Market Loved Powell’s Words

The SPY and QQQ opened essentially flat on Tuesday while the DIA gapped down a half of a percent at the opening bell.  All three major indices then meandered sideways until Fed Chair Powell began to speak at 12:40 pm.  At that point, the bulls spiked the market higher for 15 minutes, only to see the bears sell off all three indices hard for 35 minutes.  However, the bulls stepped back in at 1:40 pm to lead nearly as strong of a rebound rally lasted the rest of the day.  This action gave us large white candles with small upper and lower wicks.  The SPY and QQQ both held support at their T-line and DIA climbed back above its own T-line.  This took place on greater than average volume.

On the day, seven of the 10 sectors are green as Energy (+2.42%) led the way higher and Consumer Defensive (-0.42%) lagged the other sectors.  At the same time, the SPY was up 1.31%, the DIA was up 0.90%, and QQQ was up 2.07%.  Meanwhile, the VXX was down 3.10% to 11.24 and T2122 climbed back up inside of the overbought territory at 84.67.  10-year bond yields were higher again to 3.681% and Oil (WTI) just spiked higher by 4.53% to $77.47 per barrel.  So, on the day, we saw a blah day that got very volatile and eventually bullish after Fed Chair Powell gave his speech to the Washington Economic Club. 

The main news of the day was Fed Chair Powell’s Speech and Question-and-Answer Session at the Economic Club of Washington DC.  During his remarks, Powell said that “disinflation has begun…but it’s going to take a long time.”  He specifically cited the good sector as where the disinflation is showing itself strongest.  Later Powell said, “If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in (to markets).”  He was short on specifics.  However, he did say that “we need to be patient” and that rates will need to be held higher for a long time.  Finally, he said he expects inflation to fall all year in 2023, but it was likely to take into 2024 before the Fed target of 2% inflation is hit.  On the topic of the Fed Balance Sheet, Powell said he expects it will take a couple more years before the Fed is ready to end the shrinking of its balance sheet (selling bonds).  Overall, the Dollar, Bonds, and the Stock Market all took Powell’s comments as less hawkish than expected.

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In other economic news, December Exports came in a $250.20 billion (down from $252.40 billion in November).  Meanwhile, December Imports were up slightly, coming in at $317.60 billion (up from $313.40 billion in November).  This also increased the Trade Deficit with a December balance of $67.40 billion (which was less than the forecast of $68.50 billion but also above the November value of $61.00 billion).  Still, this was a record for the “trade gap.”  Then, after the close, the API Weekly Crude Oil Stock Report showed an inventory drawdown of 2.184 million barrels (compared to an expected inventory build of 2.150 million barrels and last week’s 6.330-million-barrel build).  Finally, during his “State of the Union” address, President Biden called for an unspecified additional tax on Billionaires and corporate stock buybacks.  He also asked for more antitrust legislation, called for the passing of an act to stop companies from preventing workers from organizing unions, and lastly the broadening legislation to cap the cost of insulin, saying it needed to not be limited only to Medicare recipients.

In stock news, ZM announced it will lay off 15% of its employees (1,300 jobs).  Later, EBAY said it would lay off 4% (400 employees) of its own workforce.  ZM stock closed up almost 10% on the news.  In quasi-related news, Bloomberg reported that META is poised to ask its Managers to become individual contributors (in addition to managing their teams) or leave the company.  Meanwhile, DAL announced it was giving employees a 5% increase in pay across the board effective April 1.  DAL cited strong travel demand and industry labor shortages as factors in the decision.  Meanwhile, WFC agreed to pay $300 million to settle a shareholder lawsuit claiming the bank had hidden the fact it pushed unnecessary insurance on auto loan customers.  Elsewhere, HTZGC made a regulatory filing Tuesday that showed it actually owns less than half of the TSLA cars it had planned to buy in 2022 (and TSLA releases had announced).   Finally, after hours, BBBY said it has completed its last-ditch stock offering, saying that it had received $225 million and is expecting to receive another $800 million in future installments as HUD (lead investor in this offering) resells or keeps the new shares.

In airline industry news, a bankrupt South African airline (Comair) has filed suit against BA for fraud related to its agreement to buy eight 737 Max planes.  The suit claimed BA failed to disclose problems within its flight control system that caused the two plane crashes in 2018 and 2019 leading to airline losses.  BA refused to return the airline’s deposit on 737 Max planes after the crashes and 20-month groundings.  This is nearly identical to a suit filed by a Polish airline PLL LOT in 2021, which is still pending.  At the same time, BA competitor EADSY (Airbus) reported plane deliveries for January were down by a third, to 20 planes, according to Reuters.  In other labor-related news, SPR announced Tuesday that it is experiencing disruptions in supplying parts for the BA 787 and the EADSY A350 due to labor shortages. 

After the close, SNEX, LUMN, KD, OMC, AMCR, AIZ, VRTX, VOYA, FMC, EHC, CNO, ITUB, SSNC, WERN, QGEN, PLUS, PEAK, and ENPH all reported beats to the revenue and earnings lines.  Meanwhile, VFC, CCK, CSL, and FTNT all missed on the revenue line while beating on the earnings line. On the other side, NCR, WU, ILMN, ATO, RXO, and NBR all beat on the revenue line while missing on the earnings line.  Unfortunately, PRU, YUMC, CMG, VSAT, and JKHY all missed on both the top and bottom lines.  It is worth noting that KD, VRTX, FTNT, QGEN, and ENPH all raised their forward guidance.  However, CCK, EHC, SSNC, BKH, JKHY, and PEAK all lowered their own forward guidance.

