Rethinking Fed Move as More Data Ahead

Wednesday was a bearish day with gaps lower after GOOGL, MSFT, and AMD all beat but disappointed the market. SPY gapped down 0.44%, QQQ gapped down 1.05% and DIA was the exception that proves the rule opening 0.17% higher.  At that point, SPY and QQQ sold off for an hour before trading sideways until 2 p.m.  Meanwhile, DIA just meandered sideways after the open crossing and recrossing the opening gap until 2 p.m.  When the Fed announced no rate cut we saw a modest knee-jerk lower in all three major index ETFs.  However, this more than recovered by 2:30 p.m.  Then when Chair Powell said the FOMC is not ready to cut rates yet and implied doubt about a March start to cuts, all three sold off hard until 3 p.m. and then drifted lower into the close.  This action gave us an Evening Star that crossed down the T-line (8ema) in the SPY.  At the same time, DIA gave us a Bearish Engulfing candle but did not cross below its T-line.  QQQ moved the most, gapping down through its T-line and giving us a large black candle with only an upper wick.

On the day, all 10 sectors were in the red as Technology (-2.42%) was way out in front leading the way lower.  At the same time, the defensive plays Healthcare (-0.34%) and Utilities (-0.43%) holding up better than the other sectors.  Meanwhile, the SPY lost 1.63%, DIA lost 0.81%, and QQQ lost 1.96%.  Meanwhile, VXX popped up 5.07% to close at 15.13 and T2122 dropped all the way down through its mid-range to end just above oversold territory at 22.05.  10-year bond yields plummeted to 3.912% and Oil (WTI) dropped 2.61% to close at $75.79 per barrel.  So, markets started lower on future (not current) earnings worries among the big tech names.  Then we trod water for most of the day.  Even the Fed announcement was basically a non-event since it was very widely anticipated.  However, Fed Chair Powell’s words shocked traders with fear we won’t get a March rate cut, and that flushed the market the rest of the day.  This all happened on above-average volume in the SPY and DIA as well as well-above-average volume in the QQQ.

The major economic news released Wednesday included January ADP Nonfarm Employment Change, which came in well below expectations at +107k (compares to a forecast of +145k and well below the prior reading of +158k).  Later, Q4 Employment Cost Index also came in below predictions at +0.9% (versus a forecast of +1.0% and the Q3 reading of +1.1%).  Later on, January Chicago PMI also came in a bit light at 46.0 (compared to the 48.0 forecast and the prior 47.2 value).  Then EIA Weekly Crude Oil Inventories showed an inventory build of 1.234 million barrels (versus a forecasted drawdown of 0.217 million barrels and far higher than the previous week’s 9.233-million-barrel drawdown.

In Fed news, the FOMC held the Fed Funds target rate steady at 5.25% – 5.50%.  It also removed language saying it was willing to keep increasing rates but also language that indicated inflation was headed back toward its 2% inflation goal.  In addition, the statement added language indicating it is not yet ready to cut rates.  The statement said, “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”  More importantly, Fed Chair Powell commented on this, saying, “I don’t think it’s likely that the committee will reach a level of confidence by the March meeting (to lower rates…but that’s to be seen.”  Powell also said, “Inflation has eased over the past year, but remains elevated.”  He went on, “The Fed’s interest rate target is likely at its peak for this tightening cycle” …and “the Fed will likely cut rates at some point this year.”  Finally, Powell said, “we are not declaring victory, we think we still have a way to go.”

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After the close, ALGN, AVB, AXS, CCS, CMPR, CTVA, CACC, FLEX, MTH, MEOH, NXT, PTC, QRVO, QCOM, SEIC, SIGI, and TTEK all reported beats on both the revenue and earnings lines.  At the same time, BHE, BOOT, THG, and UGI all missed on revenue while beating on earnings.  On the other side, MET beat on revenue while missing on earnings.  Unfortunately, AFL, BV, CHRW, LSTR, and VSTO all missed on both the top and bottom lines.  It is worth noting that BOOT, CTVA, FLEX, and LSTR lowered forward guidance.  However, CCS, NXT, QRVO, and TTEK raised their own guidance.

