EB Daily Market Report - Thursday, January 19, 2023

Tomorrow's DMR

There will be no DMR on Friday (or possibly a very abbreviated note) as we'll be in an all-day meeting. We'll be back to our regular schedule next week.

Executive Market Summary

• Futures were down overnight as Wall Street braced for a weak open
• Our major indices did gap lower, but a subsequent mild rally has lessened the intraday losses
• Growth is down slightly vs. value as rotation becomes more of a focus
• The 10-year treasury yield ($TNX) is up 4 basis points to 3.41% as bond traders take profits after the big price rally on Wednesday
• Aggressive sectors, spared somewhat during Wednesday's selloff, seeing the opposite today as consumer discretionary (XLY, -1.67%) is the primary laggard
• Energy (XLE, +0.76%) and health care (XLV, +0.32%) are leaders today
• Renewable energy ($DWCREE, -5.76%) is particularly weak on the session, as First Solar (FSLR, -5.72%) drops; FSLR was mentioned on Tuesday as a possible short due to max pain

Market Outlook

When I discussed the potential market weakness a couple of days ago, I pointed out that there was a negative divergence on the 60-minute chart of the S&P 500 (it was also present on the NASDAQ). Also, options expiration favored the bears this week as both the SPY and QQQ were trading above their respective max pain levels. Of course, max pain provides us no guarantees, but it does give us directional clues. This month, the clues were spot on as we've seen mostly selling since Tuesday.

Because of the higher risk, I mentioned that I wasn't a big fan of sticking with leveraged ETF products - that a better opportunity would come on a rising 20-day EMA test on the SPY and/or QQQ. Well, today the QQQ tested its 20-day EMA and is attempting to bounce off of it. This is a great time to re-enter those leveraged ETFs based on the technical picture as you can quickly exit if the 20-day EMA doesn't hold. There is one other consideration, though, before you make that decision to add on risk. Tonight, Netflix (NFLX) reports its quarterly results and it could have a significant impact on the QQQ (and, thus, the QLD and TQQQ). Some of you might be ok with that additional risk as the timing (20-day EMA) makes sense. I just want to make sure you're aware that a big earnings event tonight could impact this investment - in a good or bad way.

Personally, NFLX has been showing excellent relative strength, so I fully expect we're going to see revenue and EPS expectations exceeded and, potentially, guidance raised. But it's just an educated guess. Please take only those risks that you're comfortable with.

Sector/Industry Focus

Internet stocks ($DJUSNS) will be quite dependent on the Netflix (NFLX) quarterly earnings report later today. NFLX has been a clear leader in the space, and if leaders can't meet or beat expectations, that's not generally a very good look for the group as a whole. The DJUSNS has been trending higher since bottoming in October 2022, but there's nothing technically that suggests the ultimate bottom is in play. However, if NFLX reports blowout earnings, we could see a big gap higher in both NFLX and the DJUSNS that could potentially confirm that a bottom is indeed in place. This is where the DJUSNS currently stands:

Those trendlines and price resistance levels - on both an absolute and relative basis - need to be cleared. If they are after tonight's NFLX report, I'd be inclined to say the worst is behind the internet space.

ChartLists/Strategies

From our Strong Earnings ChartList (SECL), here are two strong stocks that could offer up a great trading opportunity:

CHX:

CHX just completed a cup off of a very significant uptrend. Forming a handle that moves back to the 20-day EMA is what I'd be looking for. But this is most definitely a bullish pattern that typically results in a breakout.

HOLX:

HOLX was in a trading range for several weeks before recently breaking out again on significant volume. It's pulled back recently, however, and nearly tested its 20-day EMA earlier today. I like entry on the 20-day EMA with a fairly tight stop below.

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, January 19:

PG, NFLX, TFC, PPG, FAST, MTB, FITB, NTRS, KEY, SIVB, CMA, CBSH, CNXC, SNV, TAL, OZK

Friday, January 20:

HDB, SLB, STT, RF, HBAN, ERIC, ALLY

Economic Reports

Initial jobless claims: 190,000 (actual) vs. 215,000 (estimate)

December housing starts: 1,382,000 (actual) vs. 1,362,000 (estimate)

December building permits: 1,330,000 (actual) vs. 1,380,000 (estimate)

Happy trading!

Tom