Category: Earnings

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Earnings Economics Market Recap Stock Market

Stock Market Recap & Outlook (2/24/23) – Inflation is back! FOMC minutes and PCE shock!

This weekly market recap is brought to you by Koyfin, a powerful analytical tool that I am proud to partner with. Their platform is entirely customizable for whatever data you want to look at including stocks, ETFs, mutual funds, currencies, economic data releases (one of my personal favorites used often for these posts), crypto, and even transcripts of company events! Click the link above to get a special offer only for Dividend Dollar readers or go give my product review a read if you’re interested!

Weekly Market Review

This shortened holiday week ended up being another losing one, held down by the same issues that beat down price action last week. There’s a lingering sense that the market was due for consolidation and a growing idea that the Fed will keep rates higher for longer.

Fed concerns were the focus midweek when the FOMC minutes for the February 1st meeting were released. They weren’t aggressively hawkish or dovish, their default position continues to be a rate-hike position.

Markets are aware that many of the data releases since the last FOMC meeting are not likely to change the Fed’s mindset. A stronger than expected January employment report, the stronger than expected ISM Services PMI, the January CPI and PPI reports, all capped off by this week’s stronger than expected core PCE, which is the Fed’s preferred inflation measurement.

After the hot PCE reading on Friday, St. Louis Fed President Bullard said that “it appears that the Fed may be able to disinflate in an orderly manner and achieve a soft landing”.

Prior to that, there was some movement higher on Thursday, following NVIDIA’s ($NVDA) earnings and positive guidance. However, the market primarily had downside bias this week and took out its 50-day moving average before testing the 200-day average.

The Treasury market was boosted off of the price action in equities this week, creating tough competition for returns from stocks. The 2-year note rose to 4.78% and the 10 year note rose to 3.95%. The dollar index also rose this week by 1.4%.

None of the 11 S&P sectors made gains this week. Energy was close at -0.04% while consumer discretionary and real estate were hit the hardest will losses over -4%.

Below are summaries of daily price action throughout the week:

  • Tuesday
    • The week started lower on increasing geopolitical tensions and continued money being taken off of the table following last month’s rally for a close under 4,000.
    • News reports state that China’s President Xi Jinping may go to Moscow in April or May to meet with Putin and encourage peace talks, a view that seems to run counter to the assumed supportive relationship between Xi and Putin
    • Disappointing guidance came from Home Depot ($HD) and Walmart ($WMT) and helped push consumer discretionaries down to last place.
    • The January Existing Home Sales fell -0.7% to 4 million (consensus 4.12). Key takeaway is that sales are still under pressure of high mortgage rates and economic uncertainty. This keeps homes on the market for longer and may cause a moderation in median prices over time.
  • Wednesday
    • The day started on a positive note, but moves were modest as the market waited for the release of FOMC minutes.
    • The FOMC minutes indicated that “more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path.” A number of members also wanted raise rate by 50 points at the meeting
    • .Immediately when the minutes were released, price action in the market whipsawed before settling into a slow decline
  • Thursday
    • This day was a more upbeat day, breaking a 4 day losing streak on $SPY following the earnings and good guidance from NVIDIA.
    • Prices got pushed down as other disappointing earnings came out ($EBAY, $DG, and $DPZ are some names that come to mind in that regard). The key takeaway was that consumers are slowing their discretionary spending causing slower growth and further cuts to earnings estimates in the sector, all while the Fed looks intent to raise rates higher.
    • Downside pushed the S&P below the 4,000 level and its 50 day SMA. Buyers stepped in and finished the session with decent gains.
    • Initial Jobless Claims declined to 192k (consensus 200k) and continuing claims decreased to 1.654M. The low levels of initial claims contribute to expectations for the Fed keeping rates higher longer.
    • The second Q4 2022 GDP estimate showed a downward revision to 2.7% (consensus 2.9%). The drive down was moved by less personal spending which was partially offset by an increase in non-residential investment. This could be an off-putting mix for the Fed. Growth and inflation is still running hot, one of them must give.
  • Friday
    • The week ended with board-based selling following the hotter than expected PCE reading.
    • The Core-PCE price index rose 4.7% year-over-year versus 4.6% in December. Real disposable income was up 1.4% month-over-month and personal savings rate increased to 4.7%, indicating that consumers can keep spending.
    • The key was that the report showed inflation, not disinflation, and good spending potential which can keep the economy running above potential. That combo causes concerns about inflation being sticky and prompting the Fed to stick to tightening for harder and longer than expected.
    • The S&P closed below its 50 day SMA and tested its 200 day SMA, recovering a bit from the lows of the day before close.

Dividend Dollars’ Outlook & Opinion

That’s it for the recap. Now for my opinion!

This week was another week of consolidation and modest losses that we have been discussing in this outlook section for 3 editions now.

This was a light week in terms of quantity of economic data, however, the few releases we did have were heavy hitters. The Core PCE reading confirmed that the inflation moderation which began in June of last year has mostly leveled off, and at a level that is much higher than the Fed would like. Pair that with the fifth straight week of initial jobless claims under 200k, and you can see that the labor market is strong and able to withstand further tightening.

Earnings continued this week with 55 S&P 500 participants reporting. 44 of them beat EPS expectations. Overall, 98% of the S&P stocks have reported. Below so far are the aggregate beat rates this quarter compared to prior quarters. These figures are tracked using MarketBeat.

Now moving on to technicals. Last week pointed to slightly bearish with high volatility, and that was what we got! Within a month after the SPX broke through the long-term downtrend (red channel), 4,100 level (top green line), and hit a technical golden cross, did it struggle to keep strength. SPX broke through support at the 50 day SMA on Friday, and has the 200 and 100 day SMA not far under it for support and are converging with the downtrend. Who knows if these will hold, but they should at least slow the downtrend.

Other metrics have shifted moderately bullish. VIX put OI grew more than call OI, SPX call OI grew more than puts, and call OI for major ETFS also grew more than puts for the week, a moderately bullish change. However, the Vix volume put to call ratio moved from neutral to moderately bearish this week at 0.34. SPX volume put to call ratio looks neutral.

Overall, technical have deteriorated and inflation is not moderating. With earnings season basically over, three weeks till the next inflation report, four weeks till the next rate hike, the market may move on news headlines and Fed speak more than usual in the near term.

Technicals and inflation look we move down, a number of metrics have improved and look like we move up, and major economic releases are a few weeks out. Short term time frame looks to be volatile and set up for an oversold bounce before chop and downtrend continues. With that said, I’m neutral for next week and could see the market being moderately down or up. This is one of those weird weeks looking forward where all this analysis may not really help!

That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.

And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week.

Regards,

Dividend Dollars

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Earnings Economics Market Recap Market Update Stock Market

Stock Market Recap & Outlook (2/17/23) – Continued Earnings and Mixed Week

This weekly market recap is brought to you by Koyfin, a powerful analytical tool that I am proud to partner with. Their platform is entirely customizable for whatever data you want to look at including stocks, ETFs, mutual funds, currencies, economic data releases (one of my personal favorites used often for these posts), crypto, and even transcripts of company events! Click the link above to get a special offer only for Dividend Dollar readers or go give my product review a read if you’re interested!

Weekly Market Review

The major indices ended down this week for the second week in a row, first time in 2023. Instability in the market was driven by reactions to economic releases and Fed comments throughout the week.

MoM inflation data in the January Consumer Price Index (CPI) was not pleasing, but the report showed continued deceleration on a YoY basis. Services inflation, the section that the Fed seems to care about the most, was the exception with a jump to 7.2% YoY from 7.0% in December.

Then a stronger than expected January retail sales report, higher-than-expected producer price data for January, and another remarkably low level of weekly initial jobless claims were released in the following days.

The positive economic news paired with accelerating services inflation, fueled concerns about the possibility of the Fed raising rates more and keeping them higher for longer than previously expected.

Fed comments this week seemed to corroborate those concerns. Cleveland Fed President Mester said she advocated for a 50-basis point rate hike at the last meeting,  St. Louis Fed President Bullard shared the same sentiment, and Fed Governor Bowman said that hikes are needed until “a lot more progress” has been made on inflation.

