NVDA Report Trumps Debt Cliff Fear Early

Markets gapped lower on Wednesday (down 0.40% in the SPY, down 0.21% in the DIA, and down 0.60% in the QQQ).  The bears then followed through for an hour in all three major indices.  At that point, all three then ground sideways near the lows for 4.5 hours.  However, at that point, the Bulls stepped in to rally strongly for 25 minutes only to see a selloff the last 25 minutes of the day.  This action gave us a gap-down black-bodied Spinning Top in the SPY, a gap-down white-bodied Doji-type candle in QQQ, and a gap-down black-bodied large candle (with small wicks at each end) in the DIA.  This all happened on above-average volume in the QQQ and just less-than-average volume in the two large-cap indices.

On the day, nine of the 10 sectors were in the red with Basic Materials (-1.72%) out in front leading the way lower as Energy (+0.13%) was the only sector in the green and, again, held up considerably better than the others.  At the same time, the SPY lost 0.72%, DIA lost 0.79%, and QQQ lost 0.51%.  VXX gained 4.03% on the day to end at 37.96 and T2122 fell but remains in the mid-range at 39.79. 10-year bond yields spiked up to 3.746% while Oil (WTI) climbed 1.71% to end the day at $74.16 per barrel.  So, Wednesday was the Bears’ Day as markets were spooked by fear of default grew (for the most part on GOP posturing and messages to the press, but certainly not helped by Treasury Sec. Yellen).  However, it is notable that a handful of the tech “big dogs” did resume trying to hold the market up tech names were holding up markets (NFLX, AMZN, and META in particular).    

The only economic news Wednesday, EIA Weekly Crude Oil Inventories showed a huge and unexpected 12.456-million-barrel drawdown of inventory (compared to a forecasted 0.920-million-barrel drawdown and the prior week’s 5.040-million-barrel build of inventory).  This was in addition to a 1.6-million-barrel release from the strategic petroleum oil reserves during the week.  So, the draw was actually more than 14 million barrels.  In addition, Treasury Sec. Yellen spoke during the day, answering questions on a variety of topics.  On the topic of inflation, she said that “inflation has come down very meaningfully” and went on to cite headline inflation as having fallen more than four percent from the peak and gas prices down more than $1.50 a gallon.  On labor, she said (that the US labor market) “is a bit less hot” and has seen a big rise in participation but also “the labor market remains tight.”  Related to bank consolidation, Yellen said greater concentration among big banks is undesirable, going on to say that diversity (between small, mid-sized, and big banks) is vital with each group serving a different need in the market.  So, while she had said a few days ago that there may be more consolidation in the banking sector, she opposes consolidation among the big banks (JPM, C, BAC, WFC, GS, MS).  Elsewhere, (and contrary to conventional wisdom) Fed Governor Waller said that while an inverted yield curve in the context of stable inflation usually points to a bad economic outlook…the current yield curve may signal better times ahead.  He told a University of CA economic conference “What you’re seeing in the inversion is not so much fears about bad economic outcomes in the future, but belief and trust that we’re going to bring inflation back down and rates will be lower in the future once we do that,”.  (Whether you believe him, you believe he really believes that, or whether it is true…you be the judge.)

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In stock news, sadly, TGT announced it is removing some LGBTQ-themed products from their stores “in order to safeguard stores and employees” as well as because of the pressure from groups opposed to such products.  At the same time, C announced it’s scrapping the idea of selling its Mexican unit (Banamex) after failing to find a buyer at what it believed was a fair price.  Instead, C intends to spin off that unit in an IPO in 2025.  Meanwhile, the largest shareholder of FRPT (Jana Partners) said it intends to pursue a proxy fight (July annual meeting) as it will seek to replace four board members.  The announcement came as Jana heavily criticized management and the board’s supervision of them.  Later, Bloomberg reported that AAPL is preparing to introduce a new interface for all its “iProducts” with a smart display that will appear on locked devices.  (Bloomberg said it will be announced at AAPL’s June 5 Developer Conference.)  Elsewhere, META has begun the next round of its previously announced elimination of 10,000 jobs.  This round of layoffs is focused on business teams (marketing, program management, content strategy, corporate communications, etc.).  This is the last batch of layoffs of the 10,000 announced in March.

In stock legal and regulatory news, UK anti-trust watchdog said Wednesday that both DB and C have admitted to anti-competitive behavior (exchanging sensitive UK bond data in order to fix prices).  The agency also announced that it has provisionally found five banks had breached rules (were part of the ring) but that HSBC, MS, and RY had not yet admitted their guilt.  Elsewhere, the Biden Administration urged the Supreme Court to reject an appeal by AAPL and AVGO stemming from their loss of a district-level appeal of a $1.1 billion judgment in a patent infringement case.  (Separate cases against MSFT, SSNLF, DELL, and HPQ are still pending over the infringement of the same patents.)  The original ruling was for AAPL to pay $837.8 million and AVGO to pay $270.2 million.  At the same time, Bloomberg reported that the US prosecutors are reviewing stock trading evidence against former FRCB employees.  Meanwhile, Reuters reported that the FTC is investigating whether ABT, British company Reckitt (who owns Mead Johnson), and NSRGF (Nestle) over collusion in bidding on state contracts for baby formula (WIC programs).  After the close, MSFT filed an appeal of the UK anti-trust watchdog’s April decision to prohibit the company’s acquisition of ATVI.  (The US FTC had previously also blocked the deal and MSFT has appealed that decision as well.)

