Markets diverged again today as DIA continued to be a laggard and contrary to the two other major index ETFs.  SPY opened very modestly higher (up 0.08%), while QQQ opened up 0.04% higher, but DIA gapped down 0.34%.  After the open, SPY and QQQ rallied all morning, reaching the highs of the day at 11:25 am.  At that point, they both began a slow selloff that lasted until 2 pm.  Meanwhile, DIA ground sideways in a tight range until 2 pm after its gap lower.  However, the Fed statement at 2 pm caused the major index ETFs to “sync up” as the market crashed hard for 30 minutes, rallied hard for 30 minutes, and then fell a little less violently during the last hour of the day.  However, the SPY and QQQ did rebound in the last 5 minutes much more than the DIA.  This action gave us indecisive candles in all three major index ETFs.  The SPY printed a long-legged Doji, the DIA a gap-down black-bodied Spinning Top, and the QQQ a white-bodied Hammer or Hanging Man.

On the day, seven of the 10 sectors were in the red as Healthcare (-0.82%) led the market lower, while Consumer Defensive (+0.49%) and Technology (+0.47%) held up much better than other sectors.  At the same time, SPY gained 0.12%, QQQ gained 0.73%, and DIA fell 0.65%.  The VXX fell almost 3% to 27.57 and T2122 dropped back to just outside the overbought territory to 77.19.  10-year bond yields fell to end at 3.796% while Oil (WTI) lost 1.04% to end the day at $68.69 per barrel.  So, overall, it was a divergent day punctuated by the volatility caused by the FOMC.   Still, all three index ETFs remain above their T-lines (8ema) even as DAI retested and held its T-line during the day.  This all happened on well-above-average volume in the QQQ, slightly above-average volume in the DIA, and average volume in the SPY. 

In major economic news, the May PPI (month-on-month) came in better than expected at -0.3% (compared to a forecast of -0.1% and much better than the April value of +0.2%).  At the same time, May Core PPI was reported in line with expected values at +0.2% (exactly matching the forecast and April reading, which were both +0.2%). Later in the morning, the EIA Weekly Crude Oil Inventories came in well above the anticipated level at a build of 7.919-million-barrels (versus a forecast calling for a build of 1.482-million-barrels and far above the previous week’s 0.451-million-barrel drawdown).  However, the main news of the day came from the FOMC.  In terms of Fed Funds rate projections (dot plot), the Fed’s Q2 forecast expects current rates to top out at 5.6% (was 5.1%) this year, one year from now they expect to be at 4.6% (was 4.3%), and two years out they now anticipate the rate to be set at 3.4% (was 3.1%).  Clearly, these were all increases from the projections in the Q1 forecasts.  Their longer-term projection is for rates to fall to 2.5% (the same as it has been since 2019).  With that said, the FOMC did pause rate hikes for the first time in 10 meetings or 18 months, holding rates at the previous 5.00% to 5.25% level.

In terms of Fed speak, as noted above the FOMC statement expects Fed Funds rates to top out at 5.6% later this year.  This implies two more quarter-point hikes spread out across the four remaining 2023 meetings. (This hawkish stance was unexpected by the market and caused the big 2 pm knee-jerk downward.)  They were more upbeat about the 2023 economy, expecting the job market to endure only “small job losses” (compared to a much more somber March statement) as they project the Unemployment Rate will rise to 4.1% before year-end. At the same time, they see inflation on a very similar path to what they had projected in March.  For example, they expect PCE (their preferred inflation measure) to fall to 3.2% later this year.  (They had forecasted it would only fall to 3.4% this year at the March meeting).  Nonetheless, they still anticipate Fed Fund rate cuts (about 1%) to begin in 2024 in order to stimulate growth because they expect Unemployment to reach 4.5% in 2024. 

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As for Chair Powell himself, in addressing the pause, he said, “We’ve covered a lot of ground, and the full effects of our tightening have yet to be felt.”  Later, he tried to “walk back” the Fed Funds rate forecast by saying he thinks rate cuts are “about a couple of years out” (as opposed to one).  However, he also said “I would almost say that the conditions that we need to see in place to get inflation down are coming into place.”  (He later defined that progress to mean “growth meaningfully below trend.”)  The Chair also said that good financial conditions are likely to allow the Fed to push hard on the reduction of its balance sheet (which itself will act as a means of taking liquidity out of the market).  Finally, Powell pushed back against the idea that the FOMC had already made a decision about what they would do in July.  Specifically, he said “I would say two things: One, a decision hasn’t been made. Two, I do expect that it will be a live meeting.”  With that said, as of 5:30 pm Wednesday the CME Fedwatch Tool says that is a 64.5% probability of a quarter-point hike in July (the other 35.5% bet on no hike at that meeting). 