5 of the 11 S&P 500 sectors made gains week led by consumer discretionary (+1.6%) and utilities (+1.1%). The energy sector (-6.3%) was the worst performer by a long shot with falling oil prices.

Below are breakdowns of daily action for the week.

Monday:

  • A quick dip right out of the gate had the S&P 500 slip below the 4,100 level before buyers stepped in and a rally effort took root.
  • Mega caps were driver of index gains. Meta Platforms ($META) and Microsoft ($MSFT) each rose more than 3.0% on Monday with no specific catalysts.
  • The NY Fed’s Survey of Consumer Expectations showed that inflation expectations are stable, but household income growth expectations have dropped.
    • “Median inflation expectations remained unchanged at the one-year-ahead horizon, decreased by 0.2 percentage point at the three-year-ahead horizon, and increased by 0.1 percentage point at the five-year-ahead horizon, to 5.0%, 2.7% and 2.5%, respectively.”Disagreement on these figures decreased slightly YoY
    • The median expected growth in household income dropped to 3.3%. This is the largest one-month drop in the 10-year history of the series and is the first drop since last September.

Tuesday:

  • Tuesday’s trade was mixed as investors digested the January Consumer Price Index (CPI) released in early hours.
  • Total CPI increased 0.5% MoM (in line with consensus) and is shown in the graph below. Core-CPI increased 0.4% MoM (in line with consensus).
  • On a YoY basis, total CPI was up 6.4% (the smallest 12-month increase since October 2021) and core-CPI was up 5.6% (the smallest 12-month increase since December 2021). The YoY levels were not as low as expected AND services inflation hit 7.2% YoY from 7.0% last month.
  • The key CPI takeaway is that there has been a clear deceleration from peak inflation; however, the inflation rates are nowhere near low enough for the Fed to even think about cutting rates this year.
  • The market moved higher shortly after the open. The early gains faded, and the S&P 500 briefly slipped below the 4,100 level. There was a bounce late day and closed the session above intraday lows. 
  • Treasury yields seemed to have a more concrete reaction to the CPI data as yields jumped and closed higher.

Wednesday:

  • Ahead of Wednesday’s open was the retail report, which reflected continued strength in the economy, but left the market concerned that it boosts the likelihood of higher rates. Total sales in January were up 3.0% MoM (consensus 1.7%) and sales, excluding autos, up 2.3% ( consensus 0.8%).
    • The key takeaway from the report is that consumers were spending freely on goods in January despite inflation pressure; in fact, every single sales category showed a MoM increase, led by a 7.2% surge in sales at food services and drinking places.
  • The January Industrial Production came in flat (consensus 0.5%) and Capacity Utilization came in  78.3% (consensus 79.1%).
    • The soft reading for January can be attributed entirely to a drop in utility output. Otherwise, there was some strength in mining and manufacturing output, the latter of which saw advances in durable, nondurable, and other manufacturing activity.
  • Equities started down, but true to 2023 form, investors stepped in to buy the early weakness. The main indices all closed the session at or near their best levels of the day.
  • High-beta stocks, uplifted by the positive earnings news and guidance from the likes of Airbnb ($ABNB), Roblox ($RBLX), and Analog Devices ($ADI), helped Wednesday’s gains.

Thursday:

  • Thursday was down in the start and the finish. The negative bias was brought on by the higher-than-expected Producer Price Index (PPI) number for January and another low level of weekly initial jobless claims, which fueled concerns that the Fed will not pause its rate hikes in the near future.
  • January PPI came in at 0.7% shown below (consensus 0.4%) and Core PPI at 0.5% (consensus 0.3%).
    • The key takeaway from the report for the market is that headline inflation was hotter than expected on a monthly basis and causes concerns about inflation pressures persisting at higher levels for longer than expected.
  • Weekly Initial Claims shown below came in at 194K (consensus 203K) and Continuing Claims at 1.696 million
    • The persistence of initial claims below 200,000 reflects a very tight labor market, and a reluctance to cut workforces, which will continue to drive worries at the Fed about tight labor market conditions feeding into stickier wage-based inflation pressures as reflected in high service readings.
  • The market recovery mid-day coincided with buyers stepping in when the S&P 500 breached the 4,100 level, along with Treasury yields backing down from their post-data release highs.
  • There was a steep reversal in the last hour that had the major indices close the session near their worst levels of the day, which took the S&P 500 below 4,100 again.
  • The late afternoon plunge was precipitated by Fed speak we previously mentioned (except for Mester, who spoke prior to the plunge).

Friday:

  • The stock market opened weak continuing Thursday’s downside momentum.
  • Treasury yields began to settle and stock sentiment shifted slightly higher.
  • Ultimately, the indices closed the session near their best levels of the day even though some mega cap names were not following.

Dividend Dollars’ Outlook & Opinion

That’s it for the recap. Now for my opinion!

This week was another week of consolidation and modest losses and matched perfectly with the “technicals suggest a flat or slightly bearish week ahead” call from last week’s report. This is the second week in a row of this since I called for a slowdown in the market outlook from 2/3/23.

We had two key inflation reports with the CPI and PPI, both came in well above their estimates causing a fair amount of volatility. One flaw from this report last week was that I did not touch on the coming PPI report. Historically, the PPI tends to not move the market as much as the CPI, however the bigger miss on PPI proved otherwise this week.

As you can see in the chart below, while still quite historically high, the YoY PPI (white) and CPI (blue) peaked in June of last year. They continue to trend lower.

Earnings reports this week had 59 reports of the S&P 500 companies, putting us 81% of the way through earnings season. 41 of the 59 this week beat EPS expectations, below so far are the aggregate beat rates this quarter compared to prior quarters. These figures are tracked using MarketBeat.

Now moving on to technicals. Only three weeks after the SPX broke above the long-term downtrend (red channel), broke above resistance at 4,100 (top green line), and hit a golden cross (white arrow) and the SPX has struggled to hold the support line at 4,100. The first half of the week looked decent, but the last two days did not. Ending the week under that level and establishing a new low on 2/17 compared to the last low on 2/10 looks like a technical breakdown. SPX may be trending in the down direction in the near term.

Other metrics have shifted into bearish territory since last week. SPX OI changes grew more this last week on the put side which is moderately bearish. ETF OI changes were slightly more on the put side, but not enough to make it bearish, I consider this to be neutral. The VIX open interest put/call ratio is down almost 10% this week, this movement follows the VIX index and implies that VIX is likely to go higher moderately in the near term. This is slightly bearish. SPXOICPR saw a similar move.

Overall, metrics like the above, failure of near-term technical support, hawkish Fed comments, a concluding earnings season, a five week wait till the next FOMC meeting, and mixed economic data all make the market look fairly mixed or slightly bearish in the near-term. Next week is light on the economic data front except for Core PCE (the Fed’s preferred inflation gauge) out on Friday. With a holiday on Monday and an apparent waiting period till the big Core PCE report on Friday, I’m anticipating a choppy week till end of week with Core PCE determining the final move.

That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.

And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week.

Regards,

Dividend Dollars

Categories
Earnings Economics Market Recap Market Update Stock Market

Stock Market Recap & Outlook (2/3/23) – Continued Earnings and FOMC Meeting

This weekly market recap is brought to you by Koyfin, a powerful analytical tool that I am proud to partner with. Their platform is entirely customizable for whatever data you want to look at including stocks, ETFs, mutual funds, currencies, economic data releases (one of my personal favorites used often for these posts), crypto, and even transcripts of company events! Click the link above to get a special offer only for Dividend Dollar readers or go give my product review a read if you’re interested!

Weekly Market Review

This week started slowly as the market looked to take some money off the table following a strong January and waiting for the FOMC meeting. On Monday, the Nasdaq and S&P 500 were up 11% and 6% for January.

The slow Monday was kicked off by an article in WSJ by Nick Timiraos (chief economics correspondent for WSJ and Fed’s assumed preferred source for divulging information to) indicating that Fed officials were concerned that inflation could return to higher levels due to tight labor markets. He added that the Fed’s interest rate strategy could depend on how much members believe the economy will slow.

Anticipation of the Q4 Employment Cost Index, the January ISM releases, and the January Employment Situation Report and over 100 S&P 500 companies reporting earnings this week also added to the slow start.

