Regionals Roar Back and CPI to Call Tune

On Monday, markets gapped lower on the contagion fear coming from the collapse of SIVB on Friday.  The SPY gapped down 1.03%, DIA gapped down 0.91%, and QQQ gapped down 0.65%.  However, the bulls immediately stepped in to buy the dip and rally stocks hard until 11:30 am – 12 pm.  From noon to 1:30 pm, we saw a pullback across all three major indices.  Then from 1:30 pm to 3:30 pm we got a roundtrip rally and fade, bringing us back to roughly the 1:30 pm level.  At that point, we saw a small bounce before continuing lower to close out the day.  This action gave us white-bodied candles with large upper wicks and small lower wicks in all three major indices. 

On the day, six of the 10 sectors were in the red with Financial Services (-3.63%) again leading the way lower while Utilities (+1.29%) did best as investors ran for safety.  At the same time, the SPY lost 0.16%, the DIA lost 0.27%, and QQQ gained 0.74%.  The VXX spiked another 3% to 54.54 and T2122 dropped even more deeply into the oversold territory at 1.87.  10-year bond yields plummeted again to 3.549% (another massive move for bond yields) and Oil (WTI) fell almost 3% to $74.41 per barrel.  So, Monday saw the bears overreact with a big gap down at the open, the bulls overreact to that with a strong rally all morning, and then both sides wrestle their way not far from where we ended Friday.  Once again, this happened on heavier-than-average volume.

In economic news, the only real story of the day was the fallout and follow-up on the SIVB collapse last Friday.  Sunday evening, regulators closed SBNY to avoid a similar fate (and news cycle) as SIVB suffered.  Then, prior to the open Monday, the Treasury Dept., Fed, and FDIC announced that every depositor would be made whole for all deposits, regardless of the FDIC $250k insurance limit.  Meanwhile, the Fed created a new program called Bank Term Funding Program that will offer banks loans for up to a year.  (This program will allow banks in the same situation as SIVB to borrow against the low-yield bonds they own rather than be forced to liquidate them at a huge loss.  So, the banks will have money to cover any deposit withdrawals without booking big losses.)  Despite the Fed backstop, FDIC promised coverage of deposits, and proclamations from Sec. Yellen and President Biden that the system was sound (and made sure to emphasize that no taxpayer money will be used to clean up the mess), many regional banks took major hits in the market Monday.  These include FRC (-61.83%, WAL (-47.06%), KEY (-27.33%), ZION (-25.72%), and PACW (-21.05%).  As a result, many “industry analysts” and “economy talking heads” began calling for the Fed to halt its rate hikes “before something else breaks.”  Despite this, as of early evening on Monday, the Fed Fund Futures said there was still a 68% probability of a 0.25% rate hike next week with the other 32% betting on “no increase.”

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In stock news, PFE signed a $43 billion deal to acquire SGEN on Monday.  This deal has been rumored and in the works for quite some time (and was reported here long ago).  However, now it is official…pending regulatory approval.  In other M&A news, RBA released a letter responding to its founder (who had released a public letter in opposition to the RBA $7 billion acquisition of IAA).  In their response, RBA said their company is different than when Ritchie founded and ran the company since he retired nearly 20 years ago.  Essentially saying, RBA cannot be run as a small family-owned company if it is to keep delivering record growth and shareholder returns.  Meanwhile, after the close, it was disclosed that HYMLF has agreed to buy GM’s plant in India.  GM stopped selling cars in India in 2017 and sold a different plant in India to a Chinese firm in 2019.  However, this would complete GM’s exit from India.  Elsewhere, the US Dept. of Veterans Affairs (aka VA) announced Monday that it will begin providing coverage for a new Alzheimer’s treatment from BIIB and ESALY.  In other biotech news, Carl Icahn has launched a proxy fight with ILMN, demanding three board seats and criticizing the company’s acquisition of cancer test maker Grail.  After hours, Reuters reported that BA is expected to announce the sale of almost 80 787 Dreamliner jets to two Saudi Arabian airlines.  Finally, also after hours, UAL unexpectedly released a forecast of a loss for Q1 citing higher operating costs and weaker-than-expected demand.

