F Warns, Swiss Hike, as All Eyes On Fed

Markets gapped down (0.88% in the SPY, 0.89% in the DIA, and 1.10% in the QQQ) at the open Monday.  However, this was a bear trap as bulls immediately stepped in and rallied all 3 major indices back up through the gap and into positive territory before 11 am.  At that point, the market started a sideways grind with a slight bearish trend for a few hours.  Then finally, the bulls stepped back in at 2:30 pm to drive us back to the highs of the day at 3 pm and take us out on the highs.  This action left us with gap-down, white-bodied, Marubozu-type candles that engulfed the prior white candles.

Nine of the 10 sectors were green with Healthcare (-0.75%) by far the biggest loser and Basic Materials (+2.11%) by far the biggest gaining sector.  Meanwhile, the SPY gained 0.76%, DIA gained 0.68%, and QQQ gained 0.60% on the day.  At the same time, the VXX closed down over 9% to 17.99 and T2122 climbed out of the oversold territory to 27.34.  10-year bond yields pulled back from early highs to 3.49% and Oil (WTI) has recovered from early lows to $85.53/barrel.  All-in-all, just a bear trap day that maybe held support and relieved some over-extension.  

In stock news, AXP announced Monday that it will be hiring 1,500 technology workers before the end of 2022 (a 2.5% headcount increase) despite other financial institutions cutting jobs. Meanwhile, TSLA announced that it has completed its production capacity expansion project at its Shanghai facility.  Elsewhere, at the end of the day Monday, Bloomberg reported that banks led by BARC and BAC are moving ahead with risky leveraged buyout financing projects that had 8-10% ahead of the Fed decision, citing several project examples. (The takeaway is that, despite interest rates rising, big banks are still willing to undertake risky projects in search of an additional 4% profit above their own projected terminal Fed Funds Rate…which would make risk-free bond yields in the area of only 2.5%-3% below their risky projects.)  In other news, a group of 46 US states has now appealed a lower court dismissal of an anti-trust lawsuit against META.  Finally, after the close, F warned investors of an additional $1 billion in unplanned supply chain costs during Q3.

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In Economic news, on Monday, the National Assn. of Home Builders Housing Market Index dropped three points to 46.  Any reading below 50 indicates that single-family homebuilders have a bearish sentiment toward the housing market.  Elsewhere, Fed Funds futures have now priced in an 81% chance of a 0.75% rate hike along with a 19% probability of a 1.00% hike by the FOMC on Wednesday.  The US Dollar rose on these expectations, nearing the 20-year high set on September 7th.  Obviously, this inversely impacts all dollar-denominated commodities such as oil, gold, and grains.  Finally, the second largest US Port (Port of Long Beach) reported a decline in inbound containers in August.  The Port Executive Director attributes this to cooling consumer demand and the end of pandemic-related port backlogs.  (Long Beach and Los Angeles together account for 40% of container traffic from China.)

In Energy news, Reuters reports that German utility companies (RWE and Uniper) are very close to signing a long-term LNG supply contract with Qatar as at least a partial replacement for Russian LNG.  The Qatari fields that would supply this gas are partly owned and operated by RDS, XOM, and COP. In a related story, Bloomberg reports that European natural gas prices fell again (its longest losing streak since July) as EU countries unveiled plans to offset costs, avoid shortages, and help household users.  Elsewhere, AAA reports that US vehicle traffic fell by 3.3% in July.  This was the second consecutive monthly decline in travel that the group reported.  However, year-to-date, the group says miles traveled is up 1.8% over 2021 levels.

