Monday saw an open just on the red side of flat with SPY opening down 0.09%, DIA gapping up 0.14%, and QQQ opening down 0.12%. At that point, both large-cap index ETFs meandered sideways until 11 a.m., while QQQ rallied. From there, SPY and QQQ sold off modestly until 11:35 a.m. before starting a rally that lasted until 2:15 p.m. Then they both ground modestly lower and sideways with only the SPY rallying back the last 10 minutes of the day to close very near the high of the day. Meanwhile, DIA ground sideways from 11 a.m. until 12:30 p.m. when it followed the other major index ETFs in rallying the rest of the day, with it too closing near the high of the day. This action gave us, large, white-bodied candles with only the DIA having any real wick (lower). All three also broke out to new highs that had not been seen since January 2022. Obviously, all three remain above their T-lines.
On the day, eight of the 10 sectors were in the green with Technology (+0.74%) out in front leading the way higher while Energy (-0.35%) lagged well behind other sectors. At the same time, the SPY gained 0.39%, DIA gained 0.43%, and QQQ gained 0.85%. The VXX fell another 2.27% to close at 16.37 and T2122 fell but still remains in overbought territory at 87.32. 10-year bond yields climbed a bit to 4.241% and Oil (WTI) rose a quarter of a percent to close at $71.42 per barrel. So, Monday saw the bulls continue their rally but in a modest fashion on a no-news and no-earnings day ahead of the FOMC meeting. So, we go into the CPI reports on a bullish note. This all happened on far less-than-average volume in all three major index ETFs.
The only major economic news reported Monday was the NY Fed 1-Year Consumer Inflation Expectations which came down 0.2% between November and December to 3.40%. This was the lowest reading since April 2021. The report said the 3-year and 5-year inflation expectations remained steady at 3.0% and 2.7% respectively.
As the FOMC begins its meeting today, here are the Fedwatch Fed Fund Forecast probabilities as of Monday evening. For December (Wednesday), 97.1% of Fed Futures bets expect no rate hike while 2.9% expect a hike of a quarter-point. For January (1/31), 97.8% expect rates to be where they are now, 0.2% expect rates to be a quarter percent higher than now, and 2.1% expect a quarter-point rate cut. For March (3/24) the bets start to lean more heavily toward a cut. 56.8% expect rates as they are now, 42.3% expect a quarter-point cut, and 0.9% expect a half-percent rate reduction. By May (5/24) only 25% expect rates as they are now, 50.4% expect rates to be a quarter-point lower, 24% expect them to be a half of a percent lower, and 0.5% expect rates to be three-quarters of a percent lower. So, the market is expecting rate cuts to begin in the first half of 2024. You’ll have to decide whether the Fed will disappoint them (keeping to their “higher for longer” mantra) or not…and either way, how the market will react. However, traditionally, markets start to flag slightly before rate cuts begin.
After the close, CASY and ORCL reported that they missed on revenue while also beating on the earnings line. However, it is worth noting that ORCL did raise its forward guidance.
In stock news, on Monday, TSLA was urged by four Nordic region pension funds to respect collective bargaining for its employees. The public letter the funds sent said TSLA’s behavior was deeply troubling and not only contrary to the region’s labor model but against human rights. Later, GM and EVGO announced the opening of the first 17 sites in its nationwide electric vehicle fast-charging network. Elsewhere, Reuters reported that MSFT had struck a deal with the AFL-CIO union federation where the company agreed to remain neutral in the efforts of unions to encourage its workforce to join a union. The two also agreed to work together in the future related to AI technology and its impact on the workforce. Later, an SEC filing showed that BRKB had cut its holdings of HPQ by more than half. The filing showed Berkshire Hathaway now holds 5.2% of HPQ stock (about 51.5 million shares). The BRKB sales of HPQ took place in November. After the close, HAS announced it is eliminating 900 more jobs (after having announced 1,000 job cuts in January 2023) amid weak toy sales. The cuts are expected to take place sometime “in the next 18-24 months.” Also after the close, F announced it would cut production of F-150 Lightning (electric truck) by 50% in 2024 due to “changing market demand.”
In stock government, legal, and regulatory news, on Monday China’s Industrial Ministry announced that over 90% of new electric vehicles will qualify for that country’s tax incentives. Later, a US judge said Monday that he will hear arguments in META’s request to block the FTC from reopening a 2019 consent agreement (including a $5 billion penalty) after the FTC said the company misled parents on how much control they had over children’s messenger accounts among other things. The judge said he will hear arguments in late January. At the same time, in Brazil, the main airline lobbying group IATA urged the state and state-run oil company PBR to slash fuel prices charged to airlines. The statement called current jet fuel prices “excessively high” and “do not reflect the reality of an oil-producing country.” The IATA said high fuel costs are the main challenges facing airlines in Brazil. Later, workers at non-union automakers HMC, HYMTF (Hyundai), and VLKAF (Volkswagen) filed unfair labor practice charges against the companies Monday according to a release by the UAW union. The charges accuse the companies of launching anti-union activities and preventing workers from organizing union campaigns. Late in the day Monday, the US Sec. of Commerce told Reuters that the US was in discussions with NVDA regarding the conditions under which the company can sell AI chips to China. Sec. Raimondo made it clear that NVDA is forbidden from selling its most sophisticated semiconductors to China. After the close, SNY said it terminated an exclusive deal to license a drug from Maze Therapeutics for the treatment of Pompe disease after the FTC objected. The $755 million deal (signed in May) would have granted SNY a US monopoly on treatments for that disease. Finally, late Monday evening a federal jury found that GOOGL Android App Store (Play Store) has been protected by anticompetitive barriers that have damaged smartphone consumers and software developers. The unanimous verdict follows a four-week trial and will impact hundreds of millions of Android phone owners globally, making it a major blow to GOOGL. In fact, this could cost GOOGL billions upon billions of dollars in lost app store fees. (Expect at least months, if not years, of appeals before GOOGL gives up this fight. AAPL largely won a very similar case.)