The momentum changed on Tuesday as the market looked to end January with some gumption. A well-received Q4 Employment Cost Index and weaker-than-expected January Chicago PMI and Consumer Confidence data also may have led to the idea that the Fed may look to pause rate hikes.

The latter point was corroborated by another Nick Timiraos article that suggested the Employment Cost Index report could increase the possibility of Fed officials agreeing to pause the rate hikes sooner rather than later.

Wednesday came in strong to kick off the month of February . This followed the FOMC’s unanimous decision to raise the target range for the fed funds rate by 25 basis points to 4.50-4.75%, as expected. In the press conference afterwards, Powell did not go out of his way to rein in the market’s enthusiasm.

Mr. Powell acknowledged that the “Full effects of rapid tightening so far have yet to be felt and we have more work to do.” Core services inflation is still running too high, which creates a basis for ongoing rate hikes. Overall, though, Mr. Powell was generally encouraging about the signs of disinflation.

Also, he did not strictly express disagreement with loosening financial conditions and maintained that he thinks there is a path to getting inflation back down to 2% without a significant economic decline or increase in unemployment.

A huge earnings-driven gain in Meta Platforms ($META) kept rally effort strong at the start of Thursday’s session. The earnings results and reception of the FOMC materials encouraged a sense that earnings growth and monetary policy may be better than feared this year.

Some data releases on Thursday also helped with the market’s move higher. The Q4 Productivity report showed a drop in unit labor costs, an affirmation of falling inflation costs. Separately, weekly initial jobless claims hit their lowest level (183,000) since April 2022, providing additional confirmation of a strong labor market that could absorb the impact of a soft landing.

The rally did hit a speed bump at the 4,200 level for the S&P 500. The market may have reached an overextended area, though it did not last long as the main indices were able to climb back towards session highs ahead of Thursday’s close.

However, Thursday wasn’t all sunshine and rainbows as a sizable loss in Merck ($MRK) after its quarterly results kept the price-weighted Dow Jones Industrial Average in negative territory for most of Thursday.

Friday turned out to be a losing session with disappointing earnings and/or guidance from Alphabet ($GOOG), Amazon.com ($AMZN), Starbucks ($SBUX), and Ford ($F) despite a strong gain in January nonfarm payrolls (+517,000) and a stronger than expected January ISM Services PMI (55.2%) that returns the index to growth levels.

The strong data created some doubts as to whether the Fed will pause its rate hikes soon and cut rates at all before the end of the year, contrary to the case for rates in the early weekdays.

The fed funds futures market is now accounting for the prospect of a third 25 basis point rate hike in May. According to the CME FedWatch Tool, the probability of a rate hike in May, in addition to the one that is fully priced in for March, increased to 48% from 33% last week.

Many stocks pulled back on profit-taking efforts following the earnings and economic news. Apple ($AAPL), was the exception. Apple declined 2% off the open but quickly bounced and finished the day up 2.4%.

Only three S&P 500 sectors registered losses this week — energy (-5.8%), health care (-0.13%), and utilities (-1.42%) — while the communication services (+5.26%), information technology (+3.71%), and consumer discretionary (+2.34%) sectors logged the biggest gains.

Dividend Dollars’ Outlook & Opinion

That’s it for the recap. Now for my opinion!

This week crushed my moderately bullish outlook from the prior week. The market is at nearly a 9% in a little more than a month and have given back very little, even with earnings season being a bit mixed!

Q4 earnings season has reached the halfway point so far. 103 S&P 500 companies reported earnings and 74 of them beat consensus expectations this week. That puts us exactly at 250 of the 500 reporting results. The average EPS and Rev beats both increased this week, to 70% and 52% respectively. From a growth standpoint, these results are still lower compared to YoY results from last Q4. This information is tracked using MarketBeat.

Since the market broke out of the long term resistance, it has been off to the races. As we mentioned last week, the next point of resistance was around the 4,100 area that had rejected three times prior. The market broke through that level on Wednesday with strength. Then, on Thursday, we got a golden cross when the 50-day SMA moved above the 200-day SMA (yellow circle) which is a bullish technical indication.

Now that the market is above the 4,100 area, that resistance has turned into support and will be an area we want to watch if we see a small retracement in the coming days.

Overall, after a tough 2022 with lots a tax-loss harvesting ending the year, traders’ cash piles appear to be getting put to work. Communication, Consumer Discretionary, and Tech sectors priced significantly lower than where they were a year look like the areas that the cash is getting sent to. However, with a gain of almost 9% YTD, almost 3% of that coming from this week, it’s been a little too much too fast.

Vix OI change this week looks to be moderately bearish, SPX OI change is moderately bullish, ETF (SPY, QQQ, DIA, and other key ETFs) OI change is moderately bearish. The OI put call ratios for those items are neutral, moderately bearish, and moderately bearish respectively.

Vix levels in general are in the normal zone as of Friday’s close, with futures trading just slightly higher. Both are neutral indicators.

Economic data for next week is sparse, with the main items being jobless claims and consumer sentiment reports. I’ll be curious to read the wholesale inventories report and the consumer credit report, though these rarely have effects on the market.

With earnings season now past the halfway point, the next fed meeting 6 weeks away, and a number of mixed Vix and option indicators, I wouldn’t be surprised to see a bit of consolidation or small moves for the next few weeks.

That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.

And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week.

Regards,

Dividend Dollars

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Dividend Stocks Due Diligence Earnings Economics Stock Analysis

Soft Lines – The Retail Segment for Early Cycle Moves

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Market Cycle

The market is in a weird spot to kick off 2023. So far, this year feels like the inverse of 2022. High inflation, which defined most of the last year, seems to have given way to a narrative of falling inflation. Wages data, small business surveys, CPI, and ISM data (all items we cover regularly on the weekly market recaps) suggest softening.

The graph above is called “The Psychological Pitfalls Of A Market Cycle”. It’s broken up into four distinct areas indicated by the colors. The orange color on the far left is the Mark Up phase of a cycle, next is Distribution, followed by Mark Down, and ending with Accumulation in the dark red before the cycle repeats again with Mark Up.

We have had three consecutive inflation reports that showed no major inflation concerns. In fact, two of those three reports actually contained negative surprises! The Fed on Wednesday acknowledged weakening inflation while also mentioning that they still have work to do. Anyways, it is clear that the market’s narrative has shifted to declining inflation and that the Fed will pivot dovish sooner or later. Therefore, now is a great time to look for some early cycle outperformers.

The Soft Line Industry

Before I dive into why this sector could be good for cycle moves in the near term, lets discuss what soft lines are. If you google what the soft line industry is, you will see a site that says they sell primarily soft merchandise. Not a very helpful explanation, but it is technically correct and is a term that is used in retail quite often.

Soft lines are retailers that sell smaller items that are usually soft. Consumer items like linens, clothing, shoes, bags, towels, mats, pillows, and sometimes even beauty products. These kinds of goods may be called soft items. They are typically more difficult to handle in the supply chain than hard goods. Hard goods are stackable, easy to store, and easy to transport while soft goods need to be packaged carefully, they can wrinkle, they need to be presented aesthetically in stores, and are more sensitive to restocking.

Soft Line – Early Cycle Mover

Now back to the cycle. The uncertain backdrop of the economy appears to be closely tied to the health of the US consumer. With that said, I believe the soft line industry is at an interesting value point. Morgan Stanley’s US Soft Lines Retail Equity Analyst, Alex Straton, called the coming year a ‘tale of two halves’ in a Thoughts on The Market Podcast last week when discussing soft lines.

What they meant by this is that the first half of what retailers are facing is harder expectations from an income statement perspective caused by an ongoing excess inventory overhang (Nike’s large inventory in the end of 2022 is a great example of this) and possible recessionary conditions from a macro perspective. An article from Morgan Stanley claimed that census forecasts for the S&P 500 have earnings growth at almost 4%, this is overly optimistic in their view. Consensus earnings growth expectations specifically for soft lines are even more optimistic at 15%.

These stocks can be moved significantly based on earnings revisions. If we have negative earnings revisions ahead based on the assumption that expectations are unrealistic, it’s likely that the stocks move downwards from here, hitting a bottom sometime in the first half of the year.

