LOW Beats and Lowers With PMIs On Deck

Large-cap indices opened flat Monday and spent the day wobbling sideways in a fairly tight range.  The SPY spent most of the day on the plus side while the DIA spent nearly the whole day on the red side of breakeven.  Meanwhile, the QQQ opened flat only to immediately rally for 30 minutes before grinding sideways in a tight range the rest of the day. This action gave us a Doji in the SPY, a black-bodied Spinning Top in the DIA, and a Bullish Engulfing candle with a not insubstantial upper wick in the QQQ.  The QQQ and SPY remained above their T-line while the DIA failed that retest and closed below its own 8ema.  This all happened on very low SPY volume, as well as below-average volume in the DIA and QQQ.

On the day, eight of the 10 sectors were in the green (and a ninth just barely red) with Technology (+0.91%) out in front leading the way higher as Consumer Defensive (-1.01%) was by far the worst performing sector.  At the same time, the SPY gained 0.04%, DIA lost 0.39%, and QQQ gained 0.34%.  VXX was flat on the day at 35.81 and T2122 climbed a bit but remains in the mid-range at 65.43.  10-year bond yields spiked up to 3.717% (after being down a good chunk in premarket) while Oil (WTI) climbed a third of a percent to end the day at $71.81 per barrel.  So, Monday saw a great deal of uncertainty with a handful of big dog tech names (TSLA, AMD, GOOGL, and META) holding up the QQQ and by extension the rest of the market.   

The only economic news Monday was more talking…this time by four non-voting members of the Fed.  Before the open, St. Louis Fed President Bullard (uber-hawk) went further than he has before, saying the US economy has been “fairly robust so far (in 2023) … So, for that reason, I think we’re going to have to grind higher with the policy rate in order to put enough downward pressure on inflation.”  He went on to argue that he thinks two more rate hikes are needed in 2023, adding that he has previously wanted the Fed to make those kinds of moves.  This was quite unusual for a Fed member and contrary to his colleagues’ postures of needing to see more information.  Bullard has already made up his mind weeks and months in advance.  (Perhaps he has that freedom because he is not an FOMC voter this year.)  Later, in a virtual appearance San Francisco Fed President Daly said it would be a historical anomaly to get inflation back to 2% without unemployment going to at least 4%.  She went on to say, “Even three weeks in advance of the (next) meeting, it’s still a lot of time to collect information before we make a decision about what to do in June or what to do for the rest of the year.” (Daly is not a voter either in 2023.)  Meanwhile, Atlanta Fed President Bostic (not a voter either this year) indicated he is still in favor of a June pause, saying “Right now, absent a big change, I think I will be comfortable saying let’s just look and see how things play out.”  At the same event, Richmond Fed President Barkin said “I’m not going to prejudge June,” and “There is a plausible narrative whereby the Fed’s previous rate hikes, plus tighter credit standards amid strains in the banking sector, will cool demand and prices.”  (Barkin does not have a vote in 2023 either.) 

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In stock news, F held an investor day to tout its plan to (profitably) ramp up its electric vehicle business.  However, the company also acknowledged a huge hurdle, saying that its cost structure is $7 billion higher than its competition (non-union TSLA).  Later, INTC told its own investor conference about its plan to shift toward AI chips which it will introduce in 2025 in order to better compete with NVDA and AMD.  (INTC currently has zero market share in the AI space after its AI chips have been delayed for years.)  In other news, M&A Advisory firm GHL announced Monday that it has agreed to be acquired by Japanese company Mizuho Financial Group for $550 million ($15/share, which was a 121% premium over GHL’s Friday close of $6.78).  Meanwhile, WMT has announced it has signed a deal with pet telehealth provider Pawp to allow WMT subscribers access to Vets via video and text without appointments.  (This is direct competition to a service offered by CHWY.)  Elsewhere, both PFE and NVO announced (separately) findings of studies that show their oral weight loss drugs are as effective as the LLY and NVO injectable weight loss drugs that have been so popular and newsworthy in recent months.  Later CVX announced it is buying PDCE in a stock and debt deal worth $7.6 billion.  After the close, TGNA announced a $300 million accelerated share repurchase program and a 20% dividend increase. 

In stock legal and regulatory news, WBA asked a US judge to vacate an arbitrator’s $642 million award to HUM over prescription drug reimbursements after the arbitrator found WBA has submitted millions of falsely-inflated drug prices for reimbursement. It was no surprise the HUM asked the judge to affirm the award.  Elsewhere, FCNCA has sued HSBC for hiring away more than 40 top employees of SBNY after FCNCA bought the holdings of SBNY from the FDIC.  The suit seeks $1 billion in damages, claiming the hiring was a planned scheme and the employees took major customers and trade secrets that allowed SBNY to secure major customers.  Meanwhile, MU announced midday on Monday that after the early morning ban by China, it expects a hit mid-to-high single-digit percentage range.  Two Korean firms SSNLF and SK Hynix (South Korea listed) are expected to pick up the market share unless the US can convince the Koreans to forego the revenue in an effort to punish China.  At the same time, a US judge has ruled the CEO of MMM must attend the mediation sessions aimed at resolving nearly 260,000 lawsuits alleging MMM military earplugs failed causing hearing loss.  After the close, a federal judge in Chicago dismissed some claims made against ABT in litigation over recalled baby formula.  The judge threw our claims of “only economic loss” related to the recall.

