Rotation Picks Up As Market Follows Fed

Wednesday saw the large-caps open flat while the QQQ gapped down about 0.35%.  The divergence kicked it up a notch as the DIA put in a ragged morning rally, SPY ground sideways all morning, and the QQQ slowly sold off.  However, the bears picked up steam about noon as stocks started sinking in all 3 major indices.  Then at 2 pm, as the December Fed minutes came out, the bears really took over as stocks sold off hard and closed near the lows of the day across the board.  This left us with big, ugly black candles in all 3 major indices, with only the DIA able to stay above its T-line.  On the day, DIA lost 1.03%, SPY lost 1.92%, and QQQ lost a whopping 3.07%.  The VXX rose almost 8% to 19.29 and T2122 dropped all the way down to 29.05.  10-year bond yields shot up to 1.70% and Oil (WTI) gained a fraction to $77.17/barrel. 

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As mentioned, the December FOMC Meeting Minutes came out on Wednesday afternoon.  The surprise was that in addition to agreeing on speeding the bond-buying taper and pulling forward the first rate hike, there was a lengthy discussion about reducing the size of the Fed Balance Sheet.  (Not just stopping the growth, but many Fed voters are in favor of reducing the balance sheet by selling assets they had purchased over the years.)  In fact, many members were pushing for tightening not only by raising rates twice this year but also starting to sell the $8.3 trillion of treasuries and mortgage-backed securities that the Fed has bought.  This could happen as soon as rate hikes start (March is expected) and would put a serious damper on markets and the economy.

In premarket earnings, WBA easily beat analyst expectations on both earnings and revenue estimates for the quarter.  (Reporting they were aided by vaccinations and testing business.) They also raised guidance for the year.  WBA was up 3.6% in premarket trading, but has come back to +1.5% as of 7:30 am.  Elsewhere, CAG missed on earnings, but beat on revenue.  FE reported in-line on earnings and beat on revenue.  Meanwhile, STZ beat on both lines, and BBBY missed on both lines.

Overnight, Asian markets were mixed, but leaned heavily to the red as Asia caught up to the bearishness caused by the Fed Minutes.  Japan (-2.88%) and Australia (-2.74%) were far out front in leading the selloff.  Thailand (-1.42%) was the next closest.  On the upside, Hong Kong (+0.74%) and Singapore (+0.66%) were the only gainers.  In Europe, we see red nearly across the board at mid-day.  Only Finland (+0.51%) is showing any green.  The FTSE (-0.57%), DAX (-1.09%), and CAC (-1.40%) are typical of the spread across the region at this hour.  As of 7:30 am, US Futures are pointing toward a mixed open with continuing rotation toward safety.  The DIA implies a +0.28% open, the SPY is implying a +0.02% open, and the QQQ implies a -0.42% open.  10-year bond yields continue to spike and are at 1.744% while Oil (WTI) is up 1.18% in early trading.

The major economic news scheduled for release Thursday includes Weekly Initial Jobless Claims, Import/Exports, and Nov. Trade Balance (all at 8:30 am), Nov. Factory Orders and Dec. ISM Non-Mfg. PMI (both at 10 am).  The major earnings reports scheduled for before the market include BBBY, CAG, FE, STZ, HELE, LW, SCHN, and WBA.  There are no major reports scheduled for after the close.

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Today will be the test to see if rotation toward the safety of mega-cap names (and especially away from the tech growth names) continues as the reaction to Fed hawkishness has had a night to sink in. Earnings season is about to ramp back up. So, we will likely see a disparity between great rear-view mirror earnings and fear of a tightening economy ahead (with the Fed moving to fight inflation and Congress unable to pass the President's Budget/Spending bill). The very short-term trend is bearish in all 3 major indicies. However, we still sit near the all-time highs, especially in those massive-cap DIA names.

Volatility is the watchword now as markets are not quite sure whether it is time for a downtrend or at least a pullback. Remember that the first rule of making a lot of money in the market is to not lose a lot of money in the market. So, don't be stubborn. When you're wrong, just admit it and take your loss. (That's why we set stops.) Stick to your trading rules and on managing the things you can control. Don't chase, trade with the trend, keep consistently taking profits when you have them, and move your stops in your favor.


Swing Trade Ideas for your consideration and watchlist: RAD, COP, CVS, BYND, AMD, CBOE, PWR. 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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