PPI Early and Fed Later Will Call the Tunes

Markets opened the day mixed and mostly flat on Tuesday.  SPY opened down 0.08%, the DIA gapped up 0.18%, and QQQ opened dead flat.  Then, after 10 minutes of just gaining their footing, all three major index ETFs rallied higher at best (QQQ) in a good way and at worst (DIA) in a melt-up fashion.  This action gave us white-body candles with lower wicks and no upper wicks except in the DIA.  This took all three to new highs since January 2022 and within 1% to 3.5% of the all-time highs.  Obviously, all three remain above their T-line (8ema).  However, this all happened on far less-than-average volume in the SPY, DIA, and QQQ index ETFs.

On the day, five of the 10 sectors were in the green and five in the red with Healthcare (+0.67%) out in front leading the way higher while Energy (-1.39%) lagged well behind other sectors.  At the same time, the SPY gained 0.46%, DIA gained 0.47%, and QQQ gained 0.80%.  The VXX fell another 2.87% to close at 15.90 and T2122 fell out of its overbought territory to end in the upper part of the mid-range at 71.47.  10-year bond yields fell a bit to 4.204% and Oil (WTI) dropped another 3.55% to close at $68.79 per barrel.  So, on Tuesday the bulls again proved unphased by unchanged CPI data (did not fall but was not expected to fall) and continued to rally modestly higher.  Some may call it a “melt higher.”  The lack of volume may be a larger symptom or, quite possibly, a wait for the Fed on Wednesday afternoon.

The major economic news reported Tuesday included November CPI (month-on-month), which came in slightly above expectations at +0.1% (compared to a forecast of +0.0% and the October +0.0% reading).  At the same time, November CPI (year-on-year) came in just as anticipated at +3.1% (versus a +3.1% forecast and down slightly from the October value of +3.2%).  Simultaneously, the Nov. Core CPI (month-on-month) was reported as predicted at +0.3% (compared to the +0.3% forecast and a tick higher than October’s +0.2% reading).  On a year-on-year basis, Nov. Core CPI was flat at +4.0% (versus the +4.0% forecast and October reading).  Later, the November Federal Budget Balance showed a larger deficit than planned at -$314.0 billion (versus a -$301.1 billion forecast and far greater than the October $-67.0 billion deficit).  Then, after the close, the API Weekly Crude Oil Stocks report showed a larger-than-expected drawdown of 2.349 million barrels (compared to a -1.500 million barrel forecasted draw and the prior week’s 0.594-million-barrel inventory build).

In Fed Rate news, Tuesday evening (a day after the CPI release) Fedwatch tells us 98.2% of traders are betting rates do not change Wednesday.  Just 1.8% now expect a quarter-point hike on 12/13.  For January (1/31), there is a 92.2% probability of no change, a 6.1% chance of a quarter-point rate cut, and a 1.7% chance of a 0.25% rate hike.  The March 20 probabilities include 54.2% of the current rates, a 42.3% chance of a quarter-point reduction, a 2.6% chance of a half-percent cut, and a 1.0% probability of a quarter-point hike.  Finally, in May (5/1), the probabilities include 0.5% of a quarter-point hike from our current rates, a 25.5% chance of the same rates we have now, a 48.7 chance of a quarter-point rate cut, a 23.9% probability of a half-percent cut, and a 1.4% chance of three-quarters of a percent rate cut from current levels.

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In stock news, on Tuesday, SPWR entered into an amendment and waiver of its credit agreement with lenders.  As part of the amendment, SPWR received $25 million of new revolving credit and existing lenders will also allow access to $25 million of existing credit that had been halted.  (The deal requires the company to provide creditors with updated financial data every four weeks.)  At the same time, Reuters reported that GM and KMTUY (Komatsu) have said they will jointly develop hydrogen fuel cells for electric mining trucks.  Later, CHH “went hostile” in its bid to acquire WH.  CHH went public with its cash and stock offer in October ($8 billion at the time but now down to $7.2 billion due to stock price declines). CHH, which owns about 2% of WH, is now in the process of selecting a slate of board candidates to propose against the current board in a proxy fight.  At the same time, BA announced it delivered 56 airplanes in November, including 45 737 MAX, two 777 freighters, two 767s, six 787 Dreamliners, and one P-8 maritime patrol aircraft.  Elsewhere, STLA announced its Fiat brand will begin selling a fully-electric version of its “500 model” car in 2024.  At the same time, PFE said it expects to close its $43 billion deal to acquire SGEN this week.  Later, Reuters reported that Type-2 Diabetes patients are having difficulty being reimbursed for multi-use drugs, specifically the massively popular weight loss drugs from NVO and LLY.  This could pose a headwind for the companies as insurers UNH, CI, and others are now requiring prior authorization to cover the drugs.  At the same time. Bloomberg reported that WBA has started early discussions about exiting its “Boots” UK pharmacy business.  (WBA thought about this in the past but shelved the idea.  Bloomberg reports internal discussions have just begun again.)  Meanwhile, Reuters reported that LHX said it had suspended its acquisition activity (and mergers) “for the foreseeable future” as it seeks to strengthen its balance sheet.  After the close, it was announced that the CVLY and ORRF boards had approved their merger in an all-stock deal, creating a bank with a valuation of $5.2 billion.  The new bank will trade under ORRF.