In miscellaneous news, Turkey’s President Erdogan told PBS News that Russian President Putin has pressed him on the need for peace.  Erdogan went on to say that the basis of any peace deal would have to be returning all Ukrainian land (including Crimea), but that no leader will ever admit military action was a mistake. Meanwhile, the battle to liberate Luhansk has Russian proxies worried and again threatening to hold a referendum to join Russia (implying Russia would then be free to nuke the rest of Ukraine to guarantee the Donbas then remains in Russian hands).  Elsewhere, US Dollar strength continues as the Euro is back below parity, the British Pound is at its lowest level going back to 1980, and the Japanese Yen is again approaching a 24-year low versus the dollar.  Finally, overnight Switzerland kicked off the week’s rate hikes by increasing its benchmark rate by 1.00%.

Overnight, Asian markets were green across the board.  Australia (+1.29%), Hong Kong (+1.16%), and India (+1.10%) led the region higher as China kept its benchmark interest rate unchanged.  Meanwhile, in Europe, at midday, we are seeing the opposite story taking shape.  Russia’s -4.03% is an outlier in the region and the FTSE (-0.09%) is mostly flat in its first trading since before the Queen’s funeral.  However, the DAX (-0.65%) and CAC (-0.74%) are more typical and lead the region lower.  As of 7:30 am, US Futures are pointing toward another down start to the day.  The DIA implies a -0.33% open, the SPY is implying a -0.40% open, and the QQQ implies a -0.47% open at this hour.  10-year bond yield continue to spike and are now at 3.539% while Oil (WTI) is off 0.4% to $85.39/barrel in early trading.

There major economic news events scheduled for Tuesday include August Building Permits and August Housing Starts (both at 8:30 am), and API Weekly Crude Oil Inventories (4:30 pm).  The major earnings reports scheduled for Tuesday are limited to AJG before the open.  Then after the close, SFIX reports. 

In economic news later this week, Wednesday, August Existing Home Sales, EIA Weekly Crude Oil Inventories, Fed Interest Rate Projections, Fed Rate Decision, Fed Statement, Fed Economic Projections, and the Fed Chair Press Conference all are reported.  On Thursday, we get Q2 Current Account and Weekly Initial Jobless Claims.  Finally, on Friday, we see Mfg. PMI, Service PMI, and Fed Chair Powell speaks again.

In earnings reports later this week, Wednesday, GIS, FUL, KGH, LEN, SCS, and TCOM report.  On Thursday, we hear from ACN, DRI, FDS, AIR, COST, and FDX report.  Finally, on Friday there are no major earnings reports scheduled.

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The downtrend remains in place but the market feels like it is pausing here, waiting on the Fed decision before making any significant moves. However, the vast majority of traders expect a 0.75% hike tomorrow (the futures say the probability is now 82%). You will have to judge for yourself whether the risk is more for a lesser or greater hike. With that said (and ahead of housing data), it looks like we will open with a gap down today. So, beware of the potential for “gap and reverse” like yesterday. Simply, just don’t get caught chasing.

The major indices all remain extended a bit to the downside at this point, at least relative to their T-line (8ema). As mentioned, the trend also remains bearish. However, there is support just below. This indecision is not a good environment for swing trading. This is a “get quick or get out” market where the intraday whip and the daily “gap and chop” could eat your account alive. So, don’t feel the need to trade. Be patient and remember that the first rule of making big money predict in the market is to not lose big money in the market.

Keep in mind that trading is our job. It’s not a hobby. So, treat it that way. Do the work and follow the process. Stick with your trading rules, trade with the trend, and take those profits when you have them. Demonstrate patience and wait for confirmation. Don’t be stubborn. If you have a loss, just admit you were wrong, respect your stop, and take the loss before it grows. When price does move in your direction, always move your stops in your favor (remember the “Legend of the man in the green bathrobe“…it is NOT HOUSE MONEY, it’s all OUR MONEY!). 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.

See you in the trading room.

Ed

Swing Trade Ideas for your consideration and watchlist: BVN, NCLH, LVS, SQQQ, TZA, SPXS, MOS, WMT, NEM, NFLX, NVAX, ZS, PINS, KGC, MRNA, VALE, BAC, JPM, TSLA, FCX, CUK. 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.

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