and Asia.

In stock legal and regulatory news, NVS agreed to pay $30 million to healthcare plans and consumers to settle claims that it schemed to delay the US launch of generic drugs that would compete with its name-brand Exforge hypertension drug.  This was part of a broader $245 million settlement.  Meanwhile, a federal judge in Detroit moved more toward SBUX and dealt a blow to the NRLB ruling against the company.  The judge narrowed his previous “cease and desist” order barring the company from firing pro-union employees.  Originally, the order applied nationwide, but the just has now narrowed this to only cover a single store (in essence allowing SBUX to fire any pro-union employees elsewhere).  This is critical since 280 SBUX stores have unionized in the last two years out of 9,000 US locations.  Elsewhere, after the close, the FAA reported that BA has halted the delivery of 787 Dreamliner jets while it investigates a fuselage component.  (BA has not delivered a 787 since January 26 and there is no timeline available for the resumption.)  Finally, the US Dept. of Justice has asked a federal judge to sanction GOOGL after it claimed the company destroyed evidence by deleting internal corporate communications that had been subpoenaed as part of its antitrust case against GOOGL (related to internet search business).

In energy news, the EIA Weekly Crude oil Inventories saw stockpiles grow for the ninth-straight week.  The report showed an inventory build of 7.648-million-barrels (compared to a forecast of a 2.083-million-barrel build).  Crude inventories have grown by over 60 million barrels so far in 2023.  In addition, refineries operated at 85.9% capacity over the week, down slightly from the prior week and well below the 90% average capacity for this time of year.  Meanwhile, due to the reduced refining, the week saw a drawdown of gasoline inventories by 1.856-million-barrels (versus the forecast of a 0.108-million-barrel build and far less than the prior week’s 2.317-million-barrel build).  However, distillate (diesel and heating oil) inventories rose by 2.698 million barrels (compared to a forecast of a drawdown of 1.126 million barrels and the prior week’s drawdown of 1.285 million barrels).

In miscellaneous news, the USDA released its forecast calling for a 26.8% fall in egg prices during 2023.  The primary factor was that the agency is not seeing a rebound in bird flu after massive culling efforts in 2022.  Meanwhile, a group of Republican states has filed suit against the SEC, challenging the SEC requirements that investment funds reveal how they vote on shareholder ballots (like pay packages).  In the crypto space, the SEC and NY State’s top financial regulator both opposed Binance buying bankrupt crypto lender Voyager.  Both announced the grounds for their opposition is the ”unregistered offer and sale of securities,” which essentially declares crypto to be a security and is just another step in government opposition to cryptocurrencies.  Finally, the Biden Administration announced it will nominate former MA exec Ajay Banga to head the World Bank.

After the close, INTU, BKNG, MELI, ADSK, VICI, LYV, CHE, SWN, RHP, CWK, KWR, LUNMF, ACA, FTCH, SATS, EIX, and OPEN all reported beats on both the revenue and earnings lines.  Meanwhile, FND, PRI, BWXT, INT, CENX, and ZEUS all missed on the revenue line while beating on earnings. On the other side, SQ, PBA, ASR, SEM, ATSG, and SPNT all beat on revenue while missing on earnings.  Unfortunately, WBD, CE, BECN, OII, CVNA, and ACCO missed on both the top and bottom lines.  It is worth noting that CE, FND, ACCO, and ATSG lowered their forward guidance.  However, CHE and OII both raised their forward guidance.

Overnight, Asian markets were mostly in the red.  Japan (+1.29%) and South Korea (+0.53%) were the only appreciable green in the region.  Meanwhile, Hong Kong (-1.68%), Thailand (-1.12%), and Shenzhen (-0.81%) led the rest of the region lower.  In Europe, we see a similar picture taking shape at midday.  The FTSE (+0.21%) is among the handful of green bourses while the DAX (-0.60%) and CAC (-0.57%) are more typical and lead the region lower in early afternoon trade.  As of 7:30 am, US Futures are pointing toward a gap lower to start the day.  The DIA implies a -0.57% open, the SPY is implying a -0.63% open, and the QQQ implies a -0.90% open at this hour.  At the same time, 10-year bond yields are up to 3.912% again and Oil (WTI) is up a half of a percent to $75.80/barrel in early trading.

