Market Journal – Issue 24

A Strong Week To Kick Off Earnings

Dividend Dollars’s Outlook & Opinion

Last week, I gave a neutral outlook saying to watch my red channel in the chart below for a breakout in either direction. We got the breakout to the upside this week and closed comfortably above it at 4,505 for SPX.

The strength was evident this week. Not only did we have better than expected CPI, PPI, sentiment, and job claims readings, but earnings season also kicked off with a bang! About 6% of the S&P 500 companies have reported, with 82% beating their EPS estimates and 64% beating their revenue estimates.

The two key inflation reports, CPI and PPI, both showed significant easing, though they are still above the 2% target. The CPI fell to +3% year-over-year compared to the +4% that was seen in May. This beat the 3.1% expectation. The PPI figure came in at just +0.1%, significantly lower than the +1.1% reading in the prior month. Both have been falling steadily for 12 consecutive months.

The lower inflation numbers triggered another rally in stocks this week. The SPC closed a new high for this bull market on Wednesday at 4,510. Based on this new high, the -10% correction line moves up to 4,059 and the -20% bear market line moves up to 3,608.

Again, SPX is reaching a technically overbought area based on the RSI, however it’s difficult to find a future catalyst that could cause any modest pullback. The bulls seem fully in control again. Price action got us to barely touch the 0.786 fib level at 4,528. This level may serve as a potential spot of resistance, but if it’s able to be cleared, it seems likely that there could be a path to reaching all-time highs again.

There were more sentiment indicator upgrades than downgrades this week. SPX open interest change, SPX OI put call ratio, VIX VPCR, and VIX levels in general improved while equity only equity OI change was slightly worse. With inflation coming down faster than expected, early earnings doing well, high consumer optimism, and relatively mild economics schedule for next week, my outlook for next week is fairly bullish. There may be hesitancy in price action as we get closer to the next Fed meeting, but aside from that, I am confident in my thesis.

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Weekly Market Review

Summary:

The market had a very good week with undeniable bias. CPI, PPI, Import-Index, and employment reports all corroborated the growing notion that the economy will avoid a hard landing.

The CPI report was the headliner for the week with a smaller than expected 0.2% increase. Treasury yields rushed down, and stock prices jumped higher. The 2-year note yield fell 21 basis points to 4.73% this week while the 10-year note fell 23 basis points to 3.82%.

The broader market overcame a weak start for the mega caps on Monday, which aligned with Nasdaq’s announcement that there will be a special rebalancing of the Nasdaq 100 on 7/24/23 to address overconcentration. This will be the first rebalancing since 2011. Mega caps picked up pace throughout the week and outperformed.

All 11 of the S&P 500 sectors made gains this week that ranged from 3.8% for communications (YAY $XLC) to 0.8% for energy. Q2 earnings season went underway and didn’t slow progress in any of the sectors. Delta Airlines, PepsiCo, JPMorgan Chase, Wells Fargo, Citigroup, and UnitedHealth all beat expectations.

Speaking of expectation, the fed funds futures market seemed to be friendly with the CPI report on Wednesday and seemed to cap out prospects of any additional rate hikes after the July meeting. There is a 93% chance of a 25 basis point hike in July, yet the odds of a second hike in the following meetings through the end of the year sit at11%, 53%, and 19.2% according to the CME FedWatch Tool. Several members of the Fed aren’t ready to shut out the prospects of future hikes, regardless of the odds show a one and done approach moving forward.

That perspective had some tangible effects on the USD and other central banks. The ECB and BOE are expected to have further to go with their rate hike efforts. The USD index dropped by 2.4%. This move and the soft-landing view led to a jump in commodity prices this week including oil and copper (let’s go $COPX) which rose despite weaker data out of China that sparked calls for policy stimulus.

Monday:

We had a strong start to the week. Even though $SPY was only up 0.2%, the broad-based $RSP was up 0.9% and gainers beat losers 2 to 1. Mega caps kept the major indices down as they were slow to start with $AAPL, $GOOG, and $MSFT registering losses.

Their losses followed the news that there will be special rebalance of the Nasdaq 100 ($QQQ) due to concerns of over concentration. This will occur before the open on July 24th.

Even with lagging mega caps, the broader market did well. Small caps, banks, energy, and chips all outperformed.

Economic data for the day was only the May Wholesale Inventories Report. It came in at 0.0% compared to an expected -0.1%. Inventory to sales ratios grew to 1.41 from 1.30.

Tuesday:

The market had another good day. Again, mega caps lagged, the broader market performed. However, by mid-day mega caps started to gain momentum and contribute.