In debt ceiling news, in the morning, House Speaker McCarthy said the sides “were far apart” (which hit the markets).  On the other side, the White House criticized Republicans for holding the full faith and credit of the United States hostage.  At the same time, Treasury Sec. Yellen also reiterated that she expects the country will be unable to pay its bills as of June 1, but said it is hard to estimate the exact date.  Meanwhile, she has instructed Treasury to stop paying any bills without a definite due date.  Speaker McCarthy also said he accepts Yellen’s default deadline as true (some of his GOP Congressional colleagues had questioned the legitimacy of that date Tuesday).  For their part, GOP negotiators rejected the Biden Administration’s proposals to set corporate and billionaire tax minimums (which would raise revenue) or to expand the ability to negotiate cheaper drug prices (which would significantly reduce military, Medicare, and Medicaid spending).  (The latter seems odd for a group screaming about cutting spending, but these negotiations are about making political points and not about making sense or positive change.) Speaker McCarthy also increased the pressure slightly by saying the House now plans to adjourn for a full week on Thursday (rather than the previously planned Friday).  However, Congress can be recalled.  At the end of the day, both President Biden and Speaker McCarthy told reporters that progress had been made Wednesday and that was very positive, with negotiations continuing Wednesday night.  Unfortunately, by mid-evening, Moody’s disagreed and put the US AAA credit rating on “negative watch” which is typical prior to a rating reduction.  This immediately hit DJIA Futures and if lowered increases the cost of governance by raising bond rates.

After the close, NVDA, AEO, ENS, SPLK, GES, MOD, PLUS, and SNOW all reported beats on both the revenue and earnings line.  (The first clean sweep of companies with more than $500 million in quarterly revenue in quite a while.)  It is worth noting that NVDA and SPLK both raised their forward guidance.  However, AEO and SNOW both lowered their own guidance.  Among the earnings surprises were a 200% upside surprise (SNOW), 92% upside surprise (SPLK), 75% upside surprise (GES), 40% upside surprise (MOD), and a 32% upside surprise (ENS).  The largest revenue surprise was a 10.3% upside surprise from NVDA.

Overnight, Asian markets leaned heavily toward the red side.  Once again, Hong Kong (-1.93%) led the region lower with Australia (-1.05%) next among the losers.  On the plus side, Taiwan (+0.82%) was the standout. All other moves in the region were half of a percent or less in both directions.  In Europe, we see a mixed market at midday.  The largest mover is Norway (+1.02%) to the upside while the CAC (-0.28%), DAX (-0.12%), and FTSE (-0.27%) lead the region on volume as usual in early afternoon trade.  In the US, as of 7:30 am, Futures point to a VERY mixed start to the day.  The DIA implies a -0.32% open, the SPY is implying a +0.57% open, and QQQ implies a +1.90% open at this hour.  At the same time, 10-year bond yields are up to 3.761% and Oil (WTI) is down 2% to $72.86/barrel in early trading.

The major economic news events scheduled for Thursday include Preliminary Q1 GDP, Preliminary Q1 GDP Price Index, and Weekly Initial Jobless Claims (all at 8:30 am), April Pending Home Sales (10 am), the Fed Balance Sheet and Bank Reserve Balances with the Fed (both at 4:30 pm).  The major earnings reports scheduled for the day are limited to AMWD, BBY, BURL, CM, DLTR, GCO, HEPS, MDT, NTES, RL, RY, TD, and TITN before the open.  Then, after the close, ADSK, COST, DECK, GPS, MRVL, RH, ULTA, and WDAY report. 

In economic news later this week, 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 Friday, BIG, BAH, and HIBB report.

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So far this morning, LNVGY (Lenovo), MDT, CM, NTES, and AMWD all reported beats on both the revenue and earnings lines.  Meanwhile, RY, TD, DLTR, and GCO beat on revenue while missing on earnings.  On the other side, TITN missed on revenue while beating on earnings. Unfortunately, BBY and BURL missed on both the top and bottom lines.  It is worth noting that DLTR and GCO both lowered their forward guidance.  The biggest surprises came from RY (110% upside revenue surprise), CM (130% upside revenue surprise), AMWD (64% upside earnings surprise), BBY (50% downside earnings surprise), GCO (45% downside earnings surprise), and NTES (31% upside earnings surprise).

With that background, it looks like the Bulls are on fire in the QQQ, which is near the premarket highs and appears as if it will challenge a breakout above the recent (Monday) highs. At the same time, it looks like SPY is headed back up to retest its T-line as resistance. However, DIA continues its move lower despite being up off of its premarket lows. Of course, all this is before the data dump at 8:30 am. Extension is not a problem in SPY obviously. However, DIA is starting to get a little stretched to the downside and, if it opens where it is now, QQQ will be a bit stretched to the upside. The T2122 indicator is now well into oversold territory. So, we have a divided market with the mega-cap DIA perhaps showing the fear of a debt default while NVDA’s blowout report has the tech-heavy QQQ in “buy, buy, buy” mode. This may be a sign of very short-term rotation into “risk on” mode. However, be careful that bad GDP, Jobless Claims, or word from the debt ceiling negotiations does not rain (hard) on that parade.

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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