In stock news, NVAX announced it will lay off 12% of its workforce (about 240 people) in a cost-cutting move for the cash-strapped biotech.  At the same time, Reuters side that Byron Allen had submitted a $30 billion offer to buy PARA, including both debt and equity.  (This came hours after Bloomberg had reported the offer was $14.3 billion for the outstanding shares.)  Later, META CEO Zuckerberg apologized to parents (for the damage social media has done) after Senators of both parties dragged the CEOs of META, SNAP, AAPL, X (Twitter), TikTok, GOOGL, and others over the coals for a lack of monitoring, age restriction, and parental reporting of inappropriate social media content and targeting of children.  (Coincidentally, I’m sure, many of the companies subpoenaed instituted new policies covering overuse by children as well as various content age restrictions within the last week.)  At the same time, financial stocks took a hit Wednesday as NYCB cut its dividend after posting a surprise loss.  (NYCB closed down 37.67% on the news.)  Later, CI announced it had sold its Medicare business unit to HCSG for $3.3 billion. Elsewhere, ADM closed its acquisition of flavor company Fuerst Day Lawson.  Later, TSLA announced it will buy equipment to expand its NV factory to produce Lithium batteries from its Chinese supplier CATL (a controversial partner that has F under attack for partnering with in MI).  TSLA says the move will reduce its costs for batteries.

In stock legal, governmental, and regulatory news, EBAY agreed to pay $59 million and upgrade its compliance measure to settle US Dept. of Justice charges that the company sold pill-making equipment to criminals making counterfeit drugs.  Later, BA was sued by shareholders alleging the company prioritized short-term profit over safety, and misled them about the company’s commitment to making safe aircraft.  At the same time, a group of 25 CA counties sued TSLA alleging the company mishandled hazardous waste at its facilities in that state. (The core allegation is that TSLA regularly mislabel hazardous waste and sends it to landfills in those 25 counties.)  The law being cited calls for civil penalties of $70k per day per violation.  Later, the US Dept. of Health and Human Services announced 2025 reimbursement rates for Medicare Advantage programs that show a total increase of 3.7%.  At the same time, a US District Judge dismissed DIS’s lawsuit against FL Governor DeSantis and members of his appointed state board.  In the dismissal, the judge ruled DIA lacked standing to sue the governor or state Sec. of Commerce.  Elsewhere, the FAA said its previously announced comprehensive audit of BA production will include all elements of production at fuselage supplier SPR.

Overnight, Asian markets were evenly mixed with five exchanges in the red, six in the green, and one remains unchanged.  Australia (-1.20%) was by far the biggest loser (by half of a percent) while South Korea (+1.82%) was by far the biggest gainer (by more than one percent).  Meanwhile, in Europe, we also see a mixed board at midday.  The CAC (-0.69%), DAX (-0.09%), and FTSE (+0.45%) lead the mixed region in early afternoon trade.  In the US, as of 7:30 a.m., Futures are pointing toward a green start to the day.  The DIA implies a +0.11% open, the SPY is implying a +0.40% open, and QQQ implies a +0.57% open at this hour.  At the same time, 10-year bond yields are up a bit to 3.944% and Oil (WTI) is up nine-tenths of a percent to $76.52 per barrel in early trading.

The major economic news scheduled for Thursday includes Weekly Initial Jobless Claims, Weekly Continuing Jobless Claims, Q4 Nonfarm Productivity, and Q4 Unit Labor Costs (all at 8:30 a.m.), S&P Global Mfg. PMI (9:45 a.m.), Dec. Construction Spending, Jan. ISM Mfg. Employment, Jan. ISM Mfg. PMI, Jan. ISM Mfg. Price Index (all at 10 a.m.), and Fed Balance Sheet (4:30 p.m.).  The major earnings reports scheduled for before the open are include FLWS, ATI, MO, ATKR, BALL, BDX, BR, BIP, BC, CAH, CMS, DLX, DOV, ETN, EPD, RACE, HON, HII, ITW, IP, JHG, KEX, LANC, LAZ, MKL, MRK, PH, PTON, PBI, DGX, RVTY, RCI, RCL, SBH, SNY, SNDR, SIRI, SR, SWK, TSCO, TT, WNC, WEC, and WRK.  Then, after the close, AMZN, AAPL, TEAM, CLX, COLM, DECK, DXC, EMN, GEN, HIG, HOLX, HLI, HUBG, KMPR, LPLA, META, MCHP, MTX, NOV, OTEX, POST, RGA, SKX, SKYW, and X report.