Overnight, Asian markets were mixed again.  Taiwan (+1.41%), South Korea (+1.30%), and India (+0.85%) led the gainers.  Meanwhile, Shenzhen (-0.62%), Thailand (-0.60%), and Shanghai (-0.49%) paced the losses.  In Europe, the picture is much greener at midday with only Russia (-0.55%) in the red.  The FTSE (+0.72%), DAX (+0.76%), and CAC (+0.45%) lead the region higher in early afternoon trade.  As of 7:30 am, US Futures are pointing toward a modestly lower start to the day after Tuesday’s rally.  The DIA implies a -0.30% open, the SPY is implying a -0.32% open, and the QQQ implies a -0.18% open at this hour.  At the same time, 10-year bond yields are back down to 3.64% and Oil (WTI) is up 1.22% to $78.09/barrel in early trading.

The major economic news events scheduled for Wednesday is limited to EIA Crude Oil Inventories (10:30 am) and WASDE Report (noon).  However, we also have three Fed speakers (Williams at 9:15 am, Vice Chair for Bank Supervision Barr at 10 am, and Waller at 1:45 pm).  The major earnings reports scheduled for the day include FOX, BDC, BAM, BG, CPRI, CDW, CME, COTY, CVS, D, ETN, EMR, EEFT, FOXA, GPRE, INGR, NYT, PAG, PFGC, REYN, RITM, TEVA, TRMB, UBER, UA, UAA, VSH, WFRD, WEN, and YUM before the opening bell.  Then, after the close, AB, UHAL, NLY, APP, ASGN, AVB, EQH, ENS, NVST, EFX, RE, FLT, FWRD, ULCC, GT, HI, IFF, LNC, MAT, MMS, MGM, MOH, ORLY, PPC, PAA, SON, SONO, STE, STC, SLF, TSE, TTMI, DIS, and XPO report.   

In economic news later in the week, on Thursday we get Weekly Jobless Claims.  Finally, on Friday, Michigan Consumer Sentiment and Jan. Federal Budget Balance are reported and we hear from Fed members Waller and Harker.

In terms of earnings later this week, on Thursday, we hear from ABBV, APO, MT, ARES, AZN, BN, BAX, BWA, BRKR, CIGI, DBD, DUK, FAF, GTES, HLT, HII, NSIT, NSP, IPG, ITT, K, LITE, MSGE, MAS, MDU, PATK, PTEN, PEP, PM, RL, SPGI, SEE, TPR, TU, TIXT, TPX, THC, TRI, TM, WMG, WEX, WTW, BHF, CBT, CC, BAP, DXCM, EQR, EXPE, FLO, G, LYFT, MTD, MHK, MSI, NGL, OSCR, PYPL. CNXN, TEX, MODG, USX, VTR, and YELL.  Finally, on Friday, ENB, FTS, GPN, HMC, IQV, MGA, NWL, SPB, and SLVM report.

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So far this morning, CVS, PFGC, PAG, UBER, ETN, D, YUM, UAA, WFRD, BDC, COHR, RITM, UA, SCGLY, and FUJIY all reported beats on both the revenue and earnings lines.  Meanwhile, TTE, EQNR, BAM, BG, CDW, TEVA, INGR, COTY, CME, TRMB, and EEFT all missed on revenue while beating on earnings.  On the other side, CRTO beat on revenue while missing on earnings.  Unfortunately, EMR, CPRI, REYN, and VSH missed on both the top and bottom lines.  It is worth noting that COTY, UAA, and BDC all raised their forward guidance.  However, INGR, CPRI, REYN, TRMB, VSH, and CRTO all lowered their own forward guidance.

In late-breaking news, interest rates dropped for a fifth consecutive week causing an 18% spike in refinance mortgage demand while new home purchase loan applications rose by 3%.  However, demand was still much lower than one year ago.  The average rate for a 30-year, fixed-rate, conforming mortgage fell to 6.18% with points also falling slightly.  Meanwhile, in addition to their earnings, CVS announced it has agreed to buy OSH for $39/share in cash ($10.8 billion overall).  This is CVS’s second acquisition in the healthcare provider space in a year.  Elsewhere, there were 4 big dividend moves of note.  DD hiked its dividend by 9.1% (to 2% annualized), VF cut its dividend by 41% to $0.30/share, MCRI declared a special dividend of $5.00/share, and MSBI hiked its dividend by 3.4% to 4.6% annualized.

With that background, it looks like all three major indices are looking to open as inside candles after yesterday’s strong move up. None of them appear to be retesting their T-lines (8ema) during premarket. However, DIA is not that far above its own T-line. The trend remains bullish (strongly bullish in the QQQ) in all three, but the DIA also remains in and upswing within its wedge. DIA and QQQ both have potential resistance just overhead with SPY dealing with a lesser level (from June ’22 highs and March ’22 lows). With only the EIA and Ag reports today, look for Fed speak as a potential volatility driver. However, in general, this should be a pure market sentiment day.

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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