There was a strong positive bias in the price action as gainers beat losses 3 to 1 at NYSE and 2 to 1 at Nasdaq. Volume was a little low, but that didn’t stop $SPY from gaining 0.7%.

Economic data for the day was only the NFIB Small Business Optimism Survey. Results rose to 91, up from 89.4. It was the highest level in 7 months and the biggest monthly gain since August 2022. Sales expectations were higher though inflation and labor shortages continue to be an issue for small businesses.

Wednesday:

Today, the market reacted positively to the CPI reading, leading $SPY and $QQQ to hit new 52-week highs. They pulled back before the close, but still finished with decent gains.

Treasury yields took a plunge in response to the data, acting as another support factor for the market. Expectations for further rate hikes after the July meeting declined in response to the report.

Wednesday’s rally was broad, but mega caps really shined as they had been lagging in the prior few sessions.

The Consumer Price Index for June was up 0.2% MoM, beating the expected 0.3%. Shelter accounted for 70% of the increase. Core CPI was also up 0.2% MoM, again beating the 0.3% expectation. This was the smallest MoM change since August 2021. On a YoY basis, CPI slowed to 3% from 4% in May, marking the smallest increase since March 2021. Core CPI closed to 4.7% from 5.3%. There is clear evidence of promising disinflation for both total and core CPI that should temper worries about the Fed raising rates beyond its July meeting. Even a hike in July seems to be unnecessary in my opinion.

Thursday:

Thursday was another strong day as the S&P closed above 4,500 and Nasdaq Composite settled near its high of the day. Mega caps boosted the indices, but many stocks participated in the rally. The positive was driven by the belief that the economy can pull off a soft landing and that the Fed is nearing the end of rate hikes.

That belief was supported by the better-than-expected PPI report after yesterday’s CPI report. Positive sentiment was also helped by some Q2 earnings surprises and guidance from $DAL, $PEP, and the $XOM acquisition news. Bank stocks also participated in the rally in anticipation of tomorrow’s earning reports from $JPM, $WFC, and $C, pushing banking ETFs to outperform on the day.

Economic data included the Producer Price Index and initial jobless claims.

The PPI for final demand increased 0.1% MoM, lower than the expected 0.2%. Core PPI also increased 0.1% MoM, beating the expected 0.2%. On a YoY basis, PPI was up just 0.1% while core PPI was up 2.4%. Wholesale inflation pressures are clearly moderating, which should be a boon for profit margins for companies able to retain pricing power. Strong progress in PPI is usually an indicator of further progress on CPI, as the former leads into the latter.

Initial jobless claims for the week fell by 12k to 237k, beating the expected 247k. Continuing claims grew by 11k to 1.729M. Initial jobless claims continue to come in at well below any levels seen in prior recessions. This reflects a continue strong state for the labor market and is supportive of consumer spending growth and a soft landing.

Friday:

There was good earnings news for the day from $UNH, $V, $JPM, and $WFC. Good economic news also rolled in from consumer sentiment and import/export prices. Also, positive rating actions for $MSFT and $NVDA occurred.

Despite all the positivity, the market had a meh day. Profit taking seemed to be occurring at the end of the big run this week. 8 of the 11 S&P 500 sectors closed with a loss. Decliners beat advancers by 3 to 1 on the NYSE and 2-to-1 on the Nasdaq.

Economic data for the day included the July University of Michigan Consumer Sentiment Index and the Import Export Price Report.

The consumer sentiment index came in at 72.6, strongly beating the expected 65.6 and the prior 64.4. This time last year, the index sat at 51.5, nearly a 40% improvement. The takeaway here is that sentiment about the economy has improved with the slowdown of inflation and the ongoing stability in the workforce.

For June, import prices fell 0.2% in June and prices were down 6.1% YoY, the largest annual decrease since May 2020. Excluding fuel, import prices were down 0.4% for the month and 1.4% YoY. Export prices dropped 0.9% for the month and 12.0% YoY, the biggest annual decline EVER recorded.

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.

Regards,

Dividend Dollars

Sources:

https://www.cnn.com/2023/07/14/business/premarket-stocks-trading-nasdaq-100-rebalance/index.html
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
https://www.census.gov/wholesale/pdf/mwts/currentwhl.pdf
https://strgnfibcom.blob.core.windows.net/nfibcom/SBET-June-2023.pdf
https://www.bls.gov/news.release/pdf/cpi.pdf
https://www.bls.gov/news.release/pdf/ppi.pdf
https://www.dol.gov/ui/data.pdf#:~:text=An%20initial%20claim%20is%20a%20claim%20filed%20by,activity%20counts%20including%20the%20count%20of%20initial%20claims
https://www.bls.gov/news.release/pdf/ximpim.pdf
http://www.sca.isr.umich.edu/

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