The major economic news events scheduled for Friday include the January PCE Price Index and January Personal Spending (both at 8:30 am), Michigan Consumer Sentiment and January New Home Sales (both at 10 am).  Fed member (non-voting, hawk) Mester also speaks at 10:15 am.  The major earnings reports scheduled for the day include CM, GTLS, CNK, EOG, EVRG, FMX, FYBR, GTN, DINO, IEP, and LAMR before the opening bell.  Then after the close, CRC reports.

So far this morning, FYBR, EVRG, CRI, GTN, and PNM have all reported beats on both the revenue and earnings lines.  Meanwhile, CM, LAMR, and GTLS have missed on revenue while beating on earnings.  On the other side, CNK and DINO both beat on revenue while missing on earnings.  There are no major reports that have reported misses on both lines.  (FMX, IEP, and SSP report closer to the open.)  It is worth noting that CRI has lowered its forward guidance.

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One year into the Russian War of Expansion against Ukraine, the war drags.  The Russians continue to be willing to take hundreds of thousands of casualties (by most estimates more than 100,000 dead).  On the other side, the West (and the US in particular) seems only willing Ukraine enough military aid to check the Russians.  (As opposed to decisively throwing them out such that they will not come back after regrouping.)  In terms of the business impacts go, according to US News and World Reports, these are the biggest losses.  PM generated 8% of its revenue from Russia and Ukraine prior to the war and that has taken a hefty hit.  PEP was generating 4.4% of total revenue from those two countries prior to the 2022 invasion.  MCD lost 4.2% of its revenue and also took a significant haircut on the assets it sold at fire sale prices to exit Russia.  Less obvious losers are MHK (which lost 4.3% of its revenue which came from Russia and Ukraine), EPAM (which used to generate 4% of revenue from the two countries, CCL (which previously got 3.5% of its revenue from Russia and Ukraine), PVH (lost 3.6% of its revenue), and WAB (which lost 3.5% of its revenue from those two countries).  The biggest corporate winners from the war are LMT, RTX, NOC, and GD, all of which have received new multi-billion dollar orders for everything from Javelin missiles (LMT), to HIMARS rocket systems (LMT), to Stinger missiles (RTX), to Stryker fighting vehicles (GD), to Abrams tanks (GD), to heavy-caliber ammunition (GD), to drones (AVAV).

With that background, it looks like the bears want to gap markets back lower in all three major indices. Still, this leaves all three major indices basically in a consolidation area of the recent downtrend. (At least at the current premarket prices.) Extension is not a problem either in terms of T2122 or the T-line. We’re sitting at a potential support level at the moment. However, all three major indices also face resistance just above after the last few days. The trend remains bearish in the short term while the basic character of the market has been “chop and thrash back-and-forth” in recent weeks. Yesterday, in particular, was a whipsaw day on the intraday chart. So, continue to show some caution and remember that it’s Friday (payday). So, lock in some profits where you can and prepare your account for the weekend news cycle.

As always, be deliberate and disciplined…but don’t be stubborn. If you have a loss, admit you were wrong and take that loss before it gets out of hand. And when the price does move in your direction, always move your stops in your favor and take a little profit off the table. You have to keep the “Legend of the man in the green bathrobe” in mind. In a winning situation, it is NOT HOUSE MONEY you’re betting, it’s YOUR MONEY! There is absolutely no reason to keep raising your bet (risk) size just because you’ve had a win. Finally, remember that trading is not a hobby. It’s a job. The money is real and so is the risk. So, treat it that way. Do the work and follow the process. Stick to your trading rules, trade with the trend, and take those profits when you have them. Do the work!

See you in the trading room.


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