COP Buys MRO and AAL Lowers Guidance

Markets started the short week off in a mixed and modest way.  SPY opened 0.14% higher, DIA opened down 0.19%, and QQQ gapped up 0.22%.  After that open, SPY and QQQ immediately faded that gap, recrossing below Friday’s close.  However, by 9:50 a.m. they were in a modest rally that eventually recrossed the open gap and then bobbed along the open level until 12:50 p.m. in the SPY and 1:40 p.m. in the QQQ.  At that point, both sold off sharply until 2:40 p.m.  Meanwhile, after the open, DIA sold off all day until that 2:40 p.m. point.  However, all three major index ETFs rallied that last 80 minutes of the day.  This action gave us Hammer type candles in all three. The SPY gave us a gap-up black-body Hammer that successfully retested the T-line (8ema).  At the same time, DIA printed a gap-down black-bodied large Hammer.  Finally, QQQ gave us a gap up white-bodied candle.  Once again, this all happened on well-below-average volume in all three major index ETFs.

On the day, eight of the 10 sectors were in the red with Industrials (-1.16%) was out in front leading the rest of the market lower.  At the same time, Energy (+1.27%) held up far better than the other sectors.  Meanwhile, SPY gained 0.07%, DIA fell -0.51%, and QQQ gained 0.37%.  VXX popped 2.13% to close at a still very low 11.49 and T2122 dropped but remains in (the lower part of) its midrange to close at 26.43.  Elsewhere, 10-year bond yields spiked to 4.542% and Oil (WTI) spiked 3.14% to close at $80.16 per barrel.  So, Tuesday was a divergent day for the market.  QQQ printed another all-time high close while DIA continued its pullback and SPY was in between those two.  However, there was clear indecision in all three major index ETFs, because all three gave us more wick than body.

The major economic news scheduled for Tuesday is limited to Conf. Board Consumer Confidence, which came in stronger than expected at 102.0 (compared to a forecast of 96.0 and the April reading of 97.5).

In Fed news, on Tuesday, Fed Governor Bowman told a Bank of Japan Conference that said she would have supported a later start or a more moderate pace of Fed Balance Sheet reduction.  Bowman said, “While it is important to slow the pace of balance sheet runoff as reserves approach ample levels, in my view we are not yet at that point.”  However, she continued, “In my view, it is important to continue to reduce the size of the balance sheet to reach ample reserves as soon as possible and while the economy is still strong … Doing so will allow the Federal Reserve to more effectively and credibly use its balance sheet to respond to future economic and financial shocks.”  At the same even, Cleveland Fed President Mester indicated more lengthy Fed statements about the economy would be useful.  She said, “While simpler is often seen as a virtue, it can also be a detriment,” … “With short statements, each word takes on added significance.”  Mester continued, “In my view, it would be preferable for policymakers to take control of the narrative by using more words to describe the current assessment of economic developments, how they have influenced the outlook, and the risks to that outlook.”  Later, back in the US, Minneapolis Fed President Kashkari told CNBC that the FOMC should wait before cutting rates.  He said, “Many more months of positive inflation data, I think, to give me confidence that it’s appropriate to dial back,” (It is worth noting that Kashkari had forecast only two cuts in his “dot” back in April.  However, the average of the dot plots was calling for three quarter-point cuts in 2024.)

After the close, HEI reported beats on both the revenue and earnings lines.  (Both were gains quarter-on-quarter with a revenue gain of 39% versus the same quarter in 2023.)