The second half of the year presents a very different story – hence the tale of two halves. If earnings revisions/expectations become more realistic, the industry will be in a position to more easily meet top line returns and margins may receive year-over-year relief. This relief may come from falling fright costs, falling price of cotton, promotions, etc. On top of that, as we go through the year, inventory should mostly reach normalization. Lastly, a recovering macro perspective should be more solidified in the second half of the year. With this improving backdrop and the fact that soft lines are early cycle outperformers, they could quickly pivot off the bottom and see gains.

It is impossible to ever call a bottom accurately and consistently on anything. But given the case for the industry turn around as we have laid out, there are a few data points to keep an eye on to help you realize when the time to initiate might be near. The first indication is 2023 guidance, and we should get more information on this in the coming weeks as earnings season continues.

The other item that we will spend more time explaining is inventory levels. Cleaner levels are essential to having a view on how long the margin risk that hit retailers in the second half of 2022 could potentially linger into this year. Last year, there was a lot of market discussion around the inventory problem. It was seen as a key risk to earnings with oversupply and lagging demand creating the perfect storm for pressuring margins.

Today, retailers have made good progress of working down inventory levels in the third quarter of 2022, but there’s still much room to go. Look at the examples below from Tapestry’s ($TPR) Q1 2023 earnings report, Ralph Lauren’s ($RL) Q2 2023 earnings report, Nike’s ($NKE) Q2 2023 earnings report, and VF’s ($VFC) Q2 2023 earnings report. What we would rather see here is that inventory levels are in line with forward sales growth.

How To See The Opportunity

As we look across the soft line space for opportunities to take advantage of for an early cycle move, make sure that you’re sticking to sound fundamental and intangible analysis. What I mean by fundamental is if the company is growing or outperforming (beauty stores like Ulta are a great example of this), look for diversification in selling channels, be aware of company events such as restructuring or leadership changes, understand if their margins reasonable, and look to see if investors are rewarded with buybacks, dividends, and/or sufficient price appreciation. What I mean by intangible is if the company has a strong brand, if the brand has value, if that brand value had an upward trajector, and do the products speak to the consumer.

If you can answer most of these items in a positive light, then you may have located a good company for this early move.

For me, certain subsectors of this industry particularly interest me and others that don’t. One to avoid, in my opinion, is activewear. These items saw strength in Covid as people gained a higher affinity for staying healthy, exercising, and taking care of their bodies. Long term, the category has really nice upside potential, but for the purposes of getting early cycle returns, the lingering strength from Covid may negate the strategy.

My other point is on mid-tier brands vs luxury/high-tier brands. A debate as old as time. I lean high-tier, for a couple of reasons. One is that higher wealth consumers will be less affected by a recession if one happens. The global economy is growing, China is opening, and India looks to be on the verge of its most performative decade ever. These items will boost attention to and desire for world-renown luxury brands. Another point I have is called revenge shopping. The Economist touched on this phenomenon which is where people are more willing to splurge on high-end items currently because they have been pinching pennies and living a stressful life since Covid that they feel they should treat themselves.

My Picks

Having said this, here are a couple of stocks I have my eyes on:

Tapestry ($TPR), the luxury brand company that operates through Coach, Kate Spade, and Stuart Weitzman. P/E ratio of 12.3, pays a 2.57% dividend, and has had decent sales growth over the last five years.

Ralph Lauren Corp. ($RL) sells premium lifestyle products including the well-known Ralph Lauren clothing brand but also sells accessories, home furnishings, and many other soft line products. P/E ratio of 17.3, pays a 2.35% dividend, and has performed great share buybacks of the last 10 years.

Steven Madden Ltd. ($SHOO) designs, markets, and sells fashion-forward footwear through several well-known brands including Steve Madden, Anne Klein, GREATS, and others through wholesale and direct-to-consumer segments. P/E ratio of 11.4, pays a 2.3% dividend, and has shown impressive sales growth over the past decade with the exception of 2020.

Burberry Group PLC ($BURBY) is a holding company that designs, manufactures, and sells apparels and accessories under the luxury Burberry brand. P/E ratio of 21.18, dividend yield of 2% that pays semi-annually, and touts some very stable margins and impressive FCF per share.

I also like Columbia Sportswear ($COLM) but did not dive into them too much as I believe seasonality may dampen the early cycle mover strategy discussed here.

Of these five, I have initiated a small position in Steven Madden Ltd. ($SHOO) and will wait for their earnings report on February 23rd before adding heavy. The reason for this is so that I can get another temperature check on the inventory levels, sales levels, and the margins are trending in the right direction. So far, sales and margins are. Inventory, which is the key, still needs improvement however.

Thank you for reading! If you like pieces like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week. And go check out the 3X discord where I’m actively conversing about ideas like this!

Regards,

Dividend Dollars

Categories
Dividend Stocks Earnings Stock Analysis

Comcast ($CMCSA) Q4 2022 Earnings – Mixed Earnings but a Light Is At The End of the Tunnel

This earnings break down is brought to you by 3X Trading, a community that highlights experience and expertise of the professional within. While other groups relay on algorithms or inexperienced traders, 3X relies on its team of seasoned professionals to navigate markets, providing you with analysis, classes, and a personal service to ensure they are always informed and making good trading decisions, for any strategy. Join the Discord server for free and learn from dividend investors and day traders alike. I frequently share analysis and insights throughout the week, so I hope to see you in there!

Summary

On Thursday, 1/26/2023, Comcast ($CMCSA) reported fourth quarter earnings that beat most expectations despite a lack of strength in subscriber growth and losses from Peacock (their streaming service).

Performance

Earnings per share came in at $0.82 for the quarter, beating expectations of $0.77 by 6.4%. Revenues came in at $30.6B beating expectations of $30.4B and a previous quarter of $29.8B. Good news so far!

Unfortunately, Adjusted EBITDA fell by 15% to $8B from $9.5B from the prior quarter. This was mostly due to higher severance expenses as hinted at by CFO Mike Cavanagh in the third quarter call. He said, “As we enter the fourth quarter and look to our year ahead, we remain focused on driving long-term growth during an increasingly challenged economic environment… We expect we will be taking severance and other cost reduction-related charges in the fourth quarter in anticipation of expense reduction actions that will provide benefits in 2023 and beyond.”

Cable Communications

Comcast report 26,000 lost broadband customers for the quarter, attributing impact to Hurricane Ian which hit Florida and South Carolina in September. The hurricane caused severe damage and losses to the homes of subscribers. When looking at total customer relationships, the firm estimates the total number decreased by 36,000 and broadband increased by 4,000 when excluding the effects of the hurricane.

Though subscribers are growing, the pace has slowed compared to quarters prior to Covid. Competition from telecom and wireless providers are growing, and a housing slowdown in the US contributes to a lack of new customers as the shift to new homes. Total customer relationships of 34.3M increased slightly form 34.2M last year.

Comcast’s wireless segment, Xfinity, added 365,000 customers in the quarter, brining the total subscriber base to over 5.3M. Wireless customer growth has been consistent since jumping into the business in recent years. This was offset by a loss of 440,000 cable video subscribers as customers continue to cut traditional TV bundles in favor of streaming.

NBCUniversal

NBCUniversal is the business segment that contains the media (cable, streaming, and related advertising figures), studios (movie studios such as Universal Pictures, Dreamworks, and Focus Features) , and theme parks (5 Universal Parks and Resorts) businesses.

Revenues for Universal were up about 3% from the prior quarter to $9.8B. Revenues was boosted by the 2022 FIFA World Cup which aired on Peacock and their Spanish-language network Telemundo.

Though overall results are good, Peacock has continued to weigh on the business. Adjusted earnings fell by nearly 50% to $817M due to Peacock losses and severance expenses. $978M of that is attributed to Peacock losses compared to a loss of $614M last quarter.

This quarter, Peacock added 5M new paying Peacock customers to the subscriber base, brining the total number to 20 million. This increase could be attributed to the World Cup, football season, and English Premiere League. The company remains committed to earning a return on their Peacock investment, though next year doesn’t look like the year for it. Overall, Peacock’s losses for the year of $2.5B were in line with the company’s earlier outlook. Next year, Michael Cavanagh says they expect losses to be near $3B.

