EB Daily Market Report - Special Update - Thursday, December 14, 2023

We have all of our EarningsBeats.com crew together today for meetings and a holiday dinner this evening, which begins just after noon ET. I wanted to at least get a quick update out before our meetings begin, however, so here we go...

It's very clear to me that Wall Street anticipated and LOVED the Fed's move away from its hawkish tone to a much more accommodative one. Also, the shift to value from growth was quite evident yesterday and it continues today. During our LIVE trading room yesterday, at the very beginning at 10am ET, I provided an intraday Sector Summary that showed technology (XLK) was in the second spot among the 11 sectors in terms of performance through the first 30 minutes of the session. And I encouraged those in attendance to check in later in the day, especially after 2pm ET, to see if rotation had changed. By the end of the day, the XLK had fallen all the way to 11th among the 11 sectors. That was certainly evidence that traders were rotating quite heavily away from the aggressive sectors and looking for a new home in value, or defensive, stocks, and especially in small caps. Check out the massive outperformance in the IWM vs. the QQQ during the day yesterday and into this morning's early action:

These IWM relative upside moves have been spectacular and breathtaking. The Wednesday post-2pm ET buying appetite was insatiable. And so far, we've seen more of the same this morning. We have pulled back a bit on a relative basis this morning. The IWM is now at a point where traders must make a big decision as we're literally sitting on what now is a quintuple top:

On an absolute price basis, I think it's quite clear how important the 197.50-200.00 resistance level is. Also, if we're objective and using perspective, the IWM has lagged BADLY on a relative basis for over a year now. It's now showing relative strength - for the past month - and if small caps can confirm an absolute breakout above 200, I believe they could extend this recent absolute and relative strength, playing "catch up" vs. the QQQ through year end, and possibly into early 2024. I'm very bullish this area, but I'm respecting overhead resistance.

Utilities (XLU) and real estate (XLRE) were easily the largest sector gainers on Wednesday and they were followed by the other two defensive sectors - health care (XLV) and consumer staples (XLP). As of a few minutes ago, here was your Thursday intraday sector leadership:

Again, most of today's strength is outside the aggressive sectors, enabling real estate to post solid gains for a second straight day. Seeing strength in energy (XLE) and materials (XLB) is aiding outperformance in small caps (IWM) as well.

While I'm following the current relative strength in small caps and more value-oriented areas here in December, I also am keeping in mind that January is the best calendar month of the year for areas like internet ($DJUSNS). Check this out:

Internet stocks have outperformed the S&P 500 during every January since this bull market began in 2013. Therefore, I'll be watching stocks like Meta Platforms (META), Netflix (NFLX), and Alphabet (GOOGL) for possible entries later this month. These 3 stocks have an annualized return for the month of January of +73.76%, +89.17%, and +45.23%, respectively. All 3 also historically perform well during the first months of every calendar quarter (Jan, Apr, Jul, Oct). GOOGL, in particular, has made nearly ALL of its gains since 2013 in these first months of calendar quarters. The other 8 calendar months have produced just slightly above breakeven returns.

One last thing. Initial jobless claims this morning came in nearly 10% BELOW expectations and November retail sales came in ABOVE expectations. Normally, this type of hotter-than-expected economic news would drive traders OUT of bonds, sending corresponding yields higher. This morning, the 10-year treasury yield ($TNX), with this solid economic news, is down nearly 13 basis points, after dropping 17 basis points yesterday. That's 30 basis points in two days with the TNX now down to 3.90%, 110 basis points beneath its high of 5.00% less than two months ago.

My reasoning why the TNX is dropping is this. The TNX did not go up because of strong or strengthening economic conditions. It went up as investors demanded higher returns to offset higher inflation expectations. So the lower TNX now is the result of a drop in inflation expectations, not because of a weak or weakening economic. Many folks always use economic conditions or perceived economic conditions as the reason for movements in bonds and yields. But sometimes it has nothing to do with the economy and that's the case when inflation becomes the Fed's primary concern. The next topic that CNBC and other media outlets will use to scare investors is that the Fed is cutting rates, because of a weak economy and that a recession is right around the corner. Remember, recessions CRUSH growth stocks as future earnings expectations drop rapidly. But if rates go down and future earnings expectations remain the same or (gasp!) increase, growth stock valuations will keep rising. Wall Street will move away from growth stocks, not temporarily in the month of December, but longer-term, if these big firms expect a decline in earnings for 2-3 quarters. I'll be focusing on those growth areas and how they perform on a relative basis to help determine if we should give a potential recession any thought whatsoever. I've said since the 2022 bottom that a recession is not a concern of mine. And it still isn't.

Ok, one more last thing. I love what's happening on the Tesla (TSLA) chart:

I might be slightly premature, but I bought TSLA earlier today. I loved yesterday's candle (green arrow). It appeared as though TSLA might be making a significant breakdown. Instead, we saw a big reversal on heavy volume, even clearing the 20-day EMA on the close. Today, we're following that reversal up with more bullish action. A close above the November high would be extremely bullish as it would also clear the downtrend line since July. And TSLA has a very strong history of starting a run higher 4-5 weeks before its earnings. TSLA is scheduled to report earnings on January 24th. Again, maybe I'm a tad early, but I'll take my chances on TSLA - it's one of my favorite stocks to trade.

Listen, we're overbought and we now have max pain WAY WAY WAY below current prices. Options expire tomorrow and this is reason to trade, understanding that higher risk is present. I'll stick with the long side, but avoid leverage until I believe the reward/risk justifies it.

Happy trading!

Tom