Stocks gapped significantly lower Thursday as banks missed on earnings and some Fed members were talking about a potential 1% rate hike on July 27.  The markets then sold off for the first 30 minutes before the bulls stepped in at 10 am to start a long, steady rally that reached the highs of the day at about 3:30 pm. This left us with gap-down, white candles with longer lower wicks.  As has been usual for weeks now, all the day’s action happened on lower-than-average volume. By day end, just 26% of all stocks are trading above their 40sma and only 15% of them are trading above their 200sma. All 10 sectors are in the red with Basic Materials being the worst-performing group of the day. The 3 major indices all remain below their T-line (8ema).  On the day, SPY lost 0.24%, DIA lost 0.44%, and QQQ gained 0.36%.  The VXX was flat at 22.32 and T2122 fell back into the oversold territory at 12.39.  10-year bond yields climbed to 2.959%.  However, note that the “2yr vs 5yr” and “2yr/5yr vs 10yr” yield rates are still inverted.  Oil (WTI) was flat on the day at $96.25/barrel. 

As mentioned above, earnings season got off to a less than stellar start Thursday as JPM, MS, TSM, ERIC, and CAG all reported misses on either one or both lines.  JPM CEO Jamie Dimon summed up the economy pretty well. He said that on one hand, the economy continues to grow, the job market remains strong, and consumers’ ability to spend remains healthy.  However, geopolitical tensions, high inflation, poor consumer confidence and uncertainty about Fed tightening impacts are all having very negative consequences.  For its part, JPM only missed on earnings due to increasing their bad loan reserved by nearly half a billion dollars.  However, rival MS missed on a terrible decline in investment banking revenue.  This tells us that businesses are not willing to borrow for mergers and acquisitions at this point in the cycle.  The bottom line is that this is likely a harbinger of a bad earnings season, which is something we have not seen in about a decade (give or take 2020).

In Fed news, the Fed Funds Futures now indicate a 31% probability of a 1% rate hike on July 27.  However, the most likely scenario remains a 0.75% rate increase, which has a 69% probability according to the futures.  This comes after two of the Fed hawks spoke out.  St. Louis Fed President Bullard said he would prefer a 75-basis-point hike and Fed governor Waller said that was what he supported, but said he’d be open to a larger hike if new data shows demand is not slowing.  Finally, Fed Chair Powell and former Vice-Chair Clarida were also cleared of violating any trading rules from 2019-2021 after an independent watchdog published its findings on the Office of the Inspector General’s website.

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In China news, according to Bloomberg, the Chinese Ministry of Housing and Financial Regulators called an emergency meeting with Chinese banks on Thursday night.  It appears there is a widespread mortgage payment boycott taking shape with borrowers refusing to make mortgage payments on at least 100 projects spread across more than 50 cities in the country.  The fear is that this boycott will spread even wider to individual home buyers.  This appears to be a reaction to the recent real estate sector defaults and the government’s response to those companies’ situations.  JEF estimates that a default on just the 100 projects now involved would result in bad loan losses totaling 1% of the entire Chinese mortgage balance.  Elsewhere, the Chinese Q2 GDP numbers came in far below estimates.  The Chinese economy grew 0.4% in Q2 compared to analyst estimates of +1% and Q1’s +4.8% growth.  However, in a small bright spot, June Retail Sales topped expectations, rising 3.1% (no growth was the expected consensus of regional economists). GS has cut its 2022 Chinese growth projection from 4% to 3.3% in response to the news.

In business news, after the close, BAC was fined $225 million for not disbursing state unemployment benefits during the height of the pandemic.  Bloomberg reports that another investigation by regulators has resulted in $1 billion in fines from the 5 biggest US banks (GS, BAC, C, JPM, and MS).  The companies are being fined for failing to monitor/stop employees from using unauthorized, encrypted messaging apps.  It seems each bank will be fined $200 million.

On the Russian invasion story, French President Macron warned his country to prepare for a total cutoff of Russian natural gas.  He promoted alternatives, shutting off public lights at night, and engaging in what he called “energy sobriety.”  Meanwhile, the UK Ministry of Defense released an intelligence update saying that more than 2.5 million people have been forcibly “evacuated” from Ukraine to Russia (filtration camps).  Elsewhere, war crime investigators have noted a sharp increase in the number of mass graves they have found (using satellite imagery) near residential areas that were heavily targeted by Russian artillery according to the Centre for Information Resilience (a non-governmental organization focused on exposing human rights abuses).  This all comes at the same time 45 countries have signed a declaration to punish Russia for war crimes.

