Contractor Def Tightened and CES Underway

On Monday, the Bulls took a little revenge for last week.  The SPY opened a bit higher at +0.07%, DIA gapped down 0.33% (as BA weighed heavily on the Dow), and gapped up 0.29%.  However, after the opening bell, QQQ rallied sharply until 10:50 a.m. and then began a slower, 45-degree rally that lasted the rest of the day.  At the same time, the SPY steadily rallied along a 45-degree angle all day long.  DIA was the laggard as it had to overcome the terrible BA move and it took the Dow 30 minutes to reverse the selling before starting a wavier 30-degree rally that finally filled the gap by 2 p.m. and continued slowly North.  All three major index ETFs closed very near their highs of the day.  This action gave us large, white, near-Marubozu candles in the SPY and QQQ (some might call it a Trader’s Best Friend…gap up from a Doji to a Marubozu) and a large white candle with a lower wick in the DIA.  All three also crossed back above their T-line (8ema).

On the day, nine of the 10 sectors were in the green again with Technology (+2.57%) far out in front leading the way higher while Energy (-1.13%) was the lone laggard in the red.  At the same time, the SPY gained 1.43%, DIA gained 0.59%, and QQQ gained 2.07%.  (The QQQ’s huge day came on the back of many product introductions by several QQQ members at the annual CES conventions.  Among these were MRVL (+6.99%), NVDA (+6.43%), and AMD (+5.48%).)  Meanwhile, VXX fell 2.32% to close at 15.19 and T2122 climbed the top of the mid-range (to just outside of the overbought territory) at 78.45.  10-year bond yields backed off but remain above four percent to 4.013% and Oil (WTI) plummeted 3.78% to close at $71.02 per barrel.  On the day, we saw the Bulls in control all day on what was slightly above-average volume in the DIA and below-average volume in the SPY and QQQ.

The economic news on Monday was limited to NY Fed 1-Year Consumer Inflation Expectations came in at 3.00%.  This continued a steady decline since July 2022.  The December value was 3.40%.  So, the decline was significant.  Then later, Consumer Credit (requiring installments) for November was reported much higher than predicted at $23.75 billion (versus a forecast of $9.00 billion and October’s perhaps artificially low $5.78 billion).  On the Fed side, Atlanta Fed President Bostic spoke Monday afternoon.  Bostic said that as long as inflation remains above 2%, his bias is for monetary policy to remain tight.  However, he also said overall risks in the economy have become balanced between the risk of inflation and the risk of slower economic growth.   Bostic went on to say he does anticipate rate cuts later this year, but said “I don’t think that’s where we are today.”  (Seeming to push back against the idea of a March rate cut.)  In the end, he said he was focused on his discussions with business leaders, and as of now, he is not hearing them say they are planning layoffs (which he implied would be the tipping point where risk was more on the economic slowdown side than the inflation side).  Later, Fed Governor Bowman (traditionally very hawkish) retreated from her recent stances, telling a Bankers Assn. event that the current Fed rate policy appears to be “sufficiently restrictive.”  Bowman said, “My view has evolved to consider the possibility that the rate of inflation could decline further with the policy rate held at the current level for some time.”  She continued “Should inflation continue to fall closer to our 2 percent goal over time, it will eventually become appropriate to begin the process of lowering our policy rate to prevent policy from becoming overly restrictive.”

After the close, JEF missed on revenue while beating on earnings. JEF cited a Q4 lull in merger and acquisition deals as the reason for its revenue miss.

