EB Daily Market Report - Friday, January 28, 2022

Executive Market Summary

• Futures were wild again overnight after Apple (AAPL) reported its latest quarterly results
• AAPL Chief Tim Cook acknowledged inflationary pressures and supply chain issues, but AAPL was still able to easily clear its expectations, resulting in a solid 5% gain
• Despite AAPL's strength, the S&P 500 has had trouble distancing itself from its critical neckline support at 4300
• Commodities are mostly lower, though crude oil ($WTIC, +0.10%) is managing to cling to a small gain
• Sector performance is all over the place; technology (XLK, +2.14%) is leading today's action, while energy (XLE, -2.02%) lags
• 4 sectors are up more than 0.75%, while 3 sectors are down more than 0.75% - it's been a strange day
• Software ($DJUSSW, +1.58%) is also showing some strength in technology, but semiconductors ($DJUSSC, -0.55%) remain weak

Market Outlook

I'm not sure whether to be short-term bullish due to the fact that the S&P 500 continues to hang onto 4300 price support or bearish because it can't seem to bounce much from here. Either way, the line in the sand has been drawn EXACTLY where I suggested it might recently - at neckline support. I do believe we're breaking below it, probably much lower, but the question is whether we break it now or after at least a small bounce to establish a right shoulder:

If what we've seen so far is the right shoulder, that's a very sad right shoulder. Furthermore, if you're hoping that a few under the surface signals might be signaling something bullish, you might not want to look at this chart:

We'll have a much better chance of a short-term sustained rally if we can clear the upper resistance of the current downtrend channel. So if we can clear the 4375-4400 level, then I believe 4500-4550 would be possible. But until this channel is cleared, we should expect the overall downtrend to continue.

Sector/Industry Focus

One industry group that's benefited by the move away from growth is defense ($DJUSDN). It may also be benefiting by the higher global tensions surrounding Russia and Ukraine. The DJUSDN has struggled since the pandemic began, still not reaching the level where it was prior to the pandemic. But it's actually higher in January, which cannot be said about too many industries. Lockheed Martin (LMT) is one of the leaders in this space right now and just reported better-than-expected revenues and EPS. This would definitely represent a solid trade on a pullback to its rising 20-day EMA. Here's a chart of the industry and LMT:

On LMT, the prior price high in October should provide support, as should the opening gap from earnings this week, which is just below 378. Throw in the 20-day EMA, currently at 372, and there's plenty of support to attract buyers IF LMT were to hit a rough patch in the next few days.

ChartLists/Strategies

I'm trading small positions, but mostly staying away from the growth stocks that I typically trade. There's a ton of potential upside in many of those names, but there's tremendous risk as well. I don't mind putting small pieces of my portfolio to work, but I'd rather do it somewhat boringly. I generally use mental stops, but right now I feel like I can't even take a phone call and hold a technology stock for 10 minutes. The moves are incredibly swift and occur, without warning, in both directions. Check out Atlassian Corp's (TEAM) action today after reporting results after the close yesterday:

In just the first 90 minutes of trading, TEAM traded higher by 9%, completely filled its gap and turned negative for the session, then rallied 15% to easily clear its opening high. At last check, TEAM had fallen back and was down roughly 5% from that latest high. These are ANNUAL-type returns every 10-15 minutes. It's CRAZY! Honestly, it's just gambling to me, which is why I have little interest in trading stocks like this.

One strategy that I'm using in this market is reviewing our Strong AD ChartList (SADCL) each morning. Many stocks that HAD strong ADs a week or two ago are watching them fall apart right now as distribution rocks the stock market. However, some of the energy and staples names could provide nice opportunities on morning weakness. (A strong AD essentially tells us that these stocks tend to perform better later in the day, so early morning weakness can be an opportunity.) After CHD's earnings report this morning, it gapped lower and has since turned quite positive:

This was an EB Digest article stock from this week. It had a negative divergence in play, so I was looking for at least a 50-day SMA test, which we've seen. CHD now looks poised for another breakout.

Another interesting chart from today was General Mills (GIS), which saw early morning weakness to challenge and move below its 20-day EMA, but it has since recovered and is now positive on the session:

There are opportunities every day in the stock market, and I personally am trying to avoid much trading in the growth stocks simply because of the inordinate amount of risk. I can walk away from stocks like CHD and GIS for an hour at a time without feeling like I'm going to lose 10-15% of my capital, which gives me some peace of mind.

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.

Friday, January 28:

CVX, CAT, CHTR, CL, PSX, LYB, WY, VFC, SYF, CHD, BAH, RDY, ALV, GNTX, BMI

Monday, January 31:

NXPI, LHX, TT, OTIS, ARE, GGG, CACC, AGNC, KRC, WWD, AXTA, CRUS, ATKR, FN, KMPR, PCH, CBT, HP, SANM, HLIT

Economic Reports

December personal income: +0.3 (actual) vs. +0.5% (estimate)

December personal spending: -0.6% (actual) vs. -0.5% (estimate)

January consumer sentiment: 67.2 (actual) vs. 68.6 (estimate)

Happy trading!

Tom