EB Daily Market Report - Friday, February 17, 2023

Market Closed Monday, February 20th

The stock market will be closed on Monday in honor of Presidents' Day. Accordingly, EarningsBeats.com will be closed as well. There will be no Trading Places Live show on Monday morning, nor will there be a Daily Market Report. We want to wish everyone a restful holiday weekend!

New Stock Portfolios!

We held our quarterly Portfolio DRAFT last night, where we announced the 10 equal-weighted stocks that will be included in each of our 3 portfolios as of today's closing prices.

Executive Market Summary

• Futures were lower overnight and our major indices gapped down on options-expiration Friday
• There remain quite a lot of net in-the-money call premium, despite the selling the past two days
• It's definitely an "opposite kinda day" as defensive sectors - utilities (XLU, +1.31%), consumer staples (XLP, +1.11%), and health care (XLV, 0.86%) are showing strength today
• Meanwhile, crude oil ($WTIC, -2.75%) is taking a hit, encouraging sellers in energy (XLE, -3.46%)
• Technology (XLK, -1.47%) is also weak as the recently-hot software ($DJUSSW, -1.82%) and semiconductor ($DJUSSC, -1.73%) sell off - likely due to net in-the-money call premium being diminished
• The dollar (UUP, -0.10%) reached a key resistance level near 28.30 and is backing off; gold (GLD, +0.42%) has turned higher as a result
• Deere & Co. (DE, +7.25%) is today's top-performing S&P 500 company after it reported better-than-expected quarterly results, easily topping expectations

Market Outlook

Options-expiration week or, as I like to call it, "Opposite George" week (Seinfeld reference), is always an interesting week. Honestly, I feel like anything goes. Nothing really surprises me any more. I've indicated that when we're in the midst of an uptrend, pullbacks to test the rising 20-day EMA are fairly normal. Well, during options-expiration week, those "pullbacks" become much more significant for market makers as they make more money as net in-the-money call premium vanishes. Right on cue ("Q", pun intended), the QQQ has lost more than 10 bucks since the Wednesday close and is currently testing its 20-day EMA. I swear, you can't make this stuff up:

It seems rather harmless, doesn't it? Well, consider the fact that the QQQ has seen two gap downs the past two days totaling $7.08. On Thursday, the QQQ gapped down from 309.25 to 304.38, or $4.87. Today, the QQQ gapped down another $2.21, from 303.28 to 301.07. By my rough calculation, market makers save approximately $16 million in options premiums owed for every dollar the QQQ falls. Those little gap downs totaling 7 bucks equate to about $112 million savings - on one ETF!!!!

At Wednesday's close of 309.25, there were 40,000 calls open at the February $305 strike price that were worth $20 million. Today? They'll likely expire worthless. There were 30,000 calls open at the February $300 strike price that were worth $30 million. If the QQQ finishes below 300 today, they'll all be worthless. Unfortunately, this isn't a game. This is a group of wealthy Wall Street firms just ripping money from unsuspecting retail traders.

And it happens nearly every month.

By the way, and for those interested members, I did sell roughly 20% of my QQQ today and replaced it with QLD, to slightly "juice" my potential returns. Clearly, I'm anticipating a bounce off the 20-day EMA. I probably would take a bigger chance if it weren't options-expiration Friday. If we weaken into the close today, I won't take any chances. I'll exit the leveraged QLD.

Sector/Industry Focus

Copper ($COPPER) has been trending higher since bottoming in July 2022 and it's the one commodity that's directly tied to the global economy. As economic demand picks up, we tend to see rising copper prices. Check out this long-term chart of copper:

The bottom panel is the correlation coefficient. The blue-shaded area shows you that copper prices and the S&P 500 are positively correlated much more often than they are negatively correlated (red-shaded area). Therefore, rising or uptrending copper prices should be viewed as a bullish signal for the S&P 500. Currently, that is definitely the case.

ChartLists/Strategies

One stock that typically takes advantage of higher copper prices is Freeport-McMoran, Inc. (FCX). We added it to our Aggressive Portfolio for next quarter to hopefully take advantage of rising copper prices. Initial price support is near 41.00 and FCX is approaching this level after having traded above 46.00 just a few weeks ago:

Much of the selling here has been on lighter-than-average volume and the AD line suggests that accumulation continues to take place.

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, February 17

DE, NWG, PPL, CNP, CRBG, AN, LPL

Monday, February 20

WMB, CPRT, TECK, NDSN, ADTN, HLX

Tuesday, February 21

WMT, HD, MDT, PANW, PSA, O, KEYS, CSGP, SBAC, PEG, FANG, IR, EXPD, AGR, WLK, COIN, EXAS, CZR, TAP, CHK, WSC, GFL, LECO, TOL, RIG, FLR, SPT, STAA, TWNK, ZIP, TPH, ATRC, SKT, KAR, LZB

Economic Reports

January leading indicators: -0.3% (actual) vs. -0.3% (estimate)

Happy trading!

Tom