Theme parks remained a bright spot for the segment this quarter with $2.1B in revenue, right behind the studios revenue of $2.7B. Studios revenues were actually down compared to last quarter, however the segment ended the year strong with a #2 rank in the world wide box office for year thanks to movies like Jurassic World: Dominion and Puss In Boots: The Last Wish.

Sky

Lastly, Sky, the segment that holds one of Europe’s leading media and entertainment companies, reported 129,000 net customer additions. This was reflected in a revenue growth of $163M compared to last quarter. For the year, Sky revenues decreased 11.5% to $17.9B. When excluding the impact of currency, revenue only decreased $1.2%, highlighting the segment’s sensitivity to exchange rates.

Final Thoughts

These 4th quarter results won’t change any negative sentiment around the company, but it’s a step in the right direction. Broadband customer growth is still anemic. I believe the lack of growth in the broadband service is mostly an economic one. Comcast is well positioned to combat competition and maintain pricing power. Broadband business lost customers this quarter for the first time. Average revenue per customer, however, grew 3.5% year over year. The cable segments’s EBITDA margin was flat versus last year, but would have hit a record 45% if the higher severance costs hadn’t hit.

Peacock showed better growth this quarter with 5 million net adds, but still reported a loss, crushing the margins of the Universal segment. Universal faces more challenges, but a rebound in theme parks and the growth in Peacock is a good step in the right direction.

Free cash flows took a hit for the year, dropping to $12.6B from $17.1B. Expenditures were heavily tied to a rebound in content and higher cash taxes. Both items should show less of an impact for 2023. The company’s balance sheet is strong and has allowed the company to raise its dividend by 7.4% to $1.16 for 2023, their 15th consecutive increase. Approximately $17.7B was returned to shareholders this year through $4.7B in dividends and $13B in share buybacks.

Overall, $CMCSA still looks undervalued to me. It has the stability of a telecom stock with it’s focus on broadband, has potential growth aspects of similar streaming companies with Peacock, an impressive ability to bring in revenues at the box office, and a knack for stretching profits out of popular franchises with a growing theme park business. All of these items make them a diversified company that is hard to compete with and an attractive opportunity for long-term investors.

All information provided is available on Comcast’s Earnings page with access to the earnings releases, presentations, and transcripts. Both the Q3 and Q4 2022 earnings materials were used in this article.

Categories
Earnings Economics Market Recap Market Update Resources Stock Market

Stock Market Recap & Outlook (1/27/23) – Earnings and Core PCE

This weekly market recap is brought to you by Koyfin, a powerful analytical tool that I am proud to partner with. Their platform is entirely customizable for whatever data you want to look at including stocks, ETFs, mutual funds, currencies, economic data releases (one of my personal favorites used often for these posts), crypto, and even transcripts of company events! Click the link above to get a special offer only for Dividend Dollar readers or go give my product review a read if you’re interested!

Weekly Market Review

The January rally carried on as investors received more market-moving earnings results and data releases this week. The positive bias had the S&P 500 get back above its 200-day moving average and stay there all week.

Things got started on an upbeat note on Monday after an article by Nick Timiraos (chief economics correspondent for WSJ and Fed’s assumed preferred source for divulging information to)  highlighted the possibility of the Fed pausing its rate hikes this spring.

Monday also brought us a survey of businesses by the NABE that conveyed a lower possibility (56% vs nearly two-thirds before) of the U.S. being in a recession or entering one.

The market hit a speed bump on Tuesday with a lot of divergent stock prices for a number of NYSE-listed stocks including Morgan Stanley ($MS), AT&T ($T), Verizon ($VZ), Nike ($NKE) and more. The abnormality quickly led to volatility halts brining many of us to wonder what was going on. The official explanation turned out to be an “exchange-related issue.” The issue seemed to be resolved quickly with announcements of some trades will be declared null.

Defense-related companies Lockheed Martin ($LMT) and Raytheon Technologies ($RTX) reported positive quarterly results.

Market strength was offset by some disappointing earnings/guidance from the likes of  Verizon ($VZ), 3M ($MMM), Union Pacific ($UNP), and General Electric ($GE), along with the news that the U.S. filed an antitrust lawsuit against Google over alleged dominance in digital advertising.

Price action on Wednesday was integral to keeping the rally alive this week. Valuation concerns from Microsoft’s ($MSFT) disappointing fiscal Q3 outlook and expected growth deceleration for its Azure business fueled a broad retreat to kick off the session.

Investors also had a negative reaction initially to results and/or guidance from the likes of Dow component Boeing ($BA), Texas Instruments ($TXN), Kimberly-Clark ($KMB), and Norfolk Southern ($NSC).

Buyers showed up quickly after the S&P 500 dipped below its 200-day moving average to push the market higher. Most stocks either narrowed their losses or completely recovered and closed the session with a gain.

After the strong reversal on Wednesday, Tesla ($TSLA) reported strong quarterly results and outlook, which helped the rebound in the mega cap space, and Chevron ($CVX) announced a massive $75 billion stock repurchase program announcement.

There was also a number of positive data releases Thursday that helped support a positive bias. The Advance Q4 GDP Report increased at an annual rate of 2.9% in the fourth quarter of 2022. The second estimate will be released towards the end of February.

Weekly initial jobless claims unexpectedly decreased by 6,000 compared to the previous week. The current level of 186,000 is well below the 4-week moving average of 197,500.

December durable goods orders came in better than expected, as well. Orders increased 5.6% month over month to $286.9B versus an estimated 2.5%. This is especially a good reading compared to a -1.7% decrease from revised numbers last month. Excluding defense, the durable goods orders were up 6.3% for the month. Inventories, up for 23 consecutive months at this point, increase again by 0.7%.

The rally effort continued on Friday despite Intel ($INTC) reporting ugly results and guidance, KLA Corp. ($KLAC) issuing below-consensus guidance, Chevron ($CVX) missing on earnings estimates, and Hasbro ($HAS) issuing a Q4 profit warning.

On Friday, the PCE Price Index was released. Results were up 0.1% month-over-month while the core-PCE Price Index, which excludes food and energy, was up 0.3%, as expected. That left the year-over-year changes at 5.0% and 4.4%, respectively, versus 5.5% and 4.7% in November.

There was a sharp pullback before Friday’s close, as people took money off of the table heading into a big week of earnings next week from Alphabet ($GOOG), Apple ($AAPL), Amazon ($AMZN), and Meta. Other catalysts include the FOMC decision and the January Employment Report.

Only two S&P 500 sectors registered losses this week — utilities (-0.5%) and health care (-0.9%) — while the consumer discretionary (+6.4%), information technology (+4.1%), and communication services (+3.3%) sectors led the outperformers.

 

Dividend Dollars’ Outlook & Opinion

That’s it for the recap. Now for my opinion!

As mentioned in the last market update, I was expecting a red week this week and people took money off the table leading into an earnings heavy week. My other, less anticipated call, was that stocks could break above the downtrend line. This was the outcome to took precedent.

Stocks looked to trend higher this week and was supported by better than feared (notice the “better than feared” vs “better than expected” clarification was intentional) earnings reports and economic data! No data report this week was too good or too bad, and more items like this support the chance of an actual soft landing for the economy. We will have a better feeling for this next week after the FOMC meeting, but in the meantime bias is positive.

147 of the S&P 500 companies have released earnings so far. 50% have beat on top line expectations and 69% have beat on bottom line. The 50% beat rate, should it hold, would be the lowest top line rate since before the pandemic. Next week is a big earnings week and will give us more information on potential earnings recession. This information is tracked using MarketBeat.

 The S&P chart has turned bullish as the market pushed above the downtrend and put some space between price and the SMA 200. We have had the highest number of daily closes above the 200 day SMA in 2023 so far since last spring. The next level I see is around 4,080 that has rejected three times.

Similarly, the Nasdaq Composite index has a level a 11,617 to get over. It is also approaching the change to break above the 200 day SMA for the first time in a year. Additionally, the index is above is 11,500 resistance level. It looks bullish but the coming earnings from mega-cap tech names have the potential to move it.