In economic news later this week, on Friday, Jan Avg. Hourly Earnings, Jan. Nonfarm Payrolls, Jan. Private Nonfarm Payrolls, Jan. Participation Rate, Jan. Unemployment Rate, Dec. Factory Orders, Michigan Consumer Sentiment, Michigan Consumer Expectations, Michigan 1-year Inflation Expectations, and Michigan 5-year Inflation Expectations are reported.

In terms of earnings reports later this week, on Friday, ABBV, AON, BSAC, BMY, BBU, BEPC, BEP, CBOE, CHTR, CVX, CHD, CI, XOM, IMO, LYB, REGN, SAIA, and GWW report.

So far this morning, MO, ATKR, BR, BIP, CAH, ETN, EPD, RACE, HII, KEX, LAZ, MRK, PTON, PBI, DGX, RVTY, SBH, SHEL, SKFRY, and SR all reported beats to both the revenue and earnings lines.  At the same time, FLWS, BALL, BDX, CMS, DLX, DOV, FCFS, HON, IP, RCL, SIRI, SWK, TAK, TT, WNC, and WEC all missed on revenue while beating on earnings.  On the other side, GOOS beat on revenue while missing on earnings.  Unfortunately, BC, ING, SNY, and WRK missed on both the top and bottom lines.  It is worth noting that BC, DOV, and DGX lowered forward guidance.  However, CAH, MRK, and RCL raised their guidance.

In miscellaneous news, CENTCOM announced Wednesday that the US had destroyed a Houthi surface-to-air missile that presented an imminent threat to US aircraft. Later, a US Destroyer intercepted a Houthi anti-ship missing in the Gulf of Aden. Meanwhile, the US carried out airstrikes against “a number of Houthi drone sites.” So, the Red Sea and Suez Canal remain to be hotspots as the Israeli invasion of Gaza continues. At the same time, the US House of Representatives is set to vote on a bipartisan package of tax breaks for businesses (making R&D and capital expenses and capital investments deductible through at least 2025).  However, the measure would require a two-thirds majority to pass.  The bill also modestly increases Child Tax Credits for low-income taxpayers. 

In China news, FBI Director Wray warned a House Select Committee Wednesday that “China’s hackers are positioning on American infrastructure in preparation to wreak havoc and cause real-world harm to American citizens and communities, if or when China decides the time has come to strike.”  Wray said that Chinese government-backed hackers are targeting things like water treatment plants, transportation, electrical infrastructure, as well as oil/natural gas pipelines.  Elsewhere, Bloomberg reported Wednesday evening that China is now openly engaged in a massive banking system overhaul.  Reportedly, Beijing is merging hundreds of rural lenders into giant regional banks.  This process has been slowly and quietly going on in the background since 2022.  However, the process has greatly accelerated in the last month as the country seeks to tackle the $7 trillion credit risk amidst a Chinese real estate collapse.  (For reference on scope, China is said to have between 1.5 and 3 BILLION unoccupied housing units nationally. This is because the government has a strong record of seizing bank deposits.  So, for years or decades, ordinary Chinese people have banded together to invest their savings in investment properties as a way to save with less risk of confiscation.  This resulted in a huge glut of unused, non-producing, and unsaleable housing…leading to massive numbers of loan defaults.)

With that background, it looks like (at least ahead of the economic data dump) we are getting a modestly bullish rethink of the Fed. All three major index ETFs opened the premarket higher and are putting in small, white-bodied candles so far in the early session. SPY is retesting its T-line (8ema) and all three are showing inside candles (Bullish Harami type) for the premarket. DIA remains above its T-line and QQQ is still below and not yet retesting. None of the three have broken their uptrend lines, but all three are close to the trend. So, the Bulls remain in control of the trend in the longer term but after yesterday’s candle, the very short-term trend has to be bearish. In terms of extension, none of the three is too far stretched from the 8ema. T2122 has also fallen but remains outside of its oversold range. This means the market has room to run in either direction if the Bulls or Bear can gain enough momentum to do it. Also, continue to keep an eye on those Tech Big Dogs. Once again yesterday it was those stocks that led markets lower. If those 7-10 stocks lead in one direction, it’s nearly impossible for the rest of the market to do anything but follow given their trading volumes.

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 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 gains are 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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