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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

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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