EB Daily Market Report - Wednesday, July 13, 2022
Executive Market Summary
- Futures were up overnight and they gains held until 8:30am ET this morning
- The June CPI report was released, showing that inflation picked up steam in the past 30 days and that really spooked the market
- Futures immediately tanked and we opened very much on the defensive with growth stocks sold hardest at the opening bell
- Rotation kicked in, however, as money rotated towards aggressive areas - but where do we close and how do we close (rotation)
- Consumer stocks are strongest today with discretionary (XLY, +0.93%) leading and staples (XLP, +0.29%) not too far behind
- Meanwhile, weakness is mostly concentrated in industrials (XLI, -1.23%) and financials (XLF, -1.14)
- Banks ($DJUSBK, -1.64%) will kick off earnings season on Thursday as JP Morgan (JPM, -1.15%) gets set to report its latest quarterly results
- Crude oil ($WTIC, +0.49%) remains near $96 per barrel
- Despite that big inflation number this morning, the 10-year treasury yield ($TNX) has completely reversed course; earlier, it hit a high of 3.07%, but it's now at 2.92%, down 4 basis points on the session
- Twitter (TWTR, +8.03%) is today's best performer on the S&P 500
Market Outlook
Great action today. That's really all I need to say. We saw more hot inflation data before the opening bell and futures tanked as soon as the report was released. However, after that significant opening gap lower, there's been mostly buying AND the ETFs that track our key indices have shown strength since the early action. The QQQ even broke its intraday downtrend line:
The relative chart in the bottom panel is interesting in that the market starts off each day with the NASDAQ 100 underperforming. But throughout the trading day, rotation has been very clear - moving away from the S&P 500 and into the more aggressive NASDAQ 100.
It's hard to be bearish when Wall Street keeps rotating in bullish fashion.
Sector/Industry Focus
Tomorrow morning, JP Morgan (JPM) will kick off Q2 earnings season. We've seen the stock market rally the past few weeks - as it typically does - heading into earnings season. While I don't expect to see a lot of great earnings reports, I do believe Wall Street will be looking ahead to better quarters down the road and THAT is what I believe will be the catalyst for U.S. equities this summer and especially in Q4 later this year.
For now, let's look at the latest outlook for banks ($DJUSBK) as a number of them will be reporting over the next 1-2 weeks:
I look for the banks to rally from here. They're at a key relative support level that they are now testing for the fourth time. If this relative support level holds and I'm right about the stock market continuing to strengthen, banks could help provide leadership. The positive divergence adds to this theory short-term, so we'll see if JPM and the other large banks can give this industry group a boost over the next couple weeks with their quarterly results.
ChartLists/Strategies
Let's talk max pain. If you weren't at last night's session and haven't viewed the recording, options activity points to higher prices short-term. The big gap down and early morning weakness really set up a few of these stocks well in terms of reward to risk. Here are a few worth mentioning:
Erin Webber had pointed out 14 stocks within the Dow Jones or NASDAQ 100 that, as of last Friday, had significant net call or put premium in play that could aid short-term price reversals. Based on Tuesday's closing prices, the 3 with the most potential in terms of price appreciation were AMD, NVDA, and PYPL. Here are their intraday charts:
AMD:
NVDA:
PYPL:
So, is this all just a coincidence? These were all very weak stocks until the last day or two. Inflation was hotter than expected this morning. And the result? These growth stocks are seriously outperforming. I believe it's a combination of Wall Street's improving appetite for risk AND the short-term market inefficiencies around options-expiration Friday.
One other stock that I've been building a position in is Zoom Video Communications (ZM). For those waiting for a pullback, I'm not sure it'll get any better than this on ZM - especially if I'm right about the market bottom. ZM is attempting to print a reversing candle today at key short-term price support. Check out this 3-month daily chart to illustrate:
Do you see how those false breakouts just a week ago at 122.50 gave us short-term bearish signals? Well, the opposite may be true today. We were in breakdown mode this morning, but have rallied back. Do we hold into the close? If so, I believe this is an excellent reward-to-risk trade on the long side.
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 several 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.
Wednesday, July 13:
FAST, DAL
Thursday, July 14:
JPM, MS, CTAS, FRC, ERIC, CAG
Economic Reports
June CPI: +1.3% (actual) vs. +1.1% (estimate)
June Core CPI: +0.7% (actual) vs. +0.5% (estimate)
Beige book released at 2:00pm ET
Happy trading!
Tom