EB Daily Market Report - Monday, March 21, 2022
Executive Market Summary
- Futures were slightly lower overnight and our major indices gapped lower
- The 10-year treasury yield ($TNX) has jumped another 13 basis points higher to 2.28%
- Crude oil ($WTIC) is surging again, today up more than $5 per barrel to nearly $110; other commodities are mixed
- Energy (XLE, +3.22%) is back atop the sector leaderboard now that options-expiration week is in the rear view mirror
- Communication services (XLC, -1.45%), consumer discretionary (XLY, -1.32%), and technology (XLK, -1.05%) are the primary laggards after leading during options-expiration week
- Financials (XLF, -0.23%) are struggling despite the rising rate environment - more on this below
- Home construction ($DJUSHB, -3.55%) has turned considerably lower, given the prospects of higher interest rates
- Boeing (BA, -4.06%) and Home Depot (HD, -3.20%) are the two worst performing Dow Jones component stocks
Market Outlook
Investors will generally require higher yields on long-term bonds as inflation picks up steam. That's what we're seeing today as the 10-year treasury yield ($TNX) hits its highest level in nearly 3 years. The first point I'd like to make is that interest rates remain extremely low, so I'm not worried about high interest rates choking out the current secular bull market. But we do have scares from time-to-time that take the stock market down temporarily during cyclical bear markets. Cyclical simply means short-term, while secular refers to long-term.
Our major indices are currently in a short-term uptrend. The past several days, during options-expiration week, we saw our key indices continue to print higher highs and higher lows every day. An uptrend cannot end until that series of higher highs and lows is extinguished. That's minimally the first step required to potentially reverse last week's action. We're seeing some selling today, but we have yet to take this first step. Check out the S&P 500:
It might be worthwhile keeping an eye on 4390. 4390.57 was the low on Friday, so a move beneath 4390 would be the first crack in the foundation of the current 5-day advance. The blue channel lines sure look like manipulation to me. Stocks appeared to have been dragged higher in an almost straight line last week to squelch the net value of March puts. If the market does turn lower and print new lows in the coming weeks, last week's rally will go down as one of the biggest market maker heists of all-time.
Sector/Industry Focus
Financials (XLF) are supposed to thrive in rising interest rate environments, right? Well, it depends. If rates are moving higher due to economic expansion or the expectation of a strengthening economy, then yes, we should see financials perform extremely well. But if rates are moving up due to inflationary pressures, that's a totally different ball game. In this latter case, the higher rates can cause economic weakness, potentially even triggering a recession. That does nothing to help financials. I believe it's this latter scenario that's playing out right now and why the XLF is down today, despite a 10-year treasury yield ($TNX) soaring 14 basis points to 2.28% - its highest level since May 2019. Check out the recent move higher in the TNX, while the relative strength of financials wane:
Earlier today, Fed Chief Jerome Powell said "inflation is much too high" and that the Fed will address it. Well, I'm not sure if the Fed Chief is thinking about doing more than the 9 rate hikes promised last Wednesday, but whatever the case, the reaction has been tremendous selling in treasuries - the type you'd expect when inflation is a true threat.
ChartLists/Strategies
It's midday, so much can change, but I'm seeing a lot of reversals in the market today. As I sifted through the NASDAQ 100 charts, here were three that I'd consider shorting based on the look of their charts:
ALGN:
AMZN:
DOCU:
I haven't shorted any of these as I'm sticking with the leveraged inverse ETFs as my short position. I don't want to try to pick the stocks that will underperform. I either get the market call right or wrong. I don't have to worry about whether a stock is following the major indices. That's just my preference.
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.
Monday, March 21:
NKE, PDD
Tuesday, March 22:
ADBE, CCL, HQY, WOR
Economic Reports
None
Happy trading!
Tom