EB Daily Market Report - Wednesday, August 17, 2022

Tom Bowley - August 17, 2022

Executive Market Summary

Futures were lower overnight and we opened considerably lower
All of our major indices are down, but the NASDAQ has been weakening on a relative basis throughout the day - probably the weight of those growth stocks in the midst of options expiration week
Consumer discretionary (XLY, -0.98%) is weaker than consumer staples (XLP, -0.23%) - likely for the same reason
Energy (XLE, +0.95%) is today's leading sector and the only sector in positive territory - more on this below
Crude oil ($WTIC, +1.90%) is up above $88 per barrel, helping to lift energy stocks
Meanwhile, the 10-year treasury yield ($TNX) has jumped nearly 9 basis points to 2.91% as the bond market reacts to the stronger-than-expected July retail sales number (if we strip out the vehicle component)
In just a few minutes, at 2pm ET, the FOMC (Fed) minutes will be released, which could lead to increased volatility this afternoon
How we close today will likely dictate short-term market direction; if the Fed signals they could apply the brakes on rate hikes, expect a big rally, but if they remain hawkish, that could be the catalyst for lower short-term price action

Market Outlook

Well, the stock market's opportunity to begin a fairly significant selloff has begun. We know the amount of money on the table for market makers right now. I've been discussing it a TON over the past few days. Billions and billions of dollars at stake. Retail sales were released this morning and I, quite honestly, wasn't sure how the market would react to each possible scenario. I just know that there's financial incentive to see lower prices. Futures were already down when the report was released and there really wasn't much of a change after. There are a couple key earnings reports due out today and tomorrow and, of course, there are the Fed minutes, which will be released at 2pm ET. The market action could be extremely volatile this afternoon after that release.

Trying to make short-term directional calls is very difficult. I'm much better suited to discuss the long-term and intermediate-term. Timing short-term tops is especially tough. However, it does appear as though a downtrend has begun. On the S&P 500, this is what it looks like to me and what I'd expect to see in the very near-term:

Clearly, the trajectory of these two possible down channels is quite different. And maybe there'll be no downtrend at all. But if you want to be cautious near-term, like me, then I'd keep a close eye on both of these channels and how they might play out over the next few days to a week.

Sector/Industry Focus

While strong sectors/industries/stocks tend to perform poorly during options expiration week, groups that have been weak tend to come to life. Even though energy (XLE) has the second highest SCTR score among sectors, it's actually the worst-performing sector for the last 3 months:

So should we be surprised when we see that the XLE is the ONLY sector in positive territory today?

Funny how the stock market works, isn't it? This is why I call options-expiration week "Opposite George" (Seinfeld reference - check it out on YouTube if you're not a fan of the show) week. Expect the unexpected to help out those "struggling" market makers (sarcasm intended).

ChartLists/Strategies

I won't even contemplate placing a long trade right now. I'm giving it a rest for awhile, at least for the duration of this August options expiration. There are just too many uncertainties. If you're really an aggressive trader, you can try a leveraged ETF like the QID (shorts the NASDAQ 100 at a 2 to 1 clip). When you BUY the QID, it goes up TWICE the percentage that the NASDAQ 100 drops - at least in theory. I can just tell you from experience that if the stock market takes off to the upside, shorting during a secular bull market rally is quite painful. Emotionally, it's tough to pull the trigger to get out, thinking that the market "has to pull back sometime". I've had that expensive lesson before, so if you do trade the QID (short), I'd predetermine how much you're willing to risk and stick to it.

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, August 17:

CSCO, LOW, ADI, TGT, TJX, SNPS, KEYS, AMCR, ZTO, WOLF, BBWI, PFGC, DNUT

Thursday, August 18:

EL, AMAT, NTES, ROST, BILL, NICE, GLOB, BJ, TPR, KSS, STNE, CSIQ, QFIN, SPTN

Economic Reports

July retail sales: +0.0% (actual) vs. +0.1% (estimate)

July retail sales less autos: +0.4% (actual) vs. -0.1% (estimate)

June business inventories: +1.4% (actual) vs. +1.4% (estimate)

FOMC minutes to be released at 2:00pm ET

Happy trading!

Tom