Tuesday was the definition of “Whipsaw” as traders loved the CPI data and turned what had already looked like a gap up into a massive gap higher. (The SPY gapped up 2.8%, the DIA gapped 2.14% higher, and the QQQ gapped up a whopping 3.82% at the open.) However, then the bears showed up, driving a strong and persistent selloff until 1 pm. That selloff had completely faded the opening gap in all 3 major indices (and more than faded it in the DIA). By that point, the bulls were rested and began a slow rally back in the other direction until 2 pm, when another selloff began. This volatile action gave us very large, gap-up, black candles with lower wicks in the DIA, SPY, and QQQ.
On the day, eight of the ten sectors are in the green with the Energy (+1.75%) sector leading us higher while the Communication Services (-0.13%) and Consumer Defensive (-0.11%) sectors were the laggards. Meanwhile, the SPY was up 0.76%, the DIA was up 0.35%, and the QQQ was up 1.08%. This action took place on greater than average volume. The VXX fell by 4.14% to 14.58 and T2122 remains in the mid-range at 65.67. 10-year bond yields were also volatile but now down to 3.507% and Oil (WTI) was up more than 2.8% to $75.25 per barrel. So, overall, it was an extremely volatile day that saw a range that was many times the close-to-close move.
In economic news, the November CPI showed a much smaller-than-expected increase of +0.1% (compared to the forecast of +0.3% and the October reading of +0.4%). This was the smallest increase since August of 2021. It also translates into an annualized consumer inflation of 7.1% (compared to 7.3% that was forecasted and the 7.7% annual CPI was sitting at last month. As mentioned, the market loved this news since it is strong evidence that Fed moves to date have started to bring inflation down. (And traders expect this to translate into a smaller rate hike and softened tone in the Fed announcement and presser today.) Later, after the close, API reported that oil inventories unexpectedly rose by 7.8 million barrels this week (versus the forecast of a 3.9-million-barrel drawdown and last week’s 6.4-million-barrel drop). This was particularly unexpected given the midwest pipeline shutdown that is depriving a major storage hub of 662k barrels per day.
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In stock news, BA reported that its plane deliveries rose in November to 48 (up from 35 in October). Meanwhile, STLA recalled 1.4 million 2019-2022 Dodge Ram pickups over faulty tailgate latches. In other auto news, F announced it is adding a third “crew” to its Dearborn F-150 Lightning electric vehicle assembly plant (increasing production capacity by 50%). In the health industry, Reuters reports the MRNA Covid-19 vaccine has been now shown to work against the melanoma type of cancer. This news drove MRNA stock massively higher, closing up 19.63% on the day. Elsewhere, RTX has announced a $6 billion stock repurchase program. Finally, the CEO of UAL told the media on Tuesday that UAL and its main competitors are preparing for a “mild” recession in 2023. He went so far as to say that “if he didn’t read the Wall Street Journal or watch CNBC the word recession would not even be in his vocabulary right now.” Along those same lines, DAL said Wednesday morning that it expects to double earnings in 2023 due to “rebounded and robust” travel demand.
In anti-trust news, according to Bloomberg, AAPL will allow alternative app stores onto iPhones by the end of 2023…but only in the EU (where it is being forced to do so by anti-monopoly law). This may end up a boon for MSFT, META, AMZN, and any other company with a major app store. Meanwhile, ILMN began pre-emptively defending its purchase of Grail, by pledging to keep selling its DNA sequencing services to other firms. This comes ahead of an FTC commissioner’s vote on the deal, which is the final US hurdle. Still, the EU antitrust regulators have already temporarily blocked the deal and are set to make a final decision in early 2023. Finally, on Tuesday, MSFT President Smith said the company has offered to agree to a legally-binding FTC Consent Decree that would force MSFT to continue providing the “Call of Duty” game franchise to rival game platforms if the FTC would allow the acquisition of ATVI to proceed. (The EU is still investigating the deal and has promised to decide whether or not they’ll allow it by March 2023.)