In stock news, health insurance companies took a hard hit Wednesday when UNH announced its costs were rising due to an increase in surgeries by older adults.  (HUM took the worst hit plummeting 11.24%, CVS dropped 7.76%, ELV fell 6.89%, UNH itself was down 6.4%, and CI fell “just 3.11%.)  In better (shareholder) news, SHEL said it will increase shareholder distribution to 30%-40% of cash flow (up from the current 20%-30%).  This includes a 15% boost in dividends as well as an increase in the size and pace of share buybacks.  This comes as the new CEO said the company is doubling-down on its “oil and gas” units shifting away from previous efforts to grow “renewables and low-carbon” businesses.  Elsewhere, VLKAF said on Wednesday that it expects to realize $10.83 billion in savings from cost-cutting and operational efficiency gains by 2026.  At the same time, in boycott news, BUD’s Bud Light beer lost its spot as the top-selling beer in the US (for the week ending June 3) to STZ’s Modelo Especial brand following the backlash from conservatives who did not like BUD doing a social media promotion with transgender influencer Dylan Mulvaney.  (Modelo had 8.4% of US beer sales while Bud Light came in second at 7.3% after Bud Light experienced a 24.6% decrease in sales.)  Meanwhile, GOOGL announced it is launching two new AI-powered features for advertisers designed to automatically find the best ad placements across GOOGL platforms.  Later, SCHW announced it is now forecasting a 10%-11% drop in Q2 revenue due to interest effects and soft trading activity.  (SCHW said it has had to rely on more expensive funding sources than had been expected.)

In stock legal and regulatory news, the FAA said Wednesday that all new passenger aircraft will be required to have a secondary barrier to prevent flight deck intrusions. The rule will not take effect until two years from the “effective date” which itself will not be until August.  This comes as plane manufacturers (BA and EADSY), unions, and the major airline trade group have fought the rule for years.  (The rule was originally supposed to be adopted in 2019.  However, industry interest groups have been very successful in dragging out the implementation as lobbying money and lawyers carry a big stick in Washington.  In other air industry news, in a nod to airline labor shortage problems, the US House voted to raise the mandatory pilot retirement age from 65 to 67 as part of the FAA reauthorization bill expected to be taken up by the whole House next month.  Elsewhere, in Canada, the country’s budgetary watchdog now estimates that the subsidies (tax credits) paid to VLKAF in order to obtain a battery plant will cost their government $1.8 billion (US) more than forecast.  This news comes as tense negotiations are underway between Canada and STLA over the subsidies given to garner its own battery plant.  Meanwhile, President Biden vetoed a bill that would have scrapped limits on the pollution produced by heavy trucks and buses.  This leaves in place EPA rules cutting emissions by 2032 despite GOP and transportation industry objections to the reductions which they say will be too costly to implement over 9 years.

After the close, LEN beat (significantly) on both the revenue and earnings lines.  (The homebuilder posted more than a 12% upside revenue and a 27% upside earnings surprise.)  It is worth noting that the company also raised its forward guidance.

Overnight, Asian markets were mixed.  Hong Kong (+2.17%) and Shenzhen (+1.81%) were by far the biggest gainers while losses were modest, led by South Korea (-0.40%) and India (-0.36%).  Meanwhile, in Europe, the bourses are mostly lower at midday.  The CAC (-0.83%), DAX (-0.70%), and FTSE (+0.04%) lead the way on volume and market cap as usual.  However, Norway (+0.75%) is the biggest of the four gainers in early afternoon trade.  In the US, as of 7:30 am, Futures are pointing toward a down start to the day.  The DIA implies a -0.22% open, the SPY is implying a -0.41% open, and the QQQ implies a -0.73% open at this hour.  At the same time, 10-year bond yields are back up to 3.829% and Oil (WTI) is up just over 1% to $68.98 per barrel in early trading.

The major economic news events scheduled for Thursday include May Retail Sales, May Imports, May Exports, Weekly Initial Jobless Claims, NY Empire State Mfg. Index, and Philly Fed Mfg. Index (all at 8:30 am), May Industrial Production (9:15 am), April Business Inventories and April Retail Inventories (both at 10 am).  The major earnings reports scheduled for Thursday are limited to KR, JBL, and WLY before the open.  Then, after the close, ADBE reports.

In economic news later this week, on Friday, we Michigan consumer Sentiment, and a Fed Speaker (Waller at 7:45 am).

In terms of earnings reports, there are no reports scheduled for Friday.

In miscellaneous news, the ECB is expected to raised rates to the highest level in 22 years and leave the door open to more rate increases at 8:15 am today.  Unlike the US, even as the Euro Zone economy flags, the ECB is fighting against the highest inflation in the ECB’s 25-year history (now 6.1%).  Still, this increase is only expected to take ECB rates to 3.5% (nearly two full percent below the US Fed Funds rate).  On this side of the pond, UPS and Teamster negotiators have agreed to one of the key sticking points in their ongoing contract negotiations.  UPS will install air conditioning in its entire fleet of 95,000 delivery vans.  Finally, CAVA priced its IPO last night at $22 per share with 14.4 million shares on offer as of sometime today.  (IPOs typically open after the opening bell as opposed to with the bell.)

With that background, it looks like the Bears are trying to open markets near the lows of the premarket prices. All three major index ETFs remain above their T-lines (8ema). So, at least at this point and by that measure we remain in a bullish uptrend and the move is nothing but a minor pressure relief after five very strong days (at least in the QQQ and SPY). However, the ECB Rate decision or (more likely) the large US data dump at 8:30 am may change that premarket outlook. Expect there to be some volatility now that markets have had a little time to digest the Fed data and words from yesterday. In terms of over-extension, none of the major index ETFs are too far from their T-line as of premarket and the T2122 indicator has dropped back outside of the overbought territory. So, the bulls have some slack if they gather the momentum and, of course, the bears have plenty of room if they want to make a charge.

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

🎯 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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