Traders Loved Fed, Rally Persists in Premarket

Wednesday saw a dead market all morning and then a rocket ship in the afternoon.  SPY opened 0.07% higher, DIA opened just 0.01% higher, and QQQ gapped up 0.22%.  However, after that, all three major index ETFs just waffled sideways until 2 p.m.  At that point, there was a market-wide shot straight up until 3:05 p.m. (reaching new all-time highs in the DIA) when we saw 20 minutes of profit-taking.  Then the rally started again and lasted into the close where we went out near (SPY and QQQ) or at (DIA) the highs.  This action gave us large, white-bodied candles with very small lower wicks and no (or tiny) upper wicks.  All three major index ETFs remain well above their T-line (8ema).  DIA is at an all-time high close and within 4 cents of its all-time intraday high reached in the afternoon.  Meanwhile, SPY is within 2% of its own all-time high and now sits at the high since the first couple of days of 2022.  QQQ is sitting at its high since Dec. of 2021 and within 1.5% of its all-time high.  In short, the bulls have been on a wild and parabolic run for the last five days.

On the day, all 10 sectors were in the green with interest-sensitive Utilities (+3.72%) way, way out in front leading the way higher while Communications Services (+0.99%) lagged well behind the other sectors.  At the same time, the SPY gained 1.37%, DIA gained 1.45%, and QQQ gained 1.27%.  The VXX fell another 1.19% to close at 15.71 and T2122 spiked back up to the very top of its overbought territory to close at 98.44.  10-year bond yields plummeted to 4.026% and Oil (WTI) jumped 1.73% to close at $69.80 per barrel. So, on Wednesday, the market waited for the Fed.  Then traders heard exactly what they expected and had hoped for.  This led to a wild rally in the last two hours of the day.  These moves were on volume as, for once in the last week, all three major index ETFs were at average volume.

The major economic news reported Wednesday included November PPI (month-on-month), which came in better than expected at 0.0% (compared to a forecast of +0.1% but higher than the October reading of -0.4%).  At the same time, November Core PPI (month-on-month), came in even better than predicted at 0.0% (versus a forecast of +0.2% but in line with the October value of 0.0%).  Later, EIA Weekly Crude Oil Inventories showed a much bigger drawdown than anticipated at -4.259 million barrels (compared to a forecast of a drawdown of -0.650 million barrels and just shy of the prior week’s -4.632 million barrels).  However, the big news of the day was the Fed.

In Fed news, the FOMC held the Fed Funds Rate flat (as expected) for a third straight meeting at 5.25%-5.50% in a unanimous vote.  The Dot Plots show a current Fed Funds Rate projection of 5.40% for yearend (down two-tenths of a percent from the end of September).  One year out, the projections is for a Fed Funds Rate of 4.6% (down half a percent from the late September projection).  Two years out, the dot plot projects 3.6% (down three-tenths of a percent from the September forecast).  Three years out, the Fed projects a Fed Funds Rate of 2.9% (in line with the September projection).  Finally, the long-term projection is for a Fed Funds Rate of 2.5%, which was also in line with the September long-term forecast.  This implies three quarter-point rate cuts in 2024, four more in 2025, and three in 2026.  (It is worth noting that 17 or 19 FOMC members project those three quarter-point rate cuts in 2024.)

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In terms of Fed Chair Powell’s Press Conference, he indicated the tightening is likely over with FOMC talks of cuts starting to come into view.  Specifically, in answer to a question Powell said “That’s us thinking we’ve done enough,” adding rate increases are “not the base case anymore.”  Powell said, “Inflation has eased from its highs, and this has come without a significant increase in unemployment. That’s very good news.”  Later, in answer to a question, he said “Recent indicators suggest that growth in economic activity has slowed substantially from the outsized pace seen in the third quarter. Even so, GDP is on track to expand around 2.5% for the year as a whole.”  In explaining how the Fed has been able to beat down inflation without causing a recession (how we got a soft landing), Powell said, “This inflation was not the classic demand overload, pot-boiling over kind of inflation that we think about. It was a combination of very strong demand, without question, and unusual supply-side restrictions, both on the goods side but also on the labor side, because we had a [labor force] participation shock.”  (This seemed to indicate that since Covid was a primary force in inflation, restricting supply while the government ensured demand by helping people…or giving handouts if you’re on that side…inflation was easier to bring back in line while past unmet demand, from Covid supply restrictions, helped prop up the economy.) 

