EB Daily Market Report - Friday, October 21, 2022
Executive Market Summary
- Futures were weak, and we opened lower this morning
- There are no economic reports due out today, but the 10-year treasury yield ($TNX) nonetheless gapped significantly higher - to 4.32%
- That yield has been dropping throughout the session and just turned negative, spurring aggressive stocks higher
- Materials (XLB, +2.43%) and energy (XLE, +2.20%) are leading the action, but aggressive sectors have been gaining on them
- Industrials (XLI, +1.71%) is in the third spot, boosted by a very strong commercial vehicles & trucks group ($DJUSHR, +2.94%)
- The Volatility Index ($VIX) closed beneath 30 yesterday and is down nearly 2% today
- Natural gas ($NATGAS, -7.78%) lost recent support near 5.50 and has been getting slammed
- Watch the TNX; I've been looking for a big reversal and today's gap higher, followed by the intraday drop, could be marking such a reversal
- Schlumberger (SLB, +7.92%) is strong after better-than-expected quarterly earnings were released; Snap, Inc. (SNAP, -30.21%) beat its estimates and announced a $500 million buyback, but warned sales trends would worsen
Market Outlook
The good news is that the stock market remains fairly strong, given the very rapid rise in the 10-year treasury yield ($TNX). For the most part, the rapidly-rising TNX has proven to be a major headwind for U.S. equities in 2022. But since September 30th, the TNX has risen from 3.80% to today's high of 4.33%. During that same period, the S&P 500 has actually risen 115 points from 3585 to 3700. That's strange, but it IS options-expiration week and much of that rise in the TNX has occurred during this week, a week in which market makers would likely to see equity prices higher. So is the market simply being manipulated higher this week and we should be prepared for a potential drop next week? Or is this a sign that the S&P 500 simply isn't going to drop much further? Well, that's a great question.....and a difficult one to answer. I believe only history is going to answer this one for us.
Next week, though, is a very bearish one historically. Yesterday, I provided you the annualized returns on the S&P 500 and NASDAQ from the October 21st close (today) through next Thursday's close. Here is the day by day annualized return on the NASDAQ (since 1971):
- October 22nd (Saturday): -54.20%
- October 23rd (Sunday): -48.75%
- October 24th (Monday): -72.45%
- October 25th (Tuesday): -47.26%
- October 26th (Wednesday): -84.53%
- October 27th (Thursday): -73.38%
That's definitely a rough patch historically. We've seen the stock market move higher during this upcoming week, but we've seen plenty of big drops. I plan to remain long with the QQQ because of my belief that there are more risks to being short or in cash than there are remaining long. But everyone has to make their own decisions. I can tell you that I own ZERO leveraged ETFs. Given history, the risks are simply too great to take that aggressive approach.
Sector/Industry Focus
The Volatility Index ($VIX) has been behaving as though we're going to move higher. As we've seen a new low print in the S&P 500, the VIX has also been printing lower highs. In other words, market participants are growing less fearful on new lows, which historically has proven to be bullish. Here's how the S&P 500 and VIX look currently:
Fear is a bear's best friend. MANY bottoms have formed when new price lows are reached with fading fear. Now I won't say that fear is completely fading. After all, the VIX remains elevated, reaching into the mid-30s recently. But if I was bearish, which I am not, I'd really want to see new highs on the VIX and the market is not cooperating.
ChartLists/Strategies
Are we going to trend higher or lower during the balance of Q4? I know that's a highly debatable topic. As you are most likely aware, I'm bullish. But that doesn't mean we'll go higher. Personally, to help manage my short-term risk, I am sticking strictly with ETFs. That will change when I feel more comfortable that we're trending higher OR if we move back to recent lows with improving rotation. Then I'll take much more risk, especially with a key support level nearby. Until then, however, my approach is to remain long, but cautiously long.
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, October 21:
VZ, AXP, SLB, HCA, HBAN, RF, IPG, ALV, EEFT, SMPL, SXT
Monday, October 24:
CDNS, DFS, ARE, WRB, BRO, SUI, PHG, PKG, CCK, RRC, LOGI, XM, CR, MEDP, HXL, AGNC, KEX, CALX, SSD, PCH, SCHN
Economic Reports
None
Happy trading!
Tom