In stock government, legal, and regulatory news, Reuters reported Tuesday that AMZN will defend its acquisition of IRBT at a closed EU hearing.  This comes three weeks after EU antitrust officials said the deal would likely squeeze out other robot cleaners from AMZN’s online marketplace.  At the same time, in front of a 15-judge panel, ILMN accused EU antitrust regulators of reaching beyond their remit in their investigation of ILMN’s $7.1 billion acquisition of Grail.  Undaunted, the EU antitrust regulators counter-accused ILMN of trying to rewrite the EU merger rule book. (If ILMN loses this appeal, it has already said it will divest the already closed acquisition within one year.)  In the US, the Dept. of Transportation said Tuesday it is launching a new regulatory effort that will eventually require carmakers to implement technology preventing intoxicated drivers from starting a car.  At the same time, Reuters reported that AAPL has offered to let rivals access their “tap and go” mobile payments systems in an effort to settle EU antitrust charges and avoid massive fines.  Later, a group of hedge funds filed suit in the US Fifth Circuit Court of Appeals against the SEC in a bid to vacate two new rules that require transparency of short-selling.  Late in the day, a federal judge in VA ruled in favor of CSCO in a patent infringement claim from Centripetal Networks.  A different judge in the same court had awarded Centripetal $2.75 billion in 2020, but a federal appeals court overturned the decision and forced a retrial.  At the same time, AAPL announced it will now require a judge’s order before it will hand over customer push notification data to law enforcement.  (Push notification data is very useful for geolocating a phone over time.  In other words, tracking the phone’s past locations.)  Up to this point, AAPL had been handing over that data upon request from any law enforcement agency.  After the close, a Brazilian judge approved the bankruptcy of the operator of 140 SBUX stores in that country.  Also after the close, AMZN asked a DE judge to dismiss a lawsuit brought by shareholders over the company’s Kuiper satellite launch contracts.  The suit had alleged a conflict of interest as AMZN’s launch contracts were given to the former CEO’s Blue Origin company without considering alternatives such as Elon Musk’s SpaceX.

Overnight, Asian markets were mixed with the outnumbered exchanges in the red moving much more than the more numerous green exchanged.  Shenzhen (-1.54%), Thailand (-1.16%), and Shanghai (-1.15%) paced the losses with Australia (+0.31%) and Japan (+0.25%) being the only appreciable gainers.  In Europe, a different picture is taking shape at midday as all but two of the 15 exchanges are in the green.  The CAC (+0.37%), DAX (+0.17%), and FTSE (+0.35%) lead the gainers while Finland (-0.30%) and Norway (-0.04%) are the only red on the board in early afternoon trade.  In the US, as of 7:30 a.m., Futures are pointing toward a very modest green start to the day.  The DIA implies a +0.11% open, the SPY is implying a +0.11% open, and the QQQ implies a +0.17% open at this hour.  At the same time, 10-year bond yields have fallen again to 4.181% and Oil (WTI) is up a third of a percent to $68.87 per barrel in early trading.

The major economic news scheduled for Wednesday include Nov. PPI and Nov. Core PPI (both at 8:30 a.m.), EIA Crude Oil Inventories (10:30 a.m.), Fed Rate Decision, Fed Statement, Current Q4 Interest Rate Projection, Q4 1st Year Projection, Q4 2nd Year Projection, Q4 3rd Year Projection, and FOMC Economic Projections (all at 2 p.m.), and the Fed Chair Press Conference (2:30 p.m.).  The major earnings report scheduled for before the open is limited to ABM and REVG.  Then, after the close, ADBE and NDSN report.

In economic news later this week, on Thursday, we get Weekly Initial Jobless Claims, Weekly Continuing Jobless Claims, Nov. Retail Sales, Oct. Business Inventories, Oct. Retail Inventories, and the Fed Balance Sheet.  Finally, on Friday, NY Empire State Mfg. Index, Nov. Industrial Production, S&P Global Mfg. PMI, S&P Global Services PMI, and S&P Global Composite PMI are reported.

In terms of earnings reports later this week, on Thursday, we hear from JBL, COST, LEN, and SCHL.  Finally, on Friday, DRI reports.

In geopolitical news, Houthi rebels in Yemen took credit for a missile attack on a Norwegian oil tanker in the Red Sea.  The group claimed it attacked (in support of Palestine) because the tanker was delivering oil to an Israeli oil terminal.  Elsewhere, the US Departments of Treasury and State announced new sanctions on hundreds of people and entities in China, Turkey, and UAE as part of its crackdown on evading sanctions on Russia. 

In miscellaneous news, Reuters reported Tuesday that in November global sales of fully-electric vehicles and electric hybrid vehicles rose 20% versus the prior year to a new record of 1.4 million vehicles.  The report (citing market research firm Rho Motion) said the sales growth was strongest in North America and China which more than offset reduced sales in Europe.  Of the 1.4 million cars sold, 70% were fully electric with the remaining 30% hybrid. This news runs counter to “conventional wisdom” that, given that F is cutting production plans for the F-150 Lightning by 50%, seems to say the demand for electric vehicles is falling.  In other news, more leverage has entered the stock market as XXXX (4x leveraged S&P500 ETN) began trading earlier this month.  (This ETN is run by BMO and is the first US foray into 4x leverage in the form of ETN.)

So far this morning, ABM and REVG reported beats on both the revenue and earnings lines.

With that background, it looks like all three major index ETFs are looking to start the day higher (ahead of PPI data anyway) but are doing so in an indecisive way as we still await the Fed this afternoon. All three major index ETFs opened the premarket slightly higher and are putting in a small, white-body, indecisive (Doji-like) candle so far in the early session. All three remain well above their T-line (8ema) this morning. The market seems to be waiting on the Fed. However, the market also thinks it knows what the news will be (no rate hike, no cut, but a promise of “higher for longer” and no promises to be led by future data). Overall, the Bulls remain well in control of both the longer-term trend and the short-term trend. So, even the indecision causes a drift higher. In terms of extension, none of the three major index ETFs is extended too far from its T-line although QQQ is getting close. The T2122 indicator has also dropped back out of its overbought territory into the upper end of the mid-range. So, both the Bulls and Bears have slack to run…if either of them can find the momentum.

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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