Overnight, Asian markets were mixed but leaned toward the green side. Hong Kong (+1.07%) was by far the biggest mover and led eight exchanges higher while New Zealand (-0.58%) paced the four losing exchanges. Meanwhile, in Europe, we see a more even split of seven bourses in the red and eight in the green at midday (all on modest moves). The CAC (+0.14%), DAX (-0.16%), and FTSE (+0.52%) lead the region on volume (as always) in early afternoon trade. In the US, as of 7:30 a.m., the Futures are pointing toward a start to the day that is just on the green side of flat. The DIA implies a +0.18% open, the SPY is implying a +0.05% open, and the QQQ implies a +0.12% open at this hour. At the same time, 10-year bond yields have dropped hard to 4.189% overnight and Oil (WTI) is down another half of a percent to $70.94 per barrel in early trading.
The major economic news scheduled for Tuesday includes Nov. CPI and Nov. Core CPI (both at 8:30 a.m.), EIA Short-term Energy Outlook (noon), Nov. Federal Budget Balance (2 p.m.), and API Weekly Crude Oil Stocks (4:30 p.m.). The major earnings report scheduled for before the open is limited to JCI. However, there are no major reports scheduled after the close.
In economic news later this week, on Wednesday, Nov. PPI, Nov. Core PPI, EIA Crude Oil Inventories, Fed Rate Decision, Fed Statement, Current Q4 Interest Rate Projection, Q4 1st Year Projection, Q4 2nd Year Projection, Q4 3rd Year Projection, FOMC Economic Projections, and the Fed Chair Press Conference are reported. On Thursday, we get Weekly Initial Jobless Claims, Weekly Continuing Jobless Claims, Nov. Retail Sales, Oct. Business Inventories, Oct. Retail Inventories, and the Fed Balance Sheet. Finally, on Friday, NY Empire State Mfg. Index, Nov. Industrial Production, S&P Global Mfg. PMI, S&P Global Services PMI, and S&P Global Composite PMI are reported.
In terms of earnings reports later this week, on Wednesday, ABM, REVG, ADBE, and NDSN report. On Thursday, we hear from JBL, COST, LEN, and SCHL. Finally, on Friday, DRI reports.
In grain and/or export news, Reuters reported Monday that bulk grain shippers across the US Gulf Coast will be sailing longer routes and paying higher freight costs to avoid the drought-caused record-high transit fees, load-size restrictions, and congestion of the Panama Canal through most of 2024. (Only 18 of the 35 normal transits per day will be allowed as of February and those ships will all be at greatly reduced maximum drafts, meaning much lower load capacities than in the past.) It is hoped that Panama’s wet season (April-May) may begin to refill drought-stricken lakes used to operate the canal locks. However, forecasters have been calling for another year of low rainfalls in the region as climate changes. The immediate impact is that the vast majority of grain ships no longer transit the Panama Canal en route to Asia (the primary US customer). Instead, in October the USDA said 33 of 38 grain ships crossed the Caribbean and Atlantic to transit the Suez Canal (adding 20 days and more than doubling freight costs in a notoriously thin-margin grain trading business). From a stock market point of view, it is hard to predict the ramifications. Input costs for major domestic grain users such as ADM, GM, KHC, etc. may fall as US grain stockpiles rise. It’s also possible that markets will adjust by forcing farmers to produce less grain (or a different mix), which could drive input costs down for other sectors (like livestock feed). Or, Asian customers may simply recognize the changing climate effects and absorb the added costs (more likely the government will recognize the situation and subsidize grain shipping to avoid the loss of exports). In any event, the climate will force changes to the 2024 grain markets, even just through shipping costs.
So far this morning, JCI missed on both the revenue and earnings lines.
With that background, it looks like all three major index ETFs are looking to continue higher (before CPI data) but in a very tepid way. All three major index ETFs opened the premarket slightly higher and are putting in a small, white-body, indecisive (Doji-like) candle so far in the early session. All three remain above their T-line (8ema) this morning. It seems pretty obvious that the market is waiting on CPI but even more likely on the Fed. However, in both cases, the market thinks it knows what the news will be (flat inflation and flat rates). So, while we may well get more “wait and see” for the Fed decision Wednesday, the risk is on the side of a CPI surprise. Overall, the Bulls remain well in control of both the longer-term trend and the short-term trend. In terms of extension, none of the three major index ETFs is extended too far from its T-line (but QQQ is heading in that direction). However, the T2122 indicator remains well into its overbought territory. So, both the Bulls have a little room to run and the Bears have plenty of slack to run…if either of them can find the momentum.
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.
Ed
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