Fed Hawks Warn and Retail Keeps Beating

Again or still…for the second day in a row. However you say it, it’s the same story as Thursday.

Markets gapped down strongly Thursday after Wednesday’s Hawkish Fed statements.  The SPY opened down 1.27%, DIA gapped down 1.00%, and QQQ jumped down 1.59% at the open.  However, from that point, the bulls started a slow, wavy, rally that took us to the highs of the day about 1:20 pm. At that point, a slow, steady selloff started that took us back down into the morning gap, before rallying hard the last 30 minutes. During the session, price tested and held the T-line (8ema) in all 3 indices (SPY, DIA, and QQQ).  This action gave us gap-down white candles with upper wicks in all 3 major indices.

On the day, eight of the ten sectors are in the red, with the Utilities sector (-1.53%) leading the losses while the Communications Services (+0.16%) and Consumer Defensive (+0.14%) sectors held up the best.  Meanwhile, the SPY lost 0.31%, the DIA was flat at +0.01%, and the QQQ lost 0.22%.  The VXX fell 0.96% to 16.58 and T2122 dropped back into the center of the mid-range at 56.25.  10-year bond yields have climbed to 3.769% and Oil (WTI) plunged 4.26% to $81.94 per barrel.  So, overall Thursday was a gap-down day where the bulls immediately rejected the gap as the bulls and bears then fought to an overall standstill by day’s end.

In economic news, October Building Permits came in above the forecast at a number of 1.526 million (compared to 1.512 million expected, but still below the September value of 1.564 million).  October Housing Starts also beat the forecasted value, coming in at 1.425 million (compared to the forecasted 1.410 million, but again still below the 1.488 million in September).  Weekly Initial Jobless Claims also beat expectations, coming in at 222k (compared to a forecasted 225k and last week’s value of 226k).  However, the November Philly Fed Mfg. Index came in far below expectations at -19.4 (compared to the forecasted -6.2 and October’s value of -8.7).  In other economic news, Bloomberg reported that US mortgage rates saw the biggest drop in over 41 years this week, with the US avg. 30-year, fixed-rate mortgage dropping to 6.61% (lowest level in two months).  In Fed news, Fed speakers gave us more hawkish comments Thursday.  St. Louis Fed Pres. Bullard said that the rate hikes, so far, have only had limited effects on inflation.  He suggested rates will have to be hiked further than expected to effectively bring down inflation.  While he did not say how high, he used a chart that showed a range of 5%-7% (and we are currently between 3.75% and 4%).  Later, Minneapolis Fed President Kashkari said he wants to be sure inflation has stopped climbing before he would support stopping interest rate hikes, and “it’s an open question how far we have to go with the interest rate (hikes).”

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In stock news, Reuters reported that HAS is looking to sell its TV production business unit eOne.  Meanwhile, the FAA said it does not expect to certify the BA “737 Max 7” plane this year.  This means the plane will need to be reworked to meet new cockpit safety alert standards that come into effect on December 27.  However, BA is still seeking a waiver from those safety standards from Congress, but no progress has been reported on that front yet.  Elsewhere, GM subsidiary Brightdrop said it expects to reach $1 billion in revenue.  Also on Thursday, workers at 100 SBUX stores held a 1-day walkout to protest “illegal retaliation against workers who tried to organize unions.”  Elsewhere, after hours, DNUT settled US Dept. of Labor charges that it failed to pay overtime to several hundred workers by paying a $1.19 million fine.  Finally, AMZN CEO Jassy said the company would continue cutting jobs into 2023, but did not detail the additional cuts.

In energy news, the EIA said on Thursday that in October, Heating Oil costs for US households were 65% more than in the same month of 2021. In part, this was due to the US importing 38% less distillate fuel than it has in recent years as well as by a fire that has taken the largest East Coast distillate refinery (in Philadelphia) offline permanently.  In other energy news, the cause of Thursday’s selloff in oil is being attributed to bad covid news out of China.  The Chinese new case total has risen to the highest level since April with the majority of new cases coming from the heavy manufacturing region of Guangzhou.  However, the hawkish talk from Fed members also stoked fear of a rate-hike-induced economic slowdown in the US, which did not help oil prices.

After the close, AMAT, ROST, GPS, POST, UGI, KEYS, PANW, WWD, and STNE all reported beats on both the revenue and earnings lines.  Meanwhile, WSM beat on the revenue line while missing on the earnings line.  Unfortunately, FTCH missed on both the top and bottom lines.  It is worth noting that ROST, KEYS, and PANW raised their forward guidance.  However, GPS, UGI, WWD, and STNE all lowered their forward guidance.

So far this morning, JD and FL have both reported beats on the revenue and earnings lines.  However, SPB reported misses on both the top and bottom lines.

Overnight, Asian markets were mixed on modest moves.  New Zealand (+0.76%) was by far the largest gainer while Shanghai (-0.58%), Singapore (-0.42%), and Shenzhen (-0.37%) paced the losses.  Meanwhile, in Europe, with the exception of Russia (-0.65%), the entire region is in the green at midday.  The FTSE (+0.92%), DAX (+1.00%), and CAC (+1.20%) are leading a broad-based rally in early afternoon trade.  As of 7:30 am, US Futures are pointing toward a green start to the day.  The DIA implies a +0.56% open, the SPY is implying a +0.76% open, and the QQQ implies a +0.93% open at this hour.  10-year bond yields are moving higher at 3.799% and Oil (WTI) is off fractionally to $81.37/barrel.

The major economic news events scheduled for Friday, are limited to October Existing Home Sales are reported at 10 am.  It is also important to note that today is Options Expiration Friday and Bloomberg reports we have $2 Trillion of options expiring today. The major earnings reports scheduled for the day are FL, JD, and SPB before the open.  However, there are no major reports scheduled for after the close.

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The retail industry continues to show strong earnings, implying that consumers (at least last quarter) had not yet rolled over into recession mode. However, hawkish Fed comments (especially from the most hawkish, Bullard) are telling markets not to get ahead of themselves. (Bullard implied that the end of hikes may not come until 2% higher than analysts and Fed futures have priced in. If that were to happen, it is not yet priced into markets.) So, once again, beauty and the market outlook is in the eye of the beholder. There is something to hang your hat on regardless of how you feel about market direction in the longer term.

However, in the short term, there is no question that the trend is bullish and we have seen a healthy pullback to rest in the upward move. All 3 major indices tested and held the T-line yesterday. So, extension is no problem at all (either in terms of the T-line or T2122). In addition, we held support levels in all 3 major indices. With this background, what we know for sure is that the probabilities in the near term lie in the Bull’s favor. With that said, continue to be cautious about chasing and remember it is Friday (time to get paid and “get ready for the weekend news cycle” day). This is also Options Expiration Friday, with Bloomberg reporting more than $2 Trillion in options ending at the close (really Saturday, but effectively at the close). So, we could always see some kind of price action where somebody tries to pin the price in or out of the money depending on their option position. Just be aware if there is a large open interest near price.

As always, be deliberate and disciplined…but don’t be stubborn. Remember it’s 100 times more important to avoid big mistakes than it is to pick big winners. 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

Swing Trade Ideas for your consideration and watchlist: no trade ideas today. 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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