Markets gapped down on Tuesday (down 0.73% in the SPY, down 0.63% in the DIA, and down 0.73% in the QQQ). All three major index ETFs followed through the first hour before then trading sideways in a tight range until 1:15 p.m. At that point, all three took another leg lower for 30 minutes before trading sideways along the lows for the last 2.25 hours of the day. This action gave us gap-down, black-bodied candles with small wicks on both ends across the SPY, DIA, and QQQ. All three remain stretched below their T-line (8ema) and 50sma, with the DIA falling down through its 200sma on the day. This happened on a bit below-average volume in the QQQ, right at average volume in the SPY, and a bit above-average volume in the DIA.
On the day, all 10 sectors were in the red with Utilities (-2.65%) way out front leading the other sectors lower. Meanwhile, Healthcare (-0.45%) held up much better than the other sectors. At the same time, the SPY lost 1.47%, DIA lost 1.16%, and the tech-heavy QQQ lost 1.50%. VXX spiked to close at 25.04 and T2122 cropped back to the low end of the oversold territory at 3.47. 10-year bond yields spiked above four-and-a-half percent to 4.55% while Oil (WTI) also gained almost one percent to end the day at $90.54 per barrel. So, the day started off bearish and step-by-step continued that way for the rest of the day. This took us back to a state of being over-extended to the downside.
The major economic news reported Tuesday included Building Permits, which were up but still a touch below expectations at 1.541 million (compared to a forecast of 1.543 million and the prior reading of 1.443 million). That amounted to a 6.8% increase while the forecast called for a 6.9% increase. Later, the September Conf. Board Consumer Confidence came in a touch low at 103.0 (versus a forecast of 105.5 and well down from the prior value of 108.7). At the same time, August New Home Sales also came in light at 675k (compared to the forecast of 700k and well down from the July 739k number). That was a decline of 8.7% month-on-month versus the July number which was a 8.0% increase over June. Then, after the close, the API Weekly Crude Oil Stock report showed a 1.586-million-barrel build (compared to a forecasted drawdown of 1.650 million barrels and much increased from the previous week’s 5.250-million-barrel drawdown.
In Autoworker contract talks and strike news, President Biden joined the UAW picket line on Tuesday. During remarks over a bullhorn, he was asked whether autoworkers deserved a 40% raise. He answered “Yes.” On the same trip, Biden met with auto suppliers impacted by the strike where MEMA (auto supplier trade group) asked him to provide federal assistance to ensure the viability of the idled parts suppliers.
In stock news, QCOM announced Tuesday that it has entered into a multi-year partnership with Japanese IT company NTT to develop a 5G ecosystem that promotes the adoption of 5G and “AI over 5G” in Japan. At the same time, the CEO of FWONA (which owns 83% of SIRI) proposed that the radio unit of FWONA be spun off and then merged with SIRI. Later, FSR closed up 9.60% (after trading in a volatile 20% range) after reaffirming its plan to increase vehicle deliveries to 300 per day later this year (and saying it had already produced 5,000 of its SUVs). Elsewhere, LILM announced it has begun assembly of its jet-powered electric VTOL jet. This comes just two months after successful tests of a full-scale prototype in Germany. At the same time, MMM agreed to pay $10 million for violating sanction restrictions on sales to Iran. Later, ICPT received an unsolicited $19/share cash bid from Alfasigma. This was an 82% premium on the price at the time but ICPT closed up more than 79% on the news. At the same time, TGT reported that it would close nine stores across four states on Oct. 21, citing organized retail theft rings that were threatening employees, customers, and inventory shrinkage.
In stock government, legal, and regulatory news, the Financial Times reported that TSLA (along with several European carmakers) is the subject of an EU probe into whether its cars (built in China) are receiving unfair subsidies. Later, JPM paid $75 million to the US Virgin Islands to settle a lawsuit over the bank’s ties to Jeffrey Epstein. Elsewhere, the FTC and 17 states filed suit against AMZN over alleged antitrust violations that allowed the giant to dominate large segments of online retail. The case was assigned to Reagan-appointed judge Coughenour. Later the Canadian government announced it will review the proposed merger between BG and Viterra (a company backed by GLCNF). That merger would create another grain giant, close to the scale of competitors ADM and Cargill. However, it would make a 3-way grain triopoly. After the close, a federal judge in AM has overturned a jury verdict of $176.5 million against LLY in favor of TEVA over infringement on three patents. Meanwhile, a federal district judge in Atlanta ruled in favor of a venture capital fund (backed by JPM, BAC, etc.) and against the conservative anti-diversity plaintiff that had charged the fund was acting illegally because it considered the racial identity of award recipients. (This will be appealed as it was brought by the same group that was behind the anti-affirmative action decision by the Supreme Court earlier this year.) Also after the close, the SEC announced that HYZN has agreed to pay $25 million to settle charges of fraud (without admitting guilt, naturally). Finally, after the close, the FCC announced it would reintroduce “net neutrality” regulations to prohibit T, VZ, CMCSA, and others from blocking websites, slowing internet speeds, or charging higher prices for access to different websites. This is a huge deal and has been fought tooth and nail by the big telecom and cable companies while it will be cheered by AMZN, NFLX, and other major content platforms. The FCC will vote Oct. 19 on whether to solicit public comment (which is when the opponent media blitz will begin).