Overall, stocks are riding recent bullish momentum and are being supported by technical developments. The market appears to be hopeful that the Fed will show a less aggressive stance on rates. We have seen this optimism in the past before, but we haven’t seen the Fed move into a stock friendly stance. Maybe that happens at the next meeting, maybe we get more information on potential rate hike path.

We will see what happens with the Fed next week and will have a better feel  of what’s going on in tech. With VIX as low as it is, a slurry of stocks reaching 52 week highs, decent earnings and data, the bulls appear to be in control for the near term. Potential for volatility next week is high. I think the market is moderately bullish in the first of the week then could be volatile in either direction depending on those factors.

That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.

And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week.

Regards,

Dividend Dollars

Categories
Earnings Economics Market Recap Market Update Stock Market

Stock Market Recap & Outlook (1/20/22) – PPI and Earnings Brings a Whipped Week

This weekly market recap is brought to you by Koyfin, a powerful analytical tool that I am proud to partner with. Their platform is entirely customizable for whatever data you want to look at including stocks, ETFs, mutual funds, currencies, economic data releases (one of my personal favorites used often for these posts), crypto, and even transcripts of company events! Click the link above to get a special offer only for Dividend Dollar readers or go give my product review a read if you’re interested!

Weekly Review

The 2023 rally hit a speedbump week as investors may have been looking to take some money off the table after the gains from the last two weeks. Growth and rate hike concerns, which had been put on the backburner to start the year, seemed to be back in play. 

Early on Wednesday, the market initially reacted positively to the slowdown in inflation reflected in the December Producer Price Index (PPI) of -0.5% that beat expectations by 0.4%. Any optimism that may have come from the pleasing PPI report quickly faded as weak retail sales and manufacturing data was released thereafter.

Retail sales fell 1.1% month-over-month in December compared to expectations of -0.8%. This comes off of a revised 1.0% fall in November.

Industrial production fell 0.7% month-over-month in December compared to a -0.1% expectation. This, also, comes off a revised decrease to 0.6% for November.

Following these releases, the main indices sold off on Wednesday. Selling efforts had the S&P 500 take out support at its 200-day moving average. It could be argued that data is suggesting that the Fed is likely to remain on its rate hike path in spite of a weakening economic backdrop, increasing the risk for a policy mistake to trigger a deeper setback and therefor increasing the selling efforts.

Market participants also received official commentary on the economy when the FOMC released its latest Beige Book on Wednesday afternoon. “On balance, contacts generally expected little growth in the months ahead.”

St. Louis Fed President Bullard (non-FOMC voter) added fueled the market’s concerns saying that he would prefer that the Fed stay on a more aggressive path but added that the prospects for a soft landing have improved.

Thursday’s trade, a mostly choppy and sideways day, looked a lot like Wednesday’s trade with investors reacting to more data and commentary pointing towards weakening growth and the possibility of the Fed making a policy mistake.

Building permits decreased for the third consecutive month in December to 1.330 million. One surprising positive note out of the report was that single-family starts grew 11.3% month-over-month.

Weekly initial claims were released at the same time, which decreased to 190,000, their lowest level since late September. There are no major weaknesses in the labor market that could put a stop to the Fed’s hiking path.

JPMorgan Chase CEO Jamie Dimon said in an interview Thursday morning “I think there’s a lot of underlying inflation, which won’t go away so quick,” adding that he thinks rates will top 5.0%.

As earnings season progresses, the main concern for the market is the potential that weaker growth will translate to cuts in earnings estimates and downward guidance.

Goldman Sachs ($GS) sold off sharply on Tuesday after reporting below-consensus earnings (Actual EPS 3.32 vs 5.77 Average Estimate) and revenue (Actual 10.59B vs 10.91 Average Estimate), along with increased provisions for credit losses.

So far, however, quarterly results have generally received positive reactions from investors. In contrast to Goldman Sachs, Morgan Stanley ($MS) received a positive reaction despite a Q4 earnings miss.

Another notable earnings report was Netflix ($NFLX), which surged 8.5% on Friday and led to interest in the tech/growth space. It felt like this pushed a sentiment shift and produced the rally effort on Friday.

The rebound effort to close out the week had the Nasdaq Composite recoup all of its losses while the S&P 500 and Dow Jones Industrial Average put a nice dent in their weekly losses. The S&P 500 was able to climb back above its 200-day moving average by Friday’s close.

Only three S&P 500 sectors were green this week — communication services (+3.0%), energy (+0.7%), and information technology (+0.7%) — while the industrials (-3.4%), utilities (-2.9%), and consumer staples (-2.9%) sectors had the largest losses.

The 2-yr Treasury note yield fell two basis points this week to 4.20% and the 10-yr note yield fell three basis points to 3.48%. The U.S. Dollar Index fell 0.2% to 101.99.

WTI crude oil futures rose 2.3% to $81.69/bbl and natural gas futures fell 5.3% to $3.03/mmbtu.

Separately, Treasury Secretary Yellen notified Congress via a letter that the debt ceiling has been reached, prompting the Treasury Department to begin employing extraordinary measures.

Dividend Dollars’ Outlook & Opinion

That’s it for the recap. Now for my opinion!

As I mentioned in the last market update, I predicted a red week this week but that we wouldn’t break below the 100 day SMA. I was correct, but I was not expecting a rally as strong as we got on Friday. After rejecting against the downtrend line and falling under it, we only stayed there for a day before trying again. Truly some wild price action!

My main reason for predicting this is due to my assumption that quarterly earnings this season will show slowing growth. Earnings so far has been mixed, but that slowing growth is starting to as we get deeping into this earnings season. This week 26 companies in the S&P 500 reporting earnings, 15 of them beat consensus EPS expectations. 55 companies of the 500 have reported Q4 results so far and have beaten EPS 69% of the time and revenue estimated 55% of the time.

Year over year, Q4 earnings are -4.5% lower versus a -4.1% estimated from Schwab Managing Director of Trading and Derivatives. Revenues are +7.4% higher year over year versus a 3.8% estimate.

Though there was lots to talk about, this week was a moderate week for economic data materially. The key was the inflation report in PPI which eased quite a bit, it pushed the market higher very briefly before falling down sharply. A slowdown in inflation should be great news for markets since it means the Fed’s rate hikes are having effects. So that brief downturn (and the sideways movement following the CPI) doesn’t make much sense to me, unless you believe inflation expectations were already baked in.

So I believe the movement was mainly a technical one as we rejected hard off the strong downtrend line. After pushing higher through the 50 day SMA last week (dark blue line), the market stalled at the convergence of the 200 day SMA (white line) and the downtrend. The market has failed to break above that line 5 times now.

Given how firmly that line has held, I believe a significant breakthrough above it will be needed before the beginning of the next longer-term uptrend. And next week could be the deciding week for that! Next week is the biggest week for earnings in this earnings season so far.

SPX open interest change for the past week was larger to the put site (call OI +3.0% and put OI +4.4%) as was the aggregate changes in exchange traded products (includes SPY, QQQ, DIA, etc.). This could be interpreted to be bearish. However, open interest participation as a whole is +19.2% greater than 2022 levels which may be bullish for the long term. VIX levels seem neutral in the near-term, however, the VIX IV Gap is lower is moderately bullish.

Price action through Wednesday should be mostly indicative of only earnings releases as there are no noteworthy economic reports through then and the indicators mentioned above are a bit mixed. Thursday brings us the first estimate of GDP for Q4 and durable goods orders for December, both of which can cause a market reaction. Then Friday does a one up and brings us the Core PCE reading for December and a sentiment report for January.

This PCE report is about the only item left that could affect the outcome of the next Fed rate hike, which I predict to be 0.25%, but those results would have to be extremely significant to even put a 0.50% rate hike on the table.

I’m thinking risk off continues into next week after a possible brief approach up to the downtrend line again followed by a rejection down. However, be ready flip sides if earnings beats are common next week as that may be push strong enough to break above. And if we break above its off to the races.

That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.

And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week.

