EB Daily Market Report - Thursday, July 14, 2022

Executive Market Summary

• Futures were down big again this morning with another hot inflation report - this time the June PPI report
• The subsequent rally has once again been very impressive as the bulls continue to make their case for a June bottom
• Technology (XLK, +1.20%) is today's leading sector, while energy (XLE, -2.02%) remains under pressure
• Crude oil ($WTIC, +0.05%) tested key price support at $93 per barrel earlier, before bouncing back to breakeven
• Gold ($GOLD, -1.57%), silver ($SILVER, -4.32%) and other commodities are struggling
• Cryptocurrencies, however, are very strong with etherium ($ETHUSD) jumping 11.43%
• Computer hardware ($DJUSCR, +2.03%) and semiconductors ($DJUSSC, +1.91%) are strong and helping to lift technology and the NASDAQ
• Financials (XLF, -2.01%) are weak and component stocks like Travelers (TRV, -4.49%), JP Morgan (JPM, -3.86%), and Goldman Sachs (GS, -2.94%) are weighing on the Dow Jones
• JPM kicked off earnings season by promptly missing its quarterly earnings estimate

Market Outlook

We've seen headline inflation news come in hotter than expected two days in a row and that has clearly caused a ton of selling in short-term treasuries, driving those short-term yields higher. These short-term treasury yields are very heavily influenced by Federal Reserve policy and the hot inflation data drives home the likelihood of another big rate hike when the Fed meets later this month on July 26-27. Meanwhile, on the long end of the yield curve, the 10-year treasury yield ($TNX) has been dropping rapidly. Long-term inflation implications can drive these yields higher as investors demand a higher yield to compensate for higher inflation. The fact that the TNX is falling suggests the bond market really doesn't believe in that long-term inflationary narrative. But the big effect of all this is that banks are being squeezed. Interest income is reduced with lower rates on the long end and interest expense is increased due to their rising short-term borrowing costs from the Fed. The combination significantly reduces one of bank's key metrics - net interest margin. Wall Street has seen this coming and it's one big reason why banks have been such underperformers in 2022.

The following chart shows the difference in the $UST10Y and $UST1M and how it's been dropping rapidly, along with VERY positive correlation with banks' performance relative to the S&P 500:

This rapid descent will put serious strains on our economy, which is likely already in a mild recession. But we do need to remember that while the economic news will likely grow worse over the summer, Wall Street discounts these "stories" well in advance. That's one of the reasons why we had a cyclical bear market in 2022 in the first place. The remedy will come in the form of the Fed when it turns its attention away from inflation and turns more dovish. At that point, the shorter-term 1-month treasury will turn lower and provide banks relief. That will coincide with bank outperformance. But until then, we're stuck with banks underperforming and recession news becoming more and more dominant.

Sector/Industry Focus

We need to keep our eyes on consumer stocks. Discretionary (XLY) has been hammered in 2022, likely due to Wall Street accurately forecasting a recession this year. That's the group you want nothing to do with as a recession approaches. Look at this relative chart showing the significant deterioration in these discretionary stocks:

This is a great illustration of how Wall Street works. It's basic, yet many investors/traders cannot grasp it. Wall Street does not react to the news when it hits. They anticipate the news well in advance. It's why stock prices always seem to be going in the wrong direction based on news.

ChartLists/Strategies

I like to review our Short Squeeze ChartList (SSCL) periodically, looking for stocks beginning to make some noise on volume. EVGO fits the bill. Check this out:

EVGO has been rising for the past 1-2 weeks, but it might be starting to put a little pressure on short sellers. 29% of EVGO's float is short, which is a significant percentage. I don't usually start to look at these types of short squeeze stocks until volume begins to accelerate and we're seeing that today. EVGO does need to clear overhead price resistance, which it's testing now. If it's successful, a short squeeze could begin building.....

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.

Thursday, July 14:

JPM, MS, FRC, ERIC, CAG

Friday, July 15:

UNH, WFC, BLK, C, USB, PGR, PNC, BK, STT

Economic Reports

Initial jobless claims: 244,000 (actual) vs. 234,000 (estimate)

June PPI: +1.1% (actual) vs. +0.8% (estimate)

June Core PPI: +0.4% (actual) vs. +0.5% (estimate)

Happy trading!

Tom