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In stock news, BAC announced Monday that it will be taking a $1.6 billion charge in Q4 related to the bank no longer being able to use Bloomberg’s interest rate benchmark.  (Apparently, the Bloomberg LIBOR index which is being discontinued was the basis for large commercial loan interest rate calculations.  Although it is unclear why this would cost the bank so much money if the loans had a different interest rate basis.)  Later, MRK announced it would buy cancer drug developer HARP for $680 million ($23/share or 118% premium on Friday’s close).  At the same time, BCS announced it would cut 5,000 jobs globally as the bank undergoes an efficiency drive.  Later, JNJ announced it would acquire AMAM for $2 billion ($28/share or a 106% premium on Friday’s close).  Elsewhere, NVDA, AMD, and many other tech names announced a slew of new products at the CES trade show. Many of them squeezed “AI” into the announcements one way or another, but NVDA and AMD had legitimate AI product launches. (NVDA touting a “not quite high-end” AI chip to skirt US bans on sales to China and AMD touting AI capabilities in new consumer CPUs as well as even mid-tier graphics cards.) For its part, AAPL announced its new VR headset will go on sale starting Feb. 2.  (It is not expected to have much in the way of sales with a staggering $3,499 price tag.)  Meanwhile, apparel retailers LULU, ANF, CROX, and AEO all raised their Q4 guidance on Monday signaling a stronger-than-expected holiday shopping season.  At the same time, ZEAL announced it had secured $214 million in funding through private placement on Monday.  Later, VLKAF (Volkswagen) announced its cars will begin conversing with drivers via ChatGPT by the middle of 2024.  (VLKAF partnered with CRNC on this technology.)  At the same time, in a regulatory filing, videogame maker U said it was laying off 1,800 workers between now and the end of March.

In stock government, legal, and regulatory news, BRKB reached an agreement with the Haslam Family (former owners of Pilot Travel Centers aka Flying J Fuel stations) in the dispute over the accounting for the value of the remaining 20% owned by the Haslam family.  As a result, a Delaware federal court officially ended the lawsuit which had been scheduled to start Monday.  At the same time, Reuters reported that JNJ had reached a tentative agreement to pay $700 million to more than 40 states for having wrongfully marketed its talc-based baby products.  The agreement avoids stating any link between the talc and various cancers.  Later, the US Supreme Court refused to hear an appeal by XOM (and other petroleum interests) of an Appeals Court ruling that the company had engaged in decades of deceptive marketing and other tactics aimed at undermining climate science and government efforts to reduce the impacts of fossil fuels.  This throws the case back to the MN state court where XOM had used federal appeals to block the case.  Elsewhere, KKR said it intends to notify EU antitrust regulators of its plan to buyout Telecom Italia.  KKR said the notification will be made by the end of January.  Later, NFLX defeated a federal shareholder lawsuit that alleged the company had hidden the extent to which “account sharing” had been hurting company growth.  The ruling said there was no evidence the company was aware of the extent of the problem during the period the plaintiffs had claimed.  At the same time, the US Supreme Court also rejected an appeal by BTI and other tobacco makers seeking to block a CA state ban on flavored tobacco products.  The ruling said the state law did not conflict with federal regulations on the matter. Finally, early Tuesday the Dept. of Labor issued a final rule that will curb the use of contract workers (not treated as employees and responsible for their own benefits and taxes). The move will have major implications across much of the economy from trucking to automaking, to UBER and LYFT. This is the exact opposite of the previous administration rules that made it easy for companies to classify workers as contractors and save up to 30% per worker according to multiple studies.

Overnight, Asian markets were mixed but leaned toward the green side.  Japan (+1.16%) and Australia (+0.93%) paced the gainers while South Korea (-0.26%) and Thailand (-0.25%) led the losses.  In Europe, the bourses are mostly in the red at midday.  The CAC (-0.50%), DAX (-0.54%), and FTSE (-0.10%) lead the region on volume as always while Athens (+0.88%) leads three smaller exchanges in the green in early afternoon trade.  In the US, as of 7:30 a.m., Futures are pointing toward a gap-down start to the day.  The DIA implies a -0.46% open, the SPY is implying a -0.47% open, and the QQQ implies a -0.65% open at this hour.  At the same time, 10-year bond yields are up to 4.046% and Oil (WTI) is up 2.32% to $72.41 per barrel in early trading.

