EB Daily Market Report - Thursday, August 11, 2022

Executive Market Summary

• Futures were higher and, for the second straight day, excellent inflation news was reported just before the opening bell
• Our major indices opened higher and traded that way throughout much of the day, but are weakening into the afternoon as I write this - given the bullish news, the selling is a bearish short-term development
• Crude oil ($WTIC, +2.89%) is back above $94 per barrel; if we see selling in many of the growth-oriented areas, don't be surprised if energy (XLE, +4.27%) sees buyers via rotation
• Financials (XLF, +1.26%) and materials (XLB, +1.25%) are also strong today
• Meanwhile, health care (XLV, -0.55%) is the primary laggard; consumer discretionary (XLY, -0.17%) and technology (XLK, -0.06%) have reversed significantly off intraday highs this morning
• The 10-year treasury yield ($TNX) has jumped 11 basis points to 1.89% in a strange move after two very tame inflation reports - odd to say the least
• Software ($DJUSSW, -0.77%) traded up early in the session, but we've seen selling nearly all day in this group
• Walt Disney (DIS, +5.60%) is trading higher after reporting results that exceeded Wall Street consensus estimates

Market Outlook

I was expecting a real shocker to the downside in the July PPI and that's exactly what we saw this morning. Headline PPI fell 0.5%, while consensus estimates were pegged at +0.3%. Both of the inflation reports came in below expectations, which provides the Fed more "data" to consider at their next meeting in September. One of my beliefs from the beginning of the year was that inflation would peak in the first quarter and so far that's the case. As inflationary pressures subside, so too do the necessity for rate hikes by the Fed. If the outlook for interest rates reflects falling yields, valuations for companies that grow earnings rapidly will soar. There are a lot of naysayers out there that do not believe and you know what I say to that? Thank you!!!

Yesterday, we had GREAT inflation news, the S&P 500 broke through key price resistance at 4176, and the equity only put call ratio ($CPCE) was .58. Let's put this in perspective. From November 3rd, 2020 to December 1st, 2021, in a little more than a year, here were the 7 days where we saw the CPCE at or above .60:

• Friday, Feb 26, 2021: .63
• Friday, Mar 5, 2021: .60
• Wednesday, May 12, 2021: .63
• Thursday, May 13, 2021: .63
• Friday, Jul 16, 2021: .69
• Friday, Jul 23, 2021: .61
• Thursday, Aug 19, 2021: .61

My how things have changed. Sentiment has "reset". This is what we needed for the stock market. We needed nearly everyone to turn bearish to the point that they were not even interested in participating in one of the best rallies that you'll ever see. They've been so brainwashed by the media and the "news" and taken on such big losses that they cannot, for a second, believe the stock market can go up.

Do you know where the 5-day moving average of the CPCE is?

It's just beneath .60. So for 13 months, we barely EVER saw a reading at this level and now, after a 17.1% rally in the S&P 500 and a 23.2% rally in the NASDAQ, we have a 5-day AVERAGE at .60. Nobody believes.

I'm not sure how much more we rally short-term from here, but we ALL need to be aware of one MAJOR issue. Options expire next Friday. I don't typically worry about options expiring until we move into options expiration week, but just please be aware that there are currently a TON of in-the-money calls on many highly-volatile growth stocks. Many of these growth stocks have very little in-the-money puts, because the market's been going straight up. Earlier this year, we've seen big selloffs that suggested short-term rallies. But now things have changed and we've seen a massive rally that could suggest a short-term selloff next week.

While I remain extremely bullish the balance of 2022, I would definitely be thinking about being less aggressive next week. It's probably the only time you'll hear talk about the possibility of shorting stocks.

Sector/Industry Focus

A couple days ago, I featured the S&P 500's false breakout. I thought at the time it might be reason for the stock market to pause. It did, but for only one day. Today, it's the NASDAQ's turn. After two days of great inflation news, the NASDAQ soared and today challenged the 12964 price resistance from May 4th. Unless we rally strongly into the close, this first test is a failure - a short-term red flag. Here's what the chart looks like:

Again, I love the stock market to move higher throughout the balance of 2022, but we'll have periods of selling and I'd expect one between now and next Friday. Is today the start of it? I don't know. If we finish with a selloff this afternoon, a bearish engulfing candle would not be a good look for the bulls. Now that the inflation news is behind us, a "sell on the news" is a definite possibility here.

One stock that could absolutely struggle from here is Netflix (NFLX). It hit MAJOR gap resistance and could fall back to 20-day EMA support from here. I rarely short any stock during what I believe is a secular bull market rally, but the reward to risk on NFLX here is outstanding, so I've taken a short position. Any close above 250 and I'll cover. Here's the chart:

Internet stocks are still downtrending relative to the S&P 500, though they've bounced the past few weeks, and NFLX is among the worst internet stocks. Still, I'll keep a very tight stop in the event NFLX breaks out.

ChartLists/Strategies

I've discussed multiple individual trade setups recently. CARG and LRN were both morning selloffs where I was looking (hoping?) for an afternoon rally. Neither materialized and I ended up selling. I lost a small amount on CARG and exited just about breakeven on LRN. They didn't bounce like I was expecting, so I sold. I don't like to keep stocks that aren't working. But on the positive side of things, both ON and PDD were trades off moving average and/or price support and I've taken nice profits on both. Here are those two charts:

PDD:

I honestly wasn't expecting a one-day rally to my target of 51-52, but I'll take it. I exited at 51.50, just as it tested its 20-day EMA. PDD shows a falling PPO beneath centerline resistance, so momentum currently is with the bears. Taking quick profits and moving to the sidelines is definitely my style. Doing it in one day doesn't usually happen, but I'll take it!

ON:

Unlike PDD, ON is a stock that I would consider holding. It's one of the better semiconductor stocks ($DJUSSC), showing excellent relative strength and an even better AD line. Buying it on morning weakness as it tested its 20-day EMA made perfect sense from a reward to risk perspective. ON is the type of stock that could easily break out above price resistance. It's a strong stock in an improving market. However, it ran up more than 8% in just 2 days! I have difficulty NOT taking those types of quick profits. Once I sell and move back into cash, the 8% is mine and I have no further risk. There's nothing saying that ON couldn't drop right back down and test its 20-day EMA again. If so, I now have the capital to re-enter, if I so choose.

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, August 11:

BAM, ILMN, RMD, RIVN, EDR, CAH, WPM, RYAN, AER, FLO, HBI, VET, VIAV, UTZ, GLNG, GOOS, SIX, SWIR

Friday, August 12:

BR, SPB

Economic Reports

Initial jobless claims: 262,000 (actual) vs. 260,000 (estimate)

July PPI: -0.5% (actual) vs. +0.3% (estimate)

July Core PPI: +0.2% (actual) vs. +0.4% (estimate)

Happy trading!

Tom