In stock news, on Wednesday, Bloomberg reported that SNAP now has 7 million subscribers for its $3.99 Snapchat+ service launched in July 2022.  At the same time, SON announced a $50/ton price increase for its uncoated recycled paperboard.  Later, TSLA’s problems in Sweden continued to mount as the Swedish Transport Workers Union revealed Wednesday that their members would stop collecting waste at TSLA locations in Sweden in sympathy strikes on behalf of TSLA workers. GOOGL’s venture capital arm (Google Ventures) has hired a “general partner” to specifically focus on AI startups and projects.  Later, GOOGL announced price cuts for its new Gemini AI model.  The price has been cut to just 25%-50% of the June announced price.)  At the same time, SBUX got some good labor news as a third-party investigation found that the company did not engage in a “union-busting playbook.”  However, the report found there were many things the company “can do better” in labor relations.  Later, ETSY announced it would cut 225 jobs (11% of the workforce) in its restructuring plan.  Elsewhere, Reuters reported that DIS and CMCSA have increased advertising spending on the META Instagram platform (by as much as 40%) in the weeks since the two companies (among many others) halted spending on Elon Musk’s X and Musk told them to “Go F themselves.”  At the same time, LCID announced it has assembled more than 800 cars at its new Saudi Arabia plant during the plant’s focus on training new employees. Later, C said they will pay most of the bonuses due to employees who agree to depart (thus avoiding the need for one layoff) as the company undergoes a major restructure that eliminates an entire layer of management.  At the same time, Reuters reported that BP has been able to “claw back” more than $40 million from its former CEO Looney after the oil giant determined he had misled the board over personal relationships with colleagues.  (Looney was fired Wednesday after admitting a relationship with a subordinate a few months ago.)  Later, GM CEO Barra reiterated that the company still plans to end the production of internal combustion vehicles by 2035, despite recent delays in EV projects.  Meanwhile, PFE closed at a 10-year low after the company revised down its 2024 sales forecast to $5 billion below analyst consensus.  PFE said the reduction reflects “a more conservative and reliable” forecast of its Covid vaccine business.

In stock government, legal, and regulatory news, the NHTSA released documents Wednesday announcing that TSLA will recall more than 2 million of its vehicles (nearly all of them on the road) to fix a faulty Autopilot system that is supposed to ensure drivers are paying attention.  The agency said the faults were design faults and may result in foreseeable misuse of the system (which could impact TSLA liability in many liability cases).  At the same time, ABNB announced it would pay $621 million to settle outstanding Italian income tax obligations for 2017-2021.  ABNB did not admit to tax evasion and will not try to recoup this money from its Italian hosts.  This comes after a judge ordered the seizure of ABNB’s Ireland headquarters over alleged tax evasion last month.  (2022-2023 were not covered by the agreement and remain outstanding issues.)  At midday, Bloomberg reported that its sources indicate AAPL will be hit with an EU antitrust order forcing the company to change the way it blocks App providers from steering customers toward non-AAPL subscription options.  This came from a four-year investigation after SPOT had initiated antitrust claims. (If AAPL fails to comply, it could be fined 10% of global annual sales.)  After the close, UBS announced that it would pay (on behalf of its acquired CS) $10 million to settle SEC charges of providing prohibited mutual fund services.  This came after that company was barred from providing the services after a NJ court found it had violated the law.

After the close, ADBE and NDSN reported beats on both the revenue and earnings lines.