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In stock news, on Tuesday, activist investor Elliott Management disclosed that it has amassed a $2.5 billion stake in TXN.  Elliott urged the chipmaker to improve its free cash flow by implementing a “dynamic capacity management strategy.”  (Elliott was telling TXN to outsource manufacturing, where contracts can be canceled without leaving idle assets on the books, rather than building plants.)  At the same time, Chinese EV-maker Byd launched a new hybrid vehicle, moving into markets previously dominated by TM (Toyota) and VLKAF (Volkswagen).  This new vehicle will have a 1,250-mile range between refueling or recharging.  In related news, VLKAF also announced a low-cost all electric vehicle to be developed in partnership with Renault to compete with China’s Byd and TSLA in Chinese markets.  At the same time, SMNEY (Siemens Energy) announced 4,100 job cuts globally from its wind turbine division, which is around 15% of its workforce.  Reportedly, either all or the vast majority of these will be in Europe and in particular Spain.  Later, CNBC confirmed previous rumors that GOOGL is well into talks to buy HUBS.  At the same time, CPB announced it is cutting 415 jobs (from a workforce of 14,500).  TMUS announced it had agreed to acquire USM for $4.4 billion.  The deal includes TMUS obtaining customers, stores, but only 30% of USM’s wireless spectrum.  (It is worth noting that VZ was also in the bidding to make this acquisition.) 

Elsewhere, healthcare industry analysts dramatically increased market size predictions for the GLP-1 weight-loss drugs (currently from NVO and LLY).  Up until Tuesday, most said the market would reach $100 billion annually by the early 2030s.  Now, in most part based on increased production by NVO and LLY, analysts expect the sales of GLP-1 type drugs to reach $150 billion by then with some saying $131 billion per year by 2028.  Later, VZ announced it added CMCSA’s Peacock streaming service, as well as YouTube Premium on various plans.  After the close, AAL cut its Q2 profit forecast. (AAL shares fell 4% in after-hours trading.)  At the same time, UAL reaffirmed its Q2 forecast.  After the close, HES shareholders approved the $53 billion merger (sale) to CVX.  Later, Bloomberg reports that despite dour predictions and TSLA slashing workers, six of the 10 largest electric vehicle makers reported blockbuster sales growth, ranging from 56% HYMLF (Hyundai-Kia) to 86% (F) in Q1 2024 versus Q1 2023.  The report says April sales (yet to be released) came in hot as well. 

In stock legal and governmental news, on Tuesday, NKE partially won its second appeal on a lawsuit against smaller competitor ADDYY (Adidas).  The German court ruled that NKE can include three stripes on some of its trouser design.  (A lower court ruled that having two or three stripes would violate Adidas trademark back in 2022.)  Later, a US appeals court announced it will hear legal challenges to the new law that requires China-based TikTok to sell to a US-based firm by January 19 or face a ban, in September.  At the same time, the US Dept. of State “Special Envoy to Monitor and Combat Antisemitism” has ramped up pressure on META, GOOGL, MSFT, TikTok, and the former Twitter according to Bloomberg.  The Envoy (Lipstadt) requested that the companies to each designate an employee to address antisemitism issues and conduct training.  Lipstadt also pressed the platforms to crack down on anti-Semitic posts.  After the close, the Treasury Dept. set a minimum bid of $492 million for next week’s auction of the stock warrants it received from US airlines in exchange for COVID-19 assistance in 2020 and 2021.  ($54 billion in aid was issued to AAL, DAL, UAL, LUV, and smaller airlines.  $14 billion has already been repaid.)  Meanwhile, Poland signed a $735 million contract to buy JASSM-ER missiles from LMT.

Overnight, Asian markets leaned heavily to the down side with only two of the 12 exchanges hanging onto green territory.  Meanwhile, Hong Kong (-1.83%), South Korea (-1.67%), and Australia (-1.30%) led the region lower.  In Europe, we see red across the board at midday.  The CAC (-1.05%), DAX (-0.66%), and FTSE (-0.27%) lead the region lower in early afternoon trade.  In the US, as of 7:30 a.m., Futures are pointing toward a red start to the morning.  The DIA implies a -0.65% open, SPY is implying a -0.68% open, and QQQ implies a -0.73% open at this hour.  At the same time, 10-year bond yields are up to 4.568% and Oil (WTI) is up three-quarters of a percent to $80.42 per barrel in early trading.

