PPI on Deck With Eye Toward Fed

On Tuesday, markets opened basically flat and then the three major indices moved in very different ways the rest of the day.  The SPY wobbled back and forth around the open the rest of the day. We reached the highs at 10:30 am and then the lows at 11:30 am, but spent the entire day no more than one-third of a percent from flat.  At the same time, DIA opened flat and then didn’t stop its selloff until 11:30 am when it hit the lows of the day.  After reaching those lows, it moved in a very tight range along the lows all afternoon.  Meanwhile, the QQQ rode a bigger rollercoaster sideways during the morning (trading in a 1.2% range) but didn’t flatten out at the lows as it spent the afternoon trading in a tight range just on the green side of flat.  All of this happened on lower-than-average volume.

This action gave us indecisive Doji (SPY) and Spinning Top (QQQ) candles while the DIA printed a black-bodied candle that just closed below a Bearish Harami signal.  It may be worth noting that the SPY has managed to stay above its 200sma.  On the day, seven of the 10 sectors were in the red as Basic Materials (-1.11%) led the way lower and Technology (+0.46%) held up best among the sectors.  Meanwhile, the SPY was down 0.17%, the DIA was down 1.13%, and QQQ was up 0.20%.  At the same time, the VXX was up slightly to 12.12 and T2122 fell but remained deep in the overbought territory at 97.20.  10-year bond yields rose to 3.551% and Oil (WTI) was up 1.47% at $81.03 per barrel.  So, overall, it was a low-volume, indecisive day of consolidation for the bulls ahead of Wednesday’s PPI and other data.

In economic news, the NY Fed Empire State Manufacturing Index came in far lower than expected at -32.90 (compared to a forecast of -8.70 and the December value of -11.20).  The Fed may see this as a good sign as it will ease inflationary pressures.  However, after the close, Richmond Fed President Barkin told Fox Business that “he would not want to pause rate increases until it was certain that inflation was falling compellingly toward the central bank’s 2% target.”  This is not directly opposed, but a bit contrary to a few Fed officials recently saying they might prefer smaller hikes or a pause to look at more data before deciding on any more significant hikes.  Elsewhere, in conjunction with last week’s comments by Fed Chair Powell, the Fed ordered the six largest US banks to compile and submit a report by July 31 on how their businesses would be impacted by the range of plausible outcomes of climate change.  Finally, NY Fed President Williams did not address monetary policy, but told an audience that making the economy more inclusive would boost the economy more broadly (as opposed to only helping those in need of more opportunities).

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In stock news, TSLA was in hot water as a deposition from one of its engineers stated a 2016 video promoting their “full self-driving” was faked (staged), showed features the software did not have (like stopping at a red light) and was really just a demonstration of what the potential of the Autopilot software might achieve at some point.  This is despite the video on-screen tagline being “The person in the driver’s seat is only there for legal reasons. He is not doing anything. The car is driving itself.”  This deposition was released as part of a lawsuit over a 2018 Autopilot crash death.  Meanwhile, EMR unveiled a hostile takeover offer of $7 billion ($53/share) in its bid to acquire NATI.  At the same time, AAPL made a rare January product announcement, as it unveiled new MacBooks powered by a new version of its in-house (ARM-based) M2 chip.  Elsewhere, Sky News (UK) reported the MSFT is considering a cut of 5% of its workforce (11,000 jobs, including engineering jobs) as a result of a slowing global economy.  Later, a top executive from INTC said it is still committed to building its German chip plant (fab), but may need to pace itself given the current environment.  This came after German papers were reporting that INTC was backing away from opening the plant in hope of extracting more government subsidies.  Finally, after hours, CVNA adopted a “poison pill” to limit shareholders from raising their stakes and also reached an agreement to sell up to $4 billion in auto loans to ALLY. This move likely blocks institutions from gaining control and liquidating the struggling car retailer.

In Davos news, German Chancellor Sholz told Bloomberg he is sure Germany will avoid a recession this year (despite Russia’s war on Ukraine). In investment news, BLK told the gathering that it lost $4 billion in 2022 from Republican states that are opposed to the company’s ESG policies.  However, BLK CEO Fink said this was dwarfed by the $230 billion in new funds the asset management group took in during 2022 (which was not normal in a year that saw almost $400 billion in net outflows from funds).  Meanwhile, the CEO of BAC told a Davos audience that the US Consumer is still in “pretty good shape” as “people are spending, their wages are growing, and frankly there’s still a lot of stimulus (in the economy).”  In other news from the event, China’s top envoy to Davos said his country’s economic growth would return to pre-pandemic levels in 2023 (assuming you believe his forecast).  Elsewhere, MSFT said it will be incorporating artificial intelligence like ChatGPT into all of its products.  This news comes as rumors have been swirling that MSFT would expand its 2019 $1 billion investment into OpenAI (the project behind ChatGPT) with sources saying MSFT may invest another $10 billion.  Finally, EU Commission Head von der Leyen told the gathering that the EU will move to counter the “green industry” benefits that the US had given clean-energy-related companies as part of the “Inflation Reduction Act.”  This will include offering tax incentives and loans for EU-based “green” companies. 