In stock legal and regulatory news, the Interior Dept. approved a slightly cut-down (219 or 250 proposed wells approved) version of COP’s Willow oil and gas drilling project to be located inside the National Petroleum Reserve (a 23-million-acre area and the largest tract of undisturbed land in the US).  This was done over strenuous opposition from environmental groups.  COP estimates the project area holds 600 million barrels of oil.  Elsewhere, the US Court of Appeals has reversed a federal court decision, which had cited a US Supreme Court ruling that US Patent Office Trial and Appeal Board rulings cannot be appealed.  This ruling will allow many major companies to go back to federal district courts to appeal patent validity rulings including AAPL, GOOGL, CSCO, INTC, EW, TSLA, CMCSA, and others.  This will also prolong patent disputes by significant amounts and gives the major firms (with deeper pockets) an advantage in patent disputes.  Meanwhile, BUR (one of the largest litigation funders in the world) has sued SYY to prevent them from settling price-fixing claims with major chicken, pork, and beef producers.  BUR had advanced SYY $140 million so the company could sue the producers in exchange for a share of the settlement, but now says SYY is preparing to settle for “low-ball amounts.”  Finally, the US Dept. of Justice has filed suit against RAD charging that the company missed red flags it should have caught when it filled hundreds of thousands of opioid prescriptions between 2014 and 2019.

In late-breaking news, overnight CS admitted finding “material lapses in control” after the SEC prompted them on the matter last week.  The company released its annual report (which had been due for release last Thursday) and also said that its outflow of deposits has not reversed, but is at lower levels than in late 2022.  Meanwhile, the “too big to fail” major banks (BAC, C, JPM, WFC) are all reporting massive windfalls of new deposits in the last couple of days, streaming in as panicked customers seek safety.  Still, the stock market may be adjusting already as regional bank stocks are rocketing back toward prior prices in the premarket.  For example, FRC is up 33%, WAL is up 26%, KEY is up 17%, and ZION is up 11% this morning.  Finally, related to grain prices, the Ukraine-Russia grain deal (exempting Ukrainian grain shipments from Russian attacks in exchange for allowing Russian grain and fertilizer exports) has been extended for another 60 days.

Overnight, Asian markets were red across the board.  Thailand (-3.13%), South Korea (-2.56%), and Hong Kong (-2.27%) led the region lower.  Meanwhile, in Europe, the bourses lean heavily to the green side with only three showing red at midday.  The FTSE (-0.19%), Switzerland (-0.30%), and Amsterdam (-0.02%) are the only red while the DAX (+0.57%) and CAC (+0.27%) lead the region higher.  As of 7:30 am, the US Futures are pointing toward a green start to the day.  The DIA implies a +0.54% open, the SPY is implying a +0.63% open, and the QQQ implies a +0.58% open at this hour.  At the same time, 10-year bond yields have stabilized and climbed back to 3.602% while Oil (WTI) is down another 2.1% to $73.22/barrel in early trading.

The major economic news events scheduled for Tuesday include February CPI (8:30 am), API Weekly Crude Oil Stocks (4:30 pm), and we also hear from Fed member Bowman (5:20 pm).  The major earnings reports scheduled for the day include CAL and HIS before the opening bell.  Then after the close, GES, LEN, and STNE report.      

In economic news later this week, on Wednesday, February PPI. Feb. Retail Sales, NY Empire State Mfg. Index, Jan. Business Inventories, Jan. Retail Inventories, and EIA Weekly Crude Oil Inventories are reported.  On Thursday, we get Feb. Building Permits, Feb. Housing Starts, Feb. Export Price Index, Feb. Import Price Index, Weekly Initial Jobless Claims, and Philly Fed Mfg. Index.  Finally, on Friday, Feb. Industrial Production, and Michigan Consumer Sentiment are reported.

In earnings later this week, on Wednesday, ARCO, CLMT, ADBE, FIVE, HSAI, YY, TPC, and ZTO report.  On Thursday, we hear from ASO, DG, GIII, MOMO, JBL, BEKE, LE, SIG, TITN, WSM, and FDX.  Finally, Friday, AQN and XPEV report.

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So far this morning, CAL has reported beats on both the revenue and earnings lines.  IHS has not reported yet although scheduled at 6:55am.

With that background, it looks like the bulls are in charge early today (before the CPI release). However, expect heavy volatility at 8:30 am and again at the opening bell. The trend remains bearish and strong. Extention is not yet a big problem in terms of the T-line (8ema). However, the T2122 indicator is extremely stretched in the bullish reversal zone. As I see it, we are badly in need of at least a relief rally or pause. DIA found support early Monday. Any support SPY and QQQ found is less clear. The one thing we do know is that if the bulls are going to make any run at all, there will be many minor and major resistance levels to deal with overhead.

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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