In miscellaneous news, the USDA just reported a third of the nation’s winter wheat crop is being abandoned (or will be) in the field.  This comes as farmers have decided it’s economically better to destroy the crop and file an insurance claim than to spend more money harvesting.  This is the highest percentage of a planted winter-wheat crop to be abandoned since World War One.  Elsewhere, the Wall Street Journal reported over the weekend that XOM has acquires 120,000 acres of AR land where it plans to produce lithium.  Meanwhile, the Biden Administration announced a deal that calls for CA, AZ, and NV states to all cut their water usage by about 13%.  The deal means that the Federal government will not need to impose severe restrictions on the states.  (The deal was made more palatable by massive snow and rainfalls this year.)    Finally, President Biden and House Speaker McCarthy did not reach a final debt ceiling agreement Monday.  However, game theory had suggested no deal would be reached with 10 days left until the deadline.  After their meeting, both men said they had a productive meeting and believe they will reach a deal before a default

After the close, ZM, NDSN, and HEI all reported beats on the revenue and earnings lines.  Meanwhile, LU missed on revenue while beating on earnings.  It is worth noting the ZM raised its forward guidance.

Overnight, Asian markets were mixed but leaned to the red side.  Shanghai (-1.52%), Hong Kong (-1.25%), and Shenzhen (-1.03%) led the region lower.  Meanwhile, in Europe, we see a similar picture taking shape at midday as the bourses lean to the red side.  The CAC (-0.82%), DAX (-0.27%), and FTSE (+0.22%) lead and are typical of the spread in the region in early afternoon trade.  In the US, as of 7:30 am, Futures are pointing toward a very modestly down open.  The DIA implies a -0.13% open, the SPY is implying a -0.11% open, and the QQQ implies a -0.11% open at this hour.  At the same time, 10-year bond yields are jumping again and are now at 3.748% while Oil (WTI) is up two-thirds of a percent to $72.54/barrel in early trading.  

The major economic news events scheduled for Tuesday include Building Permits (8 am), Preliminary May Mfg. PMI, Preliminary May S&P Global Composite PMI, and Preliminary May Services PMI (9:45 am), April New Home Sales (10 am), and API Weekly Crude Stocks Report (4:30 pm).  The major earnings reports scheduled for the day are limited to AZO, BJ, DKS, HIS, LOW, VIPS, and WSM before the open.  Then, after the close, A, INTU, PANW, TOL, URBN, and VFC report. 

In economic news later this week, on Wednesday, EIA Weekly Crude Oil Inventories, FOMC May Minutes, and Treasury Sec. Yellen speaking are on tap.  On Thursday, we get Preliminary Q1 GDP, Preliminary Q1 GDP Price Index, Weekly Initial Jobless Claims, April Pending Home Sales, the Fed Balance Sheet, and Bank Reserve Balances with the Fed.  Finally, on Friday, April Durable Goods Orders, April Goods Trade Balance, Aprile PCE Price Index, April Personal Spending, April Retail Inventories, and Michigan Consumer Sentiment are reported.

In terms of earnings reports later this week, on Wednesday, ANF, ADI, BMO, BNS, DY, KSS, WOOF, XPEV, UHAL, AEO, ENS, PLUS, GES, MOD, NVDA, SNOW, and SPLK report.  On Thursday, we hear from AMWD, BBY, BURL, CM, DLTR, GCO, HEPS, MDT, NTES, RL, RY, TD, TITN, ADSK, COST, DECK, GPS, MRVL, RH, ULTA, and WDAY.  Finally, on Friday, BIG, BAH, and HIBB report.

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So far this morning, LOW, VIPS, AZO, and DKS all reported beats on both the revenue and earnings lines.  Meanwhile, BJ missed on revenue while beating on earnings.  On the other side, HIS beat on revenue but missed on earnings.  It is worth noting that LOW also lowered its forward guidance. It’s also worth noting that the largest surprises were 38% (VIPS) and 11% (AZO) upside earnings surprises.

In overnight news, the Saudi Oil Minister warned oil speculators to “watch out” ahead of the OPEC+ meeting.  He went on to say “They did ouch in April.  I don’t have to show my cards, I’m not a poker player … but I would just tell them to watch out.”  He made no clear implications, however, in the past, he has advocated for more investment in expanding production capacity.  So, he could, theoretically, be signaling he intends for OPEC+ not to cut production again or even to increase production quotas.  Elsewhere, Minneapolis Fed President Kashkari (voter in 2023) said last night that if the Fed does pause rate hikes in June, it should also signal that tightening isn’t over yet and the move is just a pause.  Finally, as mentioned above, the one thing both President Biden and Speaker McCarthy agreed on Monday evening was that “a default is off the table.”

With that background, it looks like markets are tepidly in the red this morning. DIA continues to be the weakest of the major indices and is retesting potential support this morning in the premarket. Meanwhile, QQQ and SPY continue to trend bullishly. The SPY does look to be doing a tiny pullback. However, the QQQ isn’t even pulling back and could best be described as consolidating at a potential resistance level at this point. Over-extension from the T-line is not a problem and consolidation will help the QQQ (which is currently the only major indice that is even a bit stretched). The T2122 indicator also continues to sit in its mid-range (telling us we have at least a little room left to run). With this all said, it does not pay to fight the tape and the trend remains bullish at the moment in the SPY and especially QQQ. DIA, on the other hand, is a choppy, slightly bearish mess. The one thing to keep in mind is that breadth of the rally is getting very thin. QQQ only had 19 (of 100) gainers and SPY had 201/500 gainers on Monday. This can be a sign of rally exhaustion.

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.


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