The major economic news scheduled for Tuesday includes Nov. Imports, Nov. Exports, and Nov. Trade Balance (all at 8:30 a.m.), EIA Short-Term Energy Outlook (noon), and API Weekly Crude Oil Stocks (4:30 p.m.).  The major earnings reports scheduled for the day are limited to AYI, ACI, MSM, and SNX before the open.  Then, after the close, PSMT and WDFC report. 

In economic news later this week, on Wednesday, EIA Weekly Crude Oil Inventories are reported and Fed member Williams speaks.  Then Thursday, we get Weekly Initial Jobless Claims, Weekly Continuing Jobless Claims, Dec. Core CPI, Dec. CPI, Dec. Federal Budget Balance, and the Fed’s Balance Sheet.  On Friday, Dec. Core PPI, Dec. PPI, and the WASDE Ag report are delivered.

In terms of earnings reports, the main thrust does not start again until the end of the week.  On Wednesday, we hear from KBH.  On Thursday, INFY reports.  Finally, on Friday, we hear from BAC, BK, BLK, C, DAL, JPM, UNH, WFC, and WIT.

In miscellaneous news, on Monday the issuers of Bitcoin spot-price ETFs started a price war on fees.  All the potential ETFs announced their fees at significantly below the average for ETF management fees.  (The average ETF charges 0.54% with the proposed Bitcoin ETFs coming in around 0.25%.)  One even lowered its fees from 0.80% to 0.25% during the day.  BLK remains on the high end, saying it will charge 0.30%.  Elsewhere, Reuters reported that China has lifted the ban on net selling by mutual fund managers.  (The previous ruling stated the managers had to buy more shares than they sold each day, artificially propping up Chinese stocks.)  Meanwhile, the inspections of 737 MAX jets ordered by the FAA following Sunday’s ALK mid-air loss of part of the fuselage and explosive decompression has now found many jets with loose bolts on their bodies.  This is another setback for BA and SPR (maker of BA fuselages).  However, no determination has been made yet on whether this is a design or manufacturing issue. BA was down more than 8% Monday while SPR was down more than 11%. 

In Oil news, Saudi Arabia’s unexpected price slashing Monday (cutting their price to $2 below the regional benchmark price) led to a large ripple-effect drop in US Oil (WTI) prices.  As a result, oil majors like XOM, CVX, COP, OXY, MRO, etc. saw a greater than one percent drop in share prices.  Elsewhere, after the close, a US federal judge granted a large group of Venezuela’s creditors the right to participate in the proceeds of the coming auction of Citgo Petroleum (Venezuelan-owned).  OI and HII were among the companies approved to participate.  (COP reached a separate settlement with Venezuela that precludes their participation.)

So far this morning, AYI reported beats on both the revenue and earnings lines.  At the same time, MSM missed on both the top and bottom lines.  (SNX and ACI report closer to the opening bell.) 

With that background, it looks like the Bears are trying to mount a comeback this morning before the Bulls can get a second day of momentum started. All three major index ETFs opened the premarket lower with SPY and DIA putting in indecisive, Spinning Top-type candles. However, the QQQ opened lower and continued, now showing a larger, black-bodied candle that is the only one of the three retesting its T-line (8ema) at this point. So, the Bulls still have control of the short-term trend (mostly on the back of Monday’s strong white candles). However, it is not a done deal with the move not decidedly bullish yet. The longer-term bullish daily trend lines remain broken but there is no Bearish trend established yet. So, technically we are not yet in a downtrend. In terms of extension, none of the three major index ETFs are far from their T-line (8ema). However, at the same time, the T2122 indicator is just outside of its over-bought range. So, both the Bulls and Bears do have room to run if they can gather the momentum to do it, but it is the Bears that have the most slack to work with right now. Continue to keep an eye on the Tech Big Dogs. After a week of seeming rotation out of those names, we saw money flood back into them Monday as a slew of new product announcements came out of the CES trade show in Las Vegas. Either way those seven to ten stocks go, it will be hard for the market to do anything but follow given their massive daily volumes.

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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