Regards,

Dividend Dollars

Categories
Earnings Economics Market Recap Market Update Stock Market

Stock Market Recap & Outlook (1/13/22) – CPI Report & Q4 Earnings Kicks Off

Apologies for missing the review last week, travel makes it hard! We are back and don’t have any more plans for a little while, so writing mode is fully engaged!

Anyways, this weekly market recap is brought to you by Koyfin, a powerful analytical tool that I am proud to partner with. Their platform is entirely customizable for whatever data you want to look at including stocks, ETFs, mutual funds, currencies, economic data releases (one of my personal favorites used often for these posts), crypto, and even transcripts of company events! Click the link above to get a special offer only for Dividend Dollar readers or go give my product review a read if you’re interested!

Weekly Review

The stock market decided to keep the heat on high for the second week of 2023. We logged decent gains on the basis that the Fed won’t have to raise rates as much as feared and that the U.S. economy may see a “soft landing” after all.

The first half of the week was a snooze-fest, as most traders were waiting for Fed Chair Powell’s speech on Tuesday, the December Consumer Price Index (CPI) on Thursday, and bank earnings reports on Friday that marked the official start to the Q4 earnings reporting season.

Fed Chair Powell gave a speech titled “Central Bank Independence” Tuesday morning. Powell’s speech made no mention of any kind of policy that would harm markets, he did, however, acknowledge that, “…restoring price stability when inflation is high can require measures that are not popular in the short term as we raise rates to slow the economy.”

The latter point notwithstanding, the S&P 500 was able to close above technical resistance at its 50-day moving average.

By Thursday’s open, the market had received the much anticipated CPI report. It was in-line with the market’s hopeful expectations that it would show continued disinflation in total CPI (from 7.1% year/year to 6.5%) and core CPI (from 6.0% year/year to 5.7%).

Those were pleasing headline numbers, but it is worth noting that services inflation, which the Fed watches closely, did not improve and rose to 7.5% year/year from 7.2% in November.

That understanding did not seem to hold back the stock or bond market. After a brief dip, the price action on Thursday generally supported the view that the Fed will pause its rate hikes sooner rather than later. In fact, the fed funds futures market now prices in a 67.0% probability of the target range for the fed funds rate peaking at 4.75-5.00% in May versus 55.2% a week ago, according to the CME FedWatch Tool.

The move up in the stock market was particularly notable considering the big move leading up to the CPI report. The S&P 500 was up 3.7% for the year entering Thursday and up 4.4% from its low of 3,802 on January 5.

Ahead of the open on Friday, the market gave back some gains and featured a series of mixed quarterly earnings from Bank of America ($BAC), JPMorgan Chase ($JPM), Wells Fargo ($WFC), and Citigroup ($C). Those stocks languished out of the gate due to higher-than-expected credit loss provisions. But true to form for 2023 so far, buyers returned and bought the weakness. Before long the bank stocks were back in positive territory and so was the broader market.

The S&P 500 moved above its 200-day moving average (3,981) on the rebound trade and closed the week a whisker shy of 4,000.

Only one of the S&P 500 sectors closed with a loss this week: consumer defensive (-0.74%) — while the heavily weighted consumer cyclical (+5.94%) and information technology (+5.58%) sectors logged the biggest gains.

The 2-yr Treasury note yield fell five basis points to 4.22% and the 10-yr note yield fell six basis points to 3.51%. The U.S. Dollar Index fell 1.6% this week to 102.18.

WTI crude oil futures made strides to the upside this week rising 8.5% to $80.06/bbl. Natural gas futures fell 4.8% to $3.23/mmbtu.

Dividend Dollars’ Opinion

That’s it for the recap. Now for my opinion!

As I mentioned in the last market update, after basing around the 3,825 level for a while, the next move was a significant one. I expected that dip buyers would step in with tax loss harvesting over, earnings season approaching, and the next rate hike still a few weeks away.

I said, “they could push the market higher for next week, or even the week after that” and that’s exactly what’s happened! The January Effect is in full swing. Last week I was correct in not expecting any major move in one direction or the other.

I predicted a short-term bounce before drawbacks are caused by possible earnings disappointments, the next rate hikes, and key economic data misses. We saw this week that two of those items are losing steam.

The CPI report showed that falling inflation is confirmed, but not overly impressive.

Then, the banks kicked off earnings. Even though they beat expectations, their results were a mixed bag. But weren’t enough to push the market lower. Many more key earnings are to come, but if the banks were any indication, this earnings season may not be the “make it or break it season”.

So far, 6% of companies in the S&P 500 have reported Q4 results with an 86% beat on EPS and 57% beat on revenue. The earnings so far show 4% growth on a year-over-year basis compared to a -4.1% estimated when Q4 ended. The season is still early, so let’s not extrapolate on these results too much. Rather, lets look at the technicals!

A lot has changed since the last time we did weekly update. The bear market low is still intact and 4,292 is the target for a new bull market to start. These two items are now -10% and +8% away from the current level.

For weeks I have been pointing out the resistance at the 50-day SMA (dark blue line) and the 100-day SMA (light blue line), the market finally broke above them. It did not take long for the next level, the 200-day SMA (white line), to come into play. Our last daily candle still encompasses the line, which is not yet a clean break. This line also converges with long-term downtrend area that began at the last all time high. The prior four failures at this level suggests it won’t be easy to break.

I think we have seen the short-term bounce that I last wrote about. This resistance we are heading into is the mother-of-all-resistance! Bargain buyers came in strong in the first two weeks of 2023, but steam may run out soon if earnings season disappoints and resistance proves heavy. I wouldn’t be surprised to see profit taking, and a red week next week, but I don’t believe we will fall under the 100 SMA now turned support.

That’s it for my recap! If you would like to see how I am building my dividend portfolio using my predictions/strategy written here, you can read about my buys in my weekly portfolio update on this link.

And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week.

Regards,

Dividend Dollars

Categories
Earnings Economics Market Recap Stock Market

Stock Market Week in Review (12/9/22) – This Week’s PMI and Next Week’s CPI

This weekly market recap is brought to you by Koyfin, a powerful analytical tool that I am proud to partner with. Their platform is entirely customizable for whatever data you want to look at including stocks, ETFs, mutual funds, currencies, economic data releases (one of my personal favorites used often for these posts), crypto, and even transcripts of company events! Click the link above to get a special offer only for Dividend Dollar readers or go give my product review a read if you’re interested!

Weekly Review

It was a trend-down week for the stock market after the quick run we experienced in the end of last week. At the start of the week, the S&P 500 was up over 10% for the quarter, the Dow Jones Industrial average was up over 18%, the NASDAQ composite was up over 6%, and the Russel 2000 was up over 11%

These gains have primarily been predicated on the notion that the Fed may soften its approach, a view that was presumably aided by Fed Chair Powell’s speech last week at the Brookings Institute.

This optimism was cooled this week as concerns resurfaced that the Fed might overtighten and trigger a period of much weaker growth or even recession. The main sticking point for the stock market is that a weaker growth outlook does not bode well for 2023 earnings.

A stronger-than-expected ISM Non-Manufacturing Index for November (56.5% vs 54.4% prior and a 53.3% expectation) also supported the idea that the Fed may rise rates higher and hold them there for longer.

Going into the historically strong “Santa Rally” month, this week was a disappointing start. The S&P 500 had the worst start to a month (five consecutive losses) since 2011.

Concerns that the Fed is going to trigger a deeper economic setback have been evident in the Treasury market for some time now. An inversion of the yield curve, which deepened this week, has often been a leading indicator of a recession. The 2s10s spread is now the widest it has been since the early 1980s. The 2-yr note yield rose to 4.37% and the 10-yr note yield rose to 3.63%.

Those growth concerns started to register more noticeably for the stock market this week. All 11 S&P 500 sectors lost ground, but the slimmest losses were registered by the counter-cyclical utilities, health care, and consumer staples sectors. The sharpest losses were logged by the energy, communication services, and consumer discretionary sectors.

Collapsing oil prices were another manifestation of the market’s growth concerns. WTI crude oil futures fell 10.8% this week to $71.29/bbl despite reports that China is easing up on zero-COVID related policies.

There was some economic data that reflected a welcome moderation in wage-based inflation. The revised Q3 Productivity Report showed a softer 2.4% increase in unit labor costs than the preliminary estimate of 3.5%. Stocks did not rally on the data, though.