The major economic news scheduled for Wednesday are limited to Fed Beige Book (2 p.m.) and API Weekly Crude Oil Stocks (4:30 p.m.).  However, we also hear from Fed members Williams (1:45 p.m.) and Bostic (7 p.m.).  The major earnings reports scheduled for before the open are limited to ANF, AAP, BMO, CHWY, and DKS.  Then, after the close, A, AEO, CPRI, HPQ, NOAH, NTNX, OKTA, PSTG, CRM, and UHAL report. 

In economic news later this week, on Thursday, Weekly Initial Jobless Claims, Weekly Continuing Jobless Claims, April Goods Trade Balance, April Retail Inventories, Preliminary Q1 GDP, Preliminary Q1 GDP Price Index, and Preliminary Q1 PCE Prices, April Pending Home Sales, EIA Crude Oil Inventories, and Fed Balance Sheet are reported.  We also hear from Fed member Williams.  Finally, on Friday, we get April Core PCE Price Index, April PCE Price Index, April Personal Spending, and May Chicago PMI.  We also head from Fed member Bostic.

In terms of earnings reports later this week, on Thursday, BBY, BIRK, BURL, CAL, CM, CBRL, DG, FL, HRL, KSS, RY, SPTN, COO, COST, DELL, GPS, GES, MRVL, NTAP, JWN, ULTA, VEEV, and ZS report.  Finally, on Friday, DOOO reports.

So far this morning, ANF, CHWY, and DKS reported beats on both the revenue and the earnings line.  Meanwhile, BMO beat on revenue while missing on earnings.  At the same time, AAP missed on both the top and bottom lines.

In miscellaneous news, the CTA (Commodity Trading Advisors, who are the client advisors for major banks, funds, and financial advisors) increased their equity exposure to an all-time high.  The bias toward stocks is now in the 96th percentile, which may be a contrary indicator for markets.  (In essence, there is nothing they can do other than stand pat or recommend other assets in the future…like after May.  That could lead to selling pressure as money is moved into things other than stocks.)  In an unrelated story (because the CTA report is backward looking), interest rates spiked on Tuesday as the Treasury auction for 5-year notes saw lower-than-expected demand, which led to higher-than-expected yield for $70 billion in bonds.  Elsewhere, nearly a million customers are without power in TX, KY, and AR after storms.  This was up from 750k early in the day Tuesday.

In late-breaking news, COP announced it has agreed to buy MRO in an all-stock deal worth $17.1 billion.  The combination will strengthen COP’s shale oil business.  The announcement said the deal is expected to close in Q4.  Elsewhere in the Oil industry, the Wall Street Journal reports that Saudi Aramco is seeking to sell between $10 billion and $20 billion in additional stock.  (Aramco raised $29.4 billion in its IPO in the Saudi Arabian stock market back in 2019, which despite being in a small exchange was the largest IPO in history.)

With that background, it looks as if markets are decidedly bearish this morning in the premarket. All three major index ETFs gapped lower in the early session and have printed black-bodied candles since then. QQQ and DIA are decisive with large black bodies and little wick, but SPY remains less decisive with plenty of wick in its premarket candle. (It is worth noting that SPY has crossed below its T-line this morning and DIA is very stretched below its own 8ema.) Bear in mind that we still have a heavy data week ahead, but not so much today. GDP comes in Thursday and PCE on Friday with a sprinkling of Fed talkers on every day.) The bulls remain in control in the QQQ, with the Bears in control in DIA and SPY somewhere in the middle in the short-term. At the same time, the mid-term remains very bullish and the longer-term market also remains Bullish. In terms of extension, DIA is over-cooked to the downside. The other two major index ETFs are not over extended from their T-lines. The T2122 indicator is back in the lower end of its mid-range. So, the bottom line is that the market has room to run either way if the Bulls or Bears can gather the momentum. With regard to those 10 big dog tickers, nine of the 10 are in the red this morning. Only NVDA (+0.72%), the biggest dog, is holding onto green with AMD (-1.24%) and TSLA (-1.08%) leading the rest lower. (Bear in mind that NVDA is by far the largest daily mover, trading almost $44 billion in stock each day on average while TSLA is a distant second at $11 billion per day in stock traded.)

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 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 gains are 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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