EB Daily Market Report - Tuesday, March 9, 2021

Tom Bowley - March 09, 2021

Executive Market Summary

Futures were very strong this morning as the Dow Jones again flirts with a close over 32000
The NASDAQ is showing exceptional leadership today, though most of it came at the opening bell
Growth stocks (IWF, +3.07%) are easily outdistancing value stocks (IWD, +0.79%), though that ratio hasn't budged much since the opening bell as well
Tomorrow will mark the first of two key inflation reports (CPI on Wednesday, PPI on Friday)
Higher than expected inflation could send the 10-year treasury yield ($TNX) higher, spoiling today's strength in growth stocks; that report and the market's reaction will be very important to watch
The sector leaderboard is the most bullish that we've seen it since March 1st; consumer discretionary (XLY, +3.48%) and technology (XLK, +3.16%) are the undisputed leaders today
All 11 sectors are higher, but consumer staples (XLP, +0.18%) is the laggard
Renewable energy ($DWCREE, +11.60%), autos ($DJUSAU, +10.91%), and semiconductors ($DJUSSC, +5.35%) are among today's leaders
Crude oil ($WTIC, -1.26%) gives back some recent gains

Market Outlook

I'm glad to see growth stocks (IWF) rebound vs. its value (IWD) counterparts. However, this short-term battle is far from over. Let me be clear - I believe growth stocks will perform very well over the next few months. I believe they'll outperform from here - just my opinion. But short-term, we have two BIG economic reports coming up that will likely determine the short-term winner between the IWF and IWD. Economic strength ahead can drive interest rates higher, which is a very good thing, especially with our rates already so low. However, inflationary concerns that drive rates higher is NOT good and that can have a detrimental impact on growth stocks. Tomorrow, we'll get the February CPI and on Friday we'll get the February PPI. While I believe any inflation scare will be short-term, that immediate impact could be substantial. Here are current estimates, according to Econoday:

Wednesday, 8:30am ET: February CPI: +0.4% (estimate); January was +0.3%
Wednesday, 8:30am ET: February Core CPI: +0.2% (estimate); January was +0.0%
Friday, 8:30am ET: February PPI: +0.4% (estimate); January was +1.3%
Friday, 8:30am ET: February PPI: +0.2% (estimate); January was +1.2%

I believe that in-line or below estimates on inflation readings would be a big positive for growth stocks, while a number above those estimates could certainly rekindle the type of mass rotation that we've been seeing. It's almost like growth stocks have 2 earnings reports coming out over the next 3 days. It really doesn't matter which growth stocks you're in. If inflation is reported higher than expected, then look for more short-term pressure on growth stocks.

Technically, growth stocks (IWF) and the NASDAQ 100 ETF (QQQ) have short-term resistance to negotiate on their hourly charts:

IWF:

QQQ:

I felt like we were ready for a bounce yesterday in both growth stocks and the NASDAQ and we're seeing that. Further out, I like both areas as well. But the next 3 days could be treacherous. One other thing I'd look for is afternoon strength and stocks, industry groups, sectors, etc., finishing on or near their highs. I don't like weakness into the close.

Today's rally is offering an opportunity to take something off the table ahead of two big inflation reports. While I will absolutely remain long several growth stocks, I will build a bit of cash in the event an inflation scare allows me the opportunity to re-enter certain stocks at lower prices over the next few days to a couple weeks. If inflation turns out to be a non-event, we have hundreds of stocks on our ChartLists that I'll look to for short-term trades. Again, I don't believe we have an inflation problem at all, but short-term upticks in readings could spook a market that already has a VIX in the 20s and is sitting on pins and needles.

Sector/Industry Focus

Computer hardware ($DJUSCR) is testing its relative 50-week SMA for the first time since August 2019, well before the pandemic began. Long-term, I'd expect this to provide some tremendous opportunities for entry into Apple (AAPL) and other stocks in this space. Is the short-term pain over? It's hard to tell, but if we're in a secular bull market, it's very, very difficult for me to imagine it continuing without leadership from this bellwether industry group. Here's a look at the longer-term weekly chart on a relative basis and then the current daily chart on an absolute basis:

$DJUSCR - relative weekly:

$DJUSCR - absolute daily:

Based on these two charts, it's difficult to say with any certainty that we've reached a tradable bottom. However, there's no doubt in my mind that a lot of risk has been eliminated by the recent absolute and relative weakness.

ChartLists/Strategies

Trading growth stocks right now, after today's rally, and into tomorrow morning's February CPI report involves considerable risk. Honestly, it's like flipping a coin or playing black or red on a roulette wheel in Vegas. I have firm convictions longer-term, but I won't ignore the short-term risks in growth stocks currently. All of our EarningsBeats.com members must decide how much you're willing to risk as we battle through the historically-challenged month of March.

Defensive sectors tend to perform well during March, so I've identified two that look solid, but much less risky in the very near-term than some of the growth stocks that we favor over the longer-term:

BHR:

BG:

If inflation is a problem tomorrow morning and we see rotation away from growth, the above two stocks could be beneficiaries. While I've mostly avoided defensive stocks - as I typically do when I believe we're in a secular bull market - these two do show excellent absolute and relative strength, so if money rotates back towards value during the latter part of this week, they could benefit accordingly.

Earnings Reports

Here are the key earnings reports for the next two days, featuring stocks with market caps of more than $10 billion. I also include a few select companies with market caps below $10 billion. Finally, any portfolio stocks that will be reporting results are highlighted in BOLD. If you decide to hold a stock into earnings, please understand the significant short-term risk that you are taking. Please be sure to check for earnings dates for any companies you own or are considering owning.

Tuesday, March 9:

MDB, XM, OSH, SHC, THO, DKS, DQ, NAV, HRB, CMD, ABM, AVAV, CLNE, MTLS, EVRI, PLCE, AVID

Wednesday, March 10:

ORCL, FNV, GDS, CPB, BLDP, ASAN, CLDR, SKLZ, SGRY, UNFI, AMC, CVGW,

Economic Reports

None

Happy trading!

Tom