EB Daily Market Report - Friday, August 5, 2022

Executive Market Summary

• Futures were flat until the July nonfarm payrolls showed a substantially higher number than expected
• Treasury yields soared on this news and stock futures tumbled
• Stocks have rallied since the opening bell, but there's been clear rotation toward more value-oriented companies with yields rising
• Crude oil prices ($WTIC, -0.43%) attempted an earlier recovery, before turning lower again
• Cryptocurrencies are having a nice day, especially ethereum ($ETHUSD, +5.35%)
• Energy (XLE, +2.26%) is enjoying a nice day, despite the reversal in crude oil prices
• Meanwhile, discretionary (XLY, -2.05%) and communication services (XLC, -1.49%) are our primary laggards
• Tesla (TSLA, -7.06%) has been weak throughout the session, pressuring automobiles ($DJUSAU, -6.28%)

Market Outlook

The July nonfarm payrolls report was released this morning and it showed that the jobs market still remains quite strong as we gained 528,000 jobs vs. the expected 250,000 number. Also, the June nonfarm payrolls were revised higher from 372,000 to 398,000. Average hourly earnings for July, which is a significant inflationary component of the report, showed a jump to 0.5%, while analysts were looking for just 0.3%. That combination led to a rather significant selling episode in the bond market, as the 10-year treasury yield ($TNX) soared to 2.87% at its peak earlier today. Most of that 20 basis point rise came during the first 30-45 minutes after the report was released. Since then, things have settled down and stabilized. At last check, however, we were just above the 20-day EMA. I would expect continuing volatility in the bond market as traders grapple with a stronger jobs market and what that might mean in terms of inflationary pressures.

For me, this changes nothing in terms of my outlook. If anything, it bolsters my confidence that this recession will be a very soft landing and we'll see rising equity prices into year end.

Sector/Industry Focus

I've discussed several hourly negative divergences over the past few days, spanning our major indices, sectors, industries, even key individual stocks like Apple (AAPL), Microsoft (MSFT), and Tesla (TSLA). There's no denying the short-term momentum issues and that could definitely be playing a role in today's selling. I also believe the "buy on rumor, sell on news" could be in play as well. Let's not forget that we're wrapping up the first week of August. Historical strength seems to weaken after the first few trading days of the month. This wouldn't be a bad time to see a little bit of selling.

I am noticing that discretionary stocks are lagging staples stocks pretty badly today and as the S&P 500 tries to rally back, the XLY:XLP ratio keeps dropping. It's only one day's worth of relative action, but given the momentum issue, perhaps it's telling us that this is the start of a weak period. Check this out:

The XLY:XLP is my favorite sustainability ratio, so I do watch it quite closely. Whether this is just a blip on this chart or whether it's signaling something more meaningful - I guess we'll find out. But it is offering up a short-term red flag.

ChartLists/Strategies

Given the riskier conditions short-term, I've mentioned recently that trading more conservative, defensive stocks might make some sense in the very near-term. I'm not a fan of trading defensive areas over the course of the balance of the year as I believe the U.S. stock market will be strong and better opportunities will be found in key areas like technology and consumer discretionary. However, when the market becomes overbought and momentum issues arise, trading more conservative stocks can help to limit downside risk.

One stock from our Strong Earnings ChartList (SECL) that has been successfully defending its 20-day EMA the past few days is Campbell Soup (CPB):

CPB has shown relative strength vs. its industry peers throughout much of 2022, its industry group - food products ($DJUSFP) - has been holding onto relative price support vs. the S&P 500, and CPB's price tends to move higher whenever volume is high (above its 50-day moving average line). Note also that CPB has been in a 3 dollar trading range for the better part of two months. Throw in that strong AD line and it seems to make sense that morning weakness could be bought with a fairly tight stop in place.

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.

Friday, August 5:

TU, TRMB, WAB, WDC, DKNG, BEP, BHVN, SRCL, GT, FLR, ADNT, TWST, GOGO, GTN, PRLB, IRBT,

Monday, August 8:

D, BNTX, AIG, IFF, TSN, GOLD, OKE, PLTR, PFG, TTWO, AZPN, VTRS, DINO, NWSA, ACM, SWCH, AVLR, QLYS, DOCN, TXG, NVAX, TGNA, ICUI, CARG, UPST, TASK, APPS, ENR, LMND

Economic Reports

July nonfarm payrolls: 528,000 (actual) vs. 250,000 (estimate)

July private payrolls: 471,000 (actual) vs. 220,000 (estimate)

July unemployment rate: 3.5% (actual) vs. 3.6% (estimate)

July average hourly earnings: +0.5% (actual) vs. +0.3% (estimate)

Happy trading!

Tom