After the close, both IBKR and UAL reported beats on the revenue and earnings lines.  UAL also raised its forward guidance, saying it expects to make 50% higher revenue in Q1 than Q1 2022 and also expects to expand its number of flights by 20%.  So far this morning, PNC beat (significantly) on revenue while also coming up short on earnings.  PNC also lowered its forward guidance.  At the same time, JBHT missed on both the top and bottom lines.  (PLD and SCHW report closer to the opening bell.)

Overnight, Asian markets leaned to the upside on mostly moderate moves.  Japan (+2.50%) was an outlier to the upside as the Bank of Japan discusses an exit from both negative rates and a way to prop up the Yen.  However, in the pack, India (+0.62%), Hong Kong (+0.47%), and Thailand (+0.26%) led the region higher.  Only South Korea (-0.47%) and Malaysia (-0.26%) were in the red Wednesday.  In Europe, we see mixed trading that leans to the green side on moderate moves at midday.  The FTSE (unchanged), DAX (+0.14%), and CAC (+0.27%) lead to the upside while a handful of smaller exchanges are in the red by about 0.10% in early afternoon trade.  As of 7:30 am, US Futures are pointing toward a modest green start to the day.  The DIA implies a +0.09% open, the SPY is implying a +0.19% open, and the QQQ implies a +0.22% open at this hour.  10-year bond yields have fallen to 3.477% and Oil (WTI) is up nearly 2% on optimism Germany will miss falling into recession and the China reopening will spur demand to $81.66/barrel.

The major economic news events scheduled for Wednesday include December PPI and Dec. Retail Sales (both at 8:30 am), Dec. Industrial Production (9:15 am), Nov. Business Inventories and Nov. Retail Inventories (both at 10 am), Fed Beige Book (2 pm), and three Fed speakers (Bostic at 9 am, Bullard at 9:30 am, and Harker at 2 pm).  The major earnings reports scheduled for the day include SCHW, JBHT, PNC, and PLD before the opening bell.  Then after the close, AA, DFS, FHN, FUL, KMI, and WTFC report.

In economic news later in the week, on Thursday, Dec. Building Permits, Dec. Housing Starts, Weekly Initial Jobless Claims, Philly Fed Mfg. Index, and EIA Weekly Crude Oil Inventories are reported.  We also get another Fed speaker (Williams).  Finally, on Friday, we get Dec. Existing Home Sales and two Fed speakers (Harker and Waller).

In terms of earnings, on Thursday, CMA, FAST, FITB, KEY, MTB, NTRS, PG, SNV, TFC, CNXC, NFLX, PPG, and SIVB report.  Finally, on Friday, we hear from ALLY, ERIC, HBAN, RF, SLB, and STT.

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In late-breaking news, mortgage demand spiked last week by 28% as rates fell to the lowest level since last September.  The average rate for a 30-year fixed-rate conforming loan fell from 6.42% to 6.23% (down almost a full percent from the peak rate at the end of October).  New home purchase applications were up 25% week on week (but still 35% lower than the same week in 2022).  Meanwhile, the number of refinance loan applications rose 34% during the week.

With that background, it looks like markets are modestly green as we wait on PPI and other data at 8:30 am. The QQQ is fighting with a resistance level, the DIA is looking for support on a retest of its T-line (8ema), and the SPY continues to try to stay above its 200sma. T2122 remains heavily overbought, but extension from the T-line is not terrible (especially in the DIA). So, it appears that PPI (and specifically the read-through to how the Fed may react to it) will call the tune early today. The Futures are currently implying an even greater bet (92% vs. yesterday’s 91% probability) that rates will rise by only a quarter-point on February 1. Likewise, the number of traders betting on a half-percent rate hike this time fell from 8.8% yesterday to 7.8% today. So, all the betting is on a more doveish Fed. The risk remains to the hawkish side. So, continue to be watchful.

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: No Trade Ideas today. 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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