The role of wage based inflation in the Fed’s policy decisions was highlighted this week by an article in The Wall Street Journal from Nick Timiraos, who some believe is the Fed’s preferred journalist for providing breaking information. Mr. Timiraos suggested that wage inflation could ultimately compel the Fed in 2023 to take its benchmark rate higher than the 5.00% the market currently expects.

In other news this week, the FTC is seeking to block Microsoft’s ($MSFT) acquisition of Activision Blizzard ($ATVI).

Looking ahead to next week, the market will be focused on the November Consumer Price Index (CPI) on Tuesday after the Producer Price Index (PPI) for November came in high this Friday. Then the FOMC decision and release of updated economic projections follows on Wednesday and could very well provide a volatile market for the week.

Dividend Dollars’ Opinion

That’s it for the recap. Now for my opinion!

Last week we had a clean rejection off of the major trendline on Monday, fell to the 100-day simple moving average on Tuesday, bounced a bit on Thursday, and fell back down to the 100 SMA on Friday.

This 100-day SMA has been triple-confirmed as support (small white arrows below) and will now be tested again this next week. Resistance at the 200-day SMA proved to work again this week. SPX ran into resistance at the 200-day SMA in August and couldn’t hold over it Monday morning.

Right now, the market is in a little bit of straddle under the 200SMA and the 100SMA. Break over the 200SMA and bulls could have a hayday until the meet the trendline again for the next task. Break under the 100SMA and bears could see a quick drop to 3,815 area as a gap fill.

Last week did not show much strength for buyers, so I think breaking down or hugging onto the 100SMA is a more likely path.

Economic events next week could bring huge momentum into the market in either direction depending on how they play out.

On Monday we have the treasury budget which shouldn’t be too significant. If anything, Monday price action will be fairly uneventful as the market awaits the CPI reading on Tuesday. If the CPI comes in higher than expected, the market could drop fast. If CPI comes in better than expected, investors will still wait for the FOMC rate decision on Wednesday to truly bring in heavy buying power.

Wednesday will be the key to next week. As we get closer to the Fed Funds target rate with each rate hike, the subsequent rate hikes become more and more important as clues to tell us if the Fed over or undershot. The market expects a 50-bps hike on Wednesday, if we see higher or low expect volatility.

Then, Thursday will bring us retail data which will give input on the state of the consumer. All of these big items together will make next week one to remember (and be cautious of).

Add to that, next week is also the last week of earnings season with a couple of big tech names ($ADBE and $ORCL) reporting. Q3 earnings, from the 497 S&P 500 companies that have reported so far, have a 59% beat of the top line and 69% beat of the bottom line. This was 63% and 76% last quarter, respectively.

Big misses by the earnings next week could enhance any downward moves that are predicated by the economic events. Any surprises won’t carry much weight into what appears to be a very bearish week next week.

What’s more important is drop in earnings beats from last quarter. This is a clear sign that the Fed driven growth slow down is occurring. Expect more lack luster earnings seasons, and to greater degrees, while we stay in this high-rate environment.

Overall, next week’s performance lies greatly with the CPI and Fed rate change. Those things are tough to predict, therefore, outside of those events and looking only at technicals, I think next week is a red one. But only time will tell! Be ready either way!

I was ready for the move down last week and made some favorable adds to my portfolio. You can read about these moves in my weekly portfolio update here.

And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week.

Regards,

Dividend Dollars

Categories
Earnings Economics

Stock Market Week in Review – 10/28/22

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Weekly Review

Generally speaking, we just had another strong week for the stock market. Mega cap stocks, which have been regarded as strong for a long time, fell off hard as earnings news rolled in this week. Apple ($AAPL) was a rare exception among the tech giants, trading up after reporting quarterly results. Meta Platforms ($META), Alphabet ($GOOG), Microsoft ($MSFT), and Amazon ($AMZN) and other big tech firms all suffered large losses following their earnings report.

The struggling mega caps didn’t weigh down the broader market as you may have guessed. A pack of blue chip companies provided a welcome distraction with good earnings news and guidance. Honeywell ($HON) and Caterpillar ($CAT) were two of the biggest boosts of the mega cap stocks and led the S&P 500 industrial sector to close with the biggest weekly gain, up 6.7%. Other top performing sectors this week included utilities (+6.5%), financials (+6.2%), and real estate (+6.2%).

Meanwhile, the losses incurred by Meta Platforms and Alphabet drove the communication services sector to close down 2.9% on the week. It was the only sector to end the week with a loss, which feels like a very rare occurrence considering recent history! Another top laggard was the consumer discretionary sector (+0.7%). The remaining six sectors all closed with gains of at least 2.8%.

Small cap stocks were a specific pocket of strength this week. The Russell 2000 gained 6.0%, which was more than the 3 major averages. 

Other notable movers included Chinese stocks, and U.S. stocks with high exposure to the Chinese market, which sold off sharply in the first half of the week. This followed President Xi Jinping securing an unprecedented, third five-year term to serve as China’s leader. That wasn’t surprising, but it did come as a shock to many investors that he managed to surround himself only with loyalists who are apt to help him pursue tighter regulations and the continuation of China’s zero-Covid policy. 

JD.com ($JD) and Pinduoduo ($PDD) were losing standouts for Chinese stocks while Las Vegas Sands ($LVS) and Starbucks ($SBUX) also suffered heavy selling on concerns related to Xi’s power grab. By the end of the week, however, these names were able to reclaim some of their losses. 

There is a growing belief among market participants that the Fed will soften its approach after the November meeting, with expectations of 75 bps and then 50 bps, respectively for the next two hikes. The policy move from the Bank of Canada this week further fueled this notion. The Bank of Canada raised its key policy rate by 50 basis points versus an expected 75 basis points. The European Central Bank, however, delivered a 75 basis point increase for its key policy rates, as expected.

This week had a ton of economic data that both supported and undermined the notion that the Fed will soften its approach soon. There is still much uncertainty. Some of the data releases included:

  • September Personal Income 0.4% (consensus 0.3%); Prior was revised to 0.4% from 0.3%; September Personal Spending 0.6% (consensus 0.4%); Prior was revised to 0.6% from 0.4%;
  • September PCE Prices 0.3% (consensus 0.3%); Prior 0.3%; September PCE Prices – Core 0.5% (consensus 0.4%); Prior 0.5%
    • The takeaway from the report is that with continued income growth and a slightly hotter than expected Core PCE price growth, the Fed has an argument to maintain its aggressive with rate hikes.
  • Weekly Initial Claims 217K (consensus 220K); Prior was revised to 220K from 214K; Weekly Continuing Claims 1.438 mln; Prior was revised to 1.383 mln from 1.385 mln
    • The takeaway from the report is that the initial claims data suggest the labor market continues to hold up well, which of course is something that will continue to draw the Fed’s attention.
  • Q3 GDP-Adv. 2.6% (consensus 2.3%); Prior -0.6%; Q3 Chain Deflator-Adv. 4.1% (consensus 5.3%); Prior 9.0%
    • The takeaway from the report is that it ends a two-quarter streak of negative GDP prints. It also suggests the economy held up well in the third quarter as it started to acclimate to rising interest rates. Real final sales of domestic product, which excludes the change in private inventories, increased a solid 3.3%.
  • October Consumer Confidence 102.5 (consensus 105.5); Prior was revised to 107.8 from 108.0
    • The takeaway from the report is that consumers’ concerns about inflation picked up again in October on the back of rising gas and food prices.

Falling Treasury yields were a big support factor for the stock market. The 10-yr Treasury note yield dipped below 4.00%, but ultimately settled the week down 20 basis points at 4.01%. The 2-yr note yield fell nine basis points to 4.42%.

In other news, Rishi Sunak was elected UK Prime Minister.

This week I only had some deep red adds in $INTC and $CMCSA plus some other moves that you can read about in my weekly portfolio update here. Use that update to help you put together a shopping list of some solid dividend stocks to pick up for the long term.

And if you like updates like this, follow my Twitter or my CommonStock page where I post updates on the economic data throughout the week.

Regards,

Dividend Dollars