EB Daily Market Report - Monday, February 6, 2023

Tom Bowley - February 06, 2023

ChartLists Updated

I've updated two of our key ChartLists as follows:

Strong Earnings ChartList (SECL)
Strong Future Earnings ChartList (SFECL)

These two should both be updated on our website later this afternoon. I'll be working on the others over the next two days, with the goal having them all updated by Wednesday.

Executive Market Summary

Futures were down overnight and our major indices gapped down to start a new week
There are no economic reports of significance due out today and very few earnings reports were released this morning
The selling is likely due to inevitable profit taking after the recent rally left us with short-term overbought conditions
Also, the 10-year treasury yield ($TNX) has jumped 10 basis points to 2.63%, the highest level of the TNX in nearly a month
Materials (XLB, -1.08%) and technology (XLK, -0.95%) are the hardest hit sectors today
Interestingly, both consumer sectors - discretionary (XLY, +0.12%) and staples (XLP, +0.05%) - are the only two sectors higher to start the week
Automobiles ($DJUSAU, +2.17%), soft drinks ($DJUSSD, +1.13%), and restaurants ($DJUSRU, +1.09%) are helping to lift consumer stocks
Commodities are mixed on the session, with crude oil ($WTIC, +0.86%) rebounding after a difficult week

Market Outlook

It's too early to begin trading off of max pain, but it's not too early to begin thinking about it. There are million of in-the-money calls right now and the net in-the-money call premium will only grow if the stock market rises over the next week or so. I don't know whether we'll see higher prices this week or not, but I can guarantee you that I'm well aware what could happen if we see strength later this week. Consider the 60-minute chart on the QQQ (ETF that tracks the NASDAQ 100):

I'll be watching for potential negative divergences and/or false breakouts, given the max pain situation. And keep in mind, even if this sets up beautifully for a potential sell off next week, there is NEVER a guarantee we'll see one. But it would clearly result in significantly increased risk of holding long in the very near-term. Let's watch and see how it plays out.

Sector/Industry Focus

There's been much talk about gold ($GOLD) recently, because of the weak dollar (UUP). I would not own gold personally, though. The only time I'm interested in owning gold is when volatility is trending higher. That's when gold outperforms the S&P 500. Many folks will tell you to buy gold when the dollar is moving lower. Well, the truth is that gold and the dollar do mostly move in inverse fashion, so you should expect to make money when the dollar is weak. But is your goal to make money on gold or to outperform the S&P 500? Check out this chart:

The last few weeks illustrate the key impacts on gold performance. Yes, there's no question that the direction of the dollar has the opposite effect on gold. However, whether gold outperforms the S&P 500 has more to do with how volatile the stock market action is. When the VIX falls, the S&P 500 rises and that almost always results in U.S. stocks outperforming gold. Check out that red circle that highlights gold underperforming the S&P 500. The dollar was falling and gold was rising. But because the stock market was rising, the VIX faltered and gold underperformed. In a bull market, I don't want to own gold. It's a nice hedge during bear markets and outperformed beautifully from January to June last year, but once signals suggested the stock market bottom was in during June 2022, gold was abandoned.

ChartLists/Strategies

Last week I suggested it might be a decent time to pause and that's exactly what our major indices have done. I suppose the good news is that we've seen very little actual selling. We gapped down at the open, traded up earlier, then gave back those gains. We're now close to where we started the day. Here are two stocks I like now, but there's some risk in both:

SPT:

SPT has been a decent performer in the internet group ($DJUSNS) and internet has been hot to start the year. I love the recent volume trends and the selling the past two days now sets SPT up at its rising 20-day EMA. It does have earnings out in a little more than two weeks, though. Will we see a pre-earnings run up? I bought a position today with that in mind, but it is a really fast mover, so just be aware the higher risk associated with this one.

FTI:

Crude oil ($WTIC) has been under a lot of pressure and, as a result, many oil stocks have struggled. FTI, however, has been a very solid performer with a SCTR score of 96 and its pullback tests both the rising 20-day EMA and the recent breakout level, which is now price support. I've entered with roughly a 1% closing stop. In other words, I'll take little chance if FTI closes beneath 13.00. I want to see it turn right here.

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.

Monday, February 6:

ATVI, SPG, IDXX, CMI, ON, TSN, TTWO, PINS, SWKS, CINF, L, UDR, ACM, CNA, ZI, NBIX, TFII, NOV, AMG, POWI, FN, RMBS, DIOD, VRNS, ENR, CHGG, KMT, KFRC

Tuesday, February 7:

LIN, BP, VRTX, FISV, KKR, ITUB, CMG, FTNT, CNC, CARR, TDG, PRU, DD, ILMN, ENPH, IT, YUMC, PAYC, XYL, INCY, OMC, AMCR, RCL, ATO, FMC, J, SSNC, ESS, PEAK, CG, JKHY, CSL, VFC, ARMK, QGEN, CCK, CTLT, ARCC, AGCO, INSP, GPK, AIZ, VOYA, NVT, HTZ, EHC, HRB, WU, TENB, FRSH, RRR, NEWR, ADNT, HAE, WFRD, SPR, WERN, MAC, CNO, SIMO, HAIN, RAMP, NBR, MODN, ATEN

Economic Reports

None

Happy trading!

Tom