Overnight, Asian markets were mixed but leaned to the red side.  Hong Kong (-2.19%), Shanghai (-1.64%), and Shenzhen (-1.52%) led the region lower.  Meanwhile, Taiwan (+0.78%), India (+0.69%), and Japan (+0.54%) led the gains in the region.  In Europe, we nearly see green across the board at mid-day.  Only Sweden (-1.20%) is defying the trend as the FTSE (+0.94%), DAX (+1.63%), and CAC (+0.71%) lead the region higher in early afternoon trading.  As of 7:30 am, US Futures are pointing toward a modestly green start to the day.  The DIA implies a +0.44% open, the SPY is implying a +0.34% open, and the QQQ implies a +0.28% open at this hour.  10-year bond yields are back down to 2.932% and Oil (WTI) is 1.5% higher to $97.23/barrel in early trading.

The major economic news events scheduled for release Friday include June Retail Sales, June Import/Export Price Index, and NY Empire State Mfg. Index (all at 8:30 am), June Industrial Production (9:15 am), May Business Inventories, May Retail Inventories, and Michigan Consumer Sentiment (all 3 at 10 am).   The major earnings reports scheduled for the day include from BK, BLK, C, PNC, PGR, STT, USB, UNH, and WFC before the open.  There are no major reports scheduled for after the close.

So far this morning, BK, C, PNC, USB, and UNH have all reported beating on both the revenue and earnings lines.  Meanwhile, WFC beat on revenue while missing on earnings.  BLK has reported significant misses on both lines. WFC took its earnings hit for similar reasons to JPM on Thursday. The company increased its reserves for bad loan losses by $588 million and also took a $576 million impairment for Q2 equity losses of its venture capital unit.

Earnings season is here again and we are getting a mixed bag right out of the shoot. Futures are showing that markets did not like that news, but probably more eyes are on inflation as yet another Fed voter (Mester) called for “at least” a 0.75% hike when the Fed announces in 2 weeks. This comes hours after Canada hiked rates by a full percent. So, for the first time, Futures are considering that there might be a 1% hike and traders are need to (and are) starting to consider how that might impact the economy and stocks. Expect more volatility and chop because the vast majority of traders don’t remember a similar situation. So, markets are likely to whipsaw back and forth as the market re-learns the lessons taught in prior decades. There are only two things that we know for sure. First, the low volumes of the last few weeks tells us there is not a huge amount of conviction in either the bull or bear camps. Second, we know the trend remains bearish in both the longer and short-term views.

Stick with your trading rules, trade with the trend, and take those profits when you have them. Demonstrate patience and wait for confirmation. Remember that trading is our job. So, do the work and follow the process. Always move your stops in your favor and remember the “Legend of the man in the green bathrobe“…it is NOT house money, it’s all our money! One way to put this is Buffett’s first rule of making big money in the market, which is to not lose big money in the market. So, don’t be stubborn. If you have a loss, just admit you were wrong, respect your stop, and take the loss before it grows. Lastly, remember that you get rich slowly and steadily in Trading…not by striking it rich on one or two trades. So, give up that lottery ticket mentality. Lastly, remember it is Friday. So, be prepared for the weekend news cycle.

See you in the trading room.

Ed

Swing Trade Ideas for your consideration and watchlist: WOLF, RIDE, MRVL, BA, MSOS, BMY, AAPL, LCID, WMT, TLRY, MAT, DT, PGR. You can find Rick’s review of tickers on his YouTube Channel here. Trade your plan, take profits along the way, and smart. Also, remember to check for impending earnings reports. Finally, remember that any tickers we mention and talk about in the trading room are not recommendations to buy or sell.

🎯 Mike Probst: Rick, Got CTL off the scanner today. Already up 30%. Love it.

🎯 Dick Carp: the scanner paid for the year with HES-thank you

🎯 Arnoldo Bolanos: LTA scanner really works $$, thanks Ed.

🎯 Bob S: LTA is incredible…. I use it … would not trade without it

🎯 Malcolm .: Posted in room 2, @Rick… I used the LTA Scanner to go through hundreds of stocks this weekend and picked out three to trade:  PYPL, TGT, and ZS.   Quality patterns and with my trading, up 24%, 7% and 12%…. this program is gold.

🎯 Friday 6/21/19  (10:09 am) Aaron B: Today, my account is at +190% since January. Thanks, RWO HRC Flash Malcolm Thomas Steve Ed Bob S Bob C Mike P and everyone that contributes every day. I love our job.

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Disclosure: We do not act on all trades we mention, and not all mentions acted on the day of the mention. All trades we mention are for your consideration only.

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