After the close, AIR, COST, and MLKN all reported beats on both the revenue and earnings lines. The AIR and COST numbers were quarter-on-quarter increases, but despite its own “beats” the MLKN numbers were actually down almost 15% quarter-on-quarter. Nonetheless, MLKN also raised its forward guidance.
Overnight, Asian markets were mixed but leaned toward the green side with only four of 12 exchanges in the red. Hong Kong (+0.83%) was by far the biggest mover as the other moves in either direction were for less than half of a percent. In Europe, we see a similar mixed picture taking shape at midday. Greece (-1.52%) is the largest loser and Russia (+0.66%) is the biggest gainer. However, as usual, the CAC +0.05%), DAX (-0.12%), and FTSE (-0.21%) lead the region on volume 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 +0.27% open, the SPY is implying a +0.36% open, and the QQQ implies a +0.35% open at this hour. At the same time, 10-year bond yields have backed up a bit again to 4.505% and Oil (WTI) is up another 1.42% to $91.69 per barrel.
The major economic news scheduled for Wednesday is limited to the August Durable Goods Order (8:30 a.m.) and EIA Weekly Crude Oil Inventories (10:30 a.m.). The major earnings reports scheduled before the opening bell are limited to PAYX. Then after the close, CNXC, FUL, JEF, MU, and WOR report.
In economic news later this week, on Thursday, we get Q2 GDP, Q2 GDP Price Index, Weekly Initial Jobless Claims, August Pending Home Sales, Fed Balance Sheet, and Fed Chair Powell speaks. Finally, on Friday, the August PCE Price Index, August Goods Trade Balance, August Personal Spending, August Retail Inventories, Chicago PMI, Michigan Consumer Sentiment, Michigan Consumer Expectations, Michigan 1-year inflation expectations, Michigan 5-year Inflation Expectations are reported and Fed member Williams speaks.
In terms of earnings reports later this week, on Thursday, CAN, KMX, JBL, and NKE report. Finally, on Friday, CCL reports.
In miscellaneous news, the Wall Street Journal reported that the tentative deal struck between Writers and Hollywood studios will allow the studios to train AI models on the work of the writers, although the writers would be compensated for the work trained upon. (This may well leave writers vulnerable to replacement. Studios have done similar things with actors, recording a day or two of lower-tier actors from many angles at scale rate and then using CGI trained on those recordings to produce realistic “cast of thousands” effects in many future movies.) In related news, the Writers Guild union called for their strike to end today with a member vote on the tentative deal still pending. Elsewhere, Reuters reported that OpenAI is in talks with institutional investors about selling existing shares at a price that values the company between $80 and $90 billion. (For reference, earlier this year, OpenAI got an investment that valued the company at $30 billion.) If completed, this would make OpenAI one of the most valuable private companies. Finally, House Speaker McCarthy and his MAGA-placating approach have continued to make little (no) progress toward avoiding a government shutdown. Luckily, on the other side of the building, the Senate is working in a bipartisan fashion (led by both Majority Leader Schumer and Minority Leader McConnell) to move forward a short-term continuing resolution to fund the government through Nov. 17. A procedural vote on this passed 77-19 and this CR also includes $6 billion for disaster relief and $6 billion in additional support for Ukraine. Late Tuesday, moderate GOP members of the House said they are now willing to invoke a seldom-used “discharge vote” procedure to force a House vote on a CR negotiated between the moderate GOP members and Democrats. Having the GOP Governance Caucus (Anti-burn it all down MAGA group) do the work of governing allows McCarthy to continue kowtowing to 20 extreme-right members while actually keeping the government operating. However, it’s unsure what that discharge vote might mean for McCarthy’s Speakership.
In late-breaking mortgage news, in China, police have placed the founder of the troubled China Evergrande Group in “police control.” This is the latest indicator that a liquidation of the company may be in the cards and comes a day after creditors gave the company until October 30 to submit a debt restructuring deal to avoid their moving for that liquidation. Back in the US, the Mortgage Brokers Assn. reports that the average rate for a conforming, 30-year, fixed-rate loan rose to 7.41% this week (up from 7.31% the week before). As a result, new home loan applications fell 2% week-on-week (and were down 27% versus the same week last year). At the same time, applications for loan refinancing fell 1% week-on-week (down 21% over the same week in 2022).
With that background, it looks like the Bulls are gapped us up in the premarket. However, so far in the early session, we are seeing black-bodied, “inside day” candles in all three major index ETFs. (This means that the premarket open was the early session high so far.) All three remain well below their T-line (8ema) and 50sma. The morning gap also did not give the DIA enough energy to retest its 200sma so far this morning. So, for now, the short-term trend is clearly remains headed lower with retests of the August and June lows as the apparent next target for the Bears (except in the SPY where those two targets have already been achieved). In terms of extension, as I said, all three major index ETFs are far below their T-line (8ema) and the T2122 indicator is also in the low end of its oversold range. This tells us we remain stretched and are in need of a bounce or at least a pause to relieve the pressure. However, we must remember the market can remain oversold (or overbought) longer than we can stay solvent betting against it.
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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