Overnight, Asian markets were mostly green.  Only Japan (-0.73%), Shenzhen (-0.62%), and Shanghai (-0.33%) were in the red.  Meanwhile, Australia (+1.65%), Thailand (+1.54%), and South Korea (+1.34%) led the gainers.  In Europe, 14 of the 15 bourses are in the green at midday with only Russia (-0.01%) barely in the red.  The CAC (+1.18%), DAX (+0.58%), and FTSE (+1.85%) lead the continent higher 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 +0.32% open, the SPY is implying a +0.34% open, and the QQQ implies a +0.43% open at this hour.  At the same time, 10-year bond yields have fallen back below the key 4% level to 3.941% and Oil (WTI) is up 1.66% to $70.61 per barrel in early trading.

The major economic news scheduled for Thursday includes Weekly Initial Jobless Claims, Weekly Continuing Jobless Claims, Nov. Retail Sales, Nov. Import Price Index, and Nov. Export Price Index (all at 8:30 a.m.), Oct. Business Inventories and Oct. Retail Inventories (both at 10 a.m.), and the Fed Balance Sheet (4:30 p.m.).  The major earnings report scheduled for before the open is limited to JBL.  Then, after the close, , COST, LEN, and SCHL report.

In economic news later this week, on Friday, NY Empire State Mfg. Index, Nov. Industrial Production, S&P Global Mfg. PMI, S&P Global Services PMI, and S&P Global Composite PMI are reported.

In terms of earnings reports later this week, on Friday, DRI reports.

In miscellaneous regulatory news, the US Commodity Futures Trading Commission voted on Wednesday to approve Crypto exchange and brokerage Bitnomial to also become its own trade clearinghouse.  This unanimous bipartisan (two GOP and two Dem board appointees) approval was the first vertical integration of brokerage, exchange, and clearinghouse ever approved by the board.  Elsewhere, the SEC voted 4-1 to adopt new clearing rules for the US bond market.  The rules require more bond repo trades to be run through clearinghouses, targeting hedge funds and prop trading firms that have become huge players in bond markets but have not been regulated until now.  This has resulted in massive leverage, debt-based trade known as “basis trades” that have created large systemic risk like bank leverage trading in 2007.  At the same time, the Nuclear Regulatory Agency granted permission for a new type of nuclear reactor Wednesday, the first such approval in 50 years.

In geopolitical news, NATO increased its 2024 budget by 13% to $2.70 billion.  At the same time, over in UAE, the COP28 climate summit ended with an agreement and statement widely seen as weak and ineffective. This can be surmised, without even reading the statement, from the fact that oil-producing countries hailed the agreement as historic.  While the agreement calls for the reduction in consumption of fossil fuels in an orderly fashion, it sets no global targets, let alone country-specific targets other than the platitude of wanting the world to be at zero by 2050 “in keeping with science.”  The statement also calls for the tripling of renewable energy capacity by 2030 globally but again lacks individual country targets or timetables.  In the meantime, fossil fuels now account for 80% of global energy and the figure continues to grow.  The demonstration reactor will be built in TN and is the first low-pressure, molten salt reactor (Thorium fueled) allowed, although there was a similar design built at the Oakridge TN DOE facility decades ago before being abandoned when the industry convinced the DOE to only allow high-pressure, water-cooled, reactors.

So far this morning, ABM and REVG reported beats on both the revenue and earnings lines.

With that background, it looks like all three major index ETFs are looking to follow through on Wednesday’s Fed move. All three major index ETFs opened the premarket higher and are putting in a small, white-body, indecisive (Doji-like) candle so far in the early session. All three remain well above their T-line (8ema) this morning. So, overall, the Bulls remain well in control of both the longer-term trend and the short-term trends. In terms of extension, all three major index ETFs are now extended far above their T-lines, although QQQ is the most stretched. The T2122 indicator has also jumped back to the very top of its overbought range. This means the Bulls need rest and consolidation to avoid exhaustion and keep the rally healthy. We just have to remember that the market can remain stretched too far in either direction a lot longer than we can stay solvent betting on a reversal that hasn’t happened yet.

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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