In miscellaneous news, part of the reason behind Tuesday’s big rally in oil was that the Dollar dropped hard against all its major pair partners. The expectation of less hawkish action and verbiage out of the FOMC would have a weakening effect on the dollar. Yet another impact of the good inflation news was a drop in mortgage rates. A 30-year fixed-rate mortgage has dropped to 6.28%, which is nearly half a percent lower than the rate at the end of November. Elsewhere, on Tuesday the Pentagon switched course and recommended that the US give Patriot Missile systems to Ukraine for air defense. (Those are made by RTX, LMT, and BA.) President Biden still needs to approve the shipments, but if it is done, it would be a major increase in capability for Ukraine to keep their country’s power grid online as repaired.
After the close, ABM reported beats on both the revenue and earnings lines. However, ABM also lowered its forward guidance. So far this morning, REVG has posted a beat on both the top and bottom lines.
Overnight, Asian markets leaned heavily to the green side. Taiwan (+1.49%), South Korea (+1.13%), and Malaysia (+0.89%) led the rally while Chinese exchanges lagged. Meanwhile, in Europe, exactly the opposite is taking shape at midday. The only green on the European board is Athens (+0.18%) and Denmark (+0.20%). At the same time, the FTSE (-0.24%), DAX (-0.51%), and CAC (-0.38%) are typical and lead the region lower in early afternoon trade. As of 7:30 am, US Futures are just on the green side of flat. The DIA implies a +0.15% open, the SPY is implying a +0.15% open, and the QQQ implies a +0.10% open at this hour. 10-year bond yields are just south of flat at 3.503% and Oil is up 1% to $76.21/barrel in early trading.
The major economic news events scheduled for Wednesday include the November Import/Export Price Index (8:30 am), EIA Crude Oil Inventories (10:30 am), Fed Q4 Interest Rate Projections, Fed Economic Projections, FOMC Statement, and the Fed Interest Rate Decision (all at 2 pm), and FOMC Press Conference (2:30 pm). (Note that Fed Futures have priced in an 80% probability of a 0.50% rate hike today.) The major earnings reports scheduled for before the open are limited to REVG. Then after the close, LEN, NDSN, and TCOM report.
In economic news later this week, on Thursday, we get November Retail Sales, Weekly Initial Jobless Claims, NY Fed Empire State Mfg. Index, Philly fed Mfg. Index, Nov. Industrial Production, Oct. Business Inventories, and Oct. Retail Inventories are reported. Finally, on Friday, Mfg. PMI and Services PMI are reported.
In earnings later this week, on Thursday we get reports from JBL and ADBE. Finally, on Friday, we hear from CAN, DRI, and WGO.
As all eyes look toward the Fed today, Bloomberg implies that somebody knew something early about CPI data which led to yesterday’s strong rally. Bloomberg says that there were massive bullish bets made in the minute prior to the release of CPI information. This magnified the premarket action and led to the huge gap-ups at the open. Only time will tell whether this will be investigated and whether the SEC could prove any inside info was acted upon.
With that background, the short-term trend is bullish after yesterday’s rollercoaster ride. Premarket prices are now essentially flat and there is no problem with over-extension, either in terms of the T-line (8ema) or the T2122 indicator. So, both the bulls and the bears have room to run once the FOMC gives its current verdict. Be ready for more whiplash as we are getting economic and interest rate projections in addition to the Fed release (and that statement’s verbiage will be parsed nine ways to Sunday). Then, a half hour later, Powell speaks AND answers questions. So, there will be something (probably several things) for both camps the latch onto today. And that is how you get the violent jerks back and forth as “average sentiment” gets worked out over an hour or two. (Also, beware that it is quite possible we then have another reassessment overnight and yet another market reaction to the news on Thursday morning.)
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.
Swing Trade Ideas for your consideration and watchlist: XLE, FNGU, GSK, HAL, APA, NEM, GEO, FIVN, ARDX, and AMAT 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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