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Dow Theory & Managing Risk-Reward in Stocks

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What’s in Today’s Report:

  • Dow Theory & Managing Risk-Reward in Stocks
  • What Is the TIPS Market Telling Us?

Money flows are decidedly risk off this morning with stock futures lower while Treasury yields fall sharply amid continued worries about the global banking system.

UBS shares are down more than 6% after Jefferies downgraded the bank following its acquisition of Credit Suisse while the bank is also under investigation regarding its bankers role in helping Russian oligarchs avoid sanctions following the Russian invasion of Ukraine.

Economically, measure of Core CPI in Japan came in hot at 3.5% vs. (E) 3.4% y/y while the European PMI Composite Flash was strong, jumping to 54.1 vs. (E) 52.0. Both data points have hawkish implication for respective central bank policy in the near term but banking fears are preventing a move higher in yields.

Looking into today’s session, there are two economic reports to watch: Durable Goods Orders (E: 1.5%) and the PMI Composite Flash (E: 49.3) while there is one Fed speaker: Bullard (9:30 a.m. ET). Markets want to see signs of slowing growth, but not a collapse, in the data, and a less hawkish tone from Bullard.

Bottom line, banks have reemerged as the primary influence on markets in the back half of the week and if the weakness in the sector continues today, stocks will have a very hard time extending yesterday’s modest bounce. Conversely if banks are able to stabilize, we could see the S&P 500 move back towards the 4,000 mark.

Why Have RSP and SPY Diverged?

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What’s in Today’s Report:

  • Why Have RSP and SPY Diverged?

Futures are little changed following a mostly quiet night as markets digest the actions by large banks to shore up FRC.

Positively, banks borrowed $165 billion from the Fed via the discount window and the new BTFP this week and that importantly shows banks are using the Fed’s programs to shore up liquidity.

On inflation, core EU HICP met expectations at 5.6% y/y, although that’s an increase from the previous 5.3% gain.

Today focus will remain on any banking headlines and economic data, but as long as there are no surprises from either (meaning KRE is stable) then stocks can digest this week’s volatility and hold yesterday’s gains.

Economically, notable reports today include Industrial Production (E: 0.4%), Consumer Sentiment (E: 67.0) and Leading Indicators (E: -0.2%), but again it’ll take a substantial surprise from them to move markets.

Has the Outlook for China Finally Turned Positive?

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What’s in Today’s Report:

  • Has the Outlook for China Finally Turned Positive?
  • Chart – FXI (China) vs. S&P 500 Divergence
  • Empire State Manufacturing Survey Takeaways

Stock futures were volatile o/n as the BOJ doubled down on their bond-buying program, sending the yen lower by nearly 3% but markets have stabilized as focus turns to a busy morning of economic data and more earnings in the U.S.

Economically, Eurozone HICP met estimates at 9.2% y/y and the Narrow Core also met estimates at 5.2% y/y.

Looking into today’s session, focus will be on earnings in the pre-market with SCHW ($1.10) and PNC ($3.95) due to release earnings ahead of the bell while DFS ($3.58) will report after the close.

There is also a slew of economic data due out this morning including: Retail Sales (E: -0.8%), PPI (E: -0.1%, 6.8%), Industrial Production (E: -0.1%), and the Housing Market Index (E: 31). The market wants to see data continue to point to slowing, but not collapsing growth (as we saw with the Empire report yesterday) and a continued deceleration in inflation metrics to maintain bets for a soft landing.

As far as other catalysts go, there are two Fed speakers to watch this morning: Bostic (9:00 a.m. ET) and Bullard (9:30 a.m. ET) and then a 20-Yr Treasury Bond auction at 1:00 p.m. ET.

Bottom line, much of the recent rally has been based on hopes for a soft landing and less hawkish pivot by the Fed and anything that contradicts those two possibilities would likely trigger a wave of volatility today.

Market Multiple Levels: S&P 500 Chart

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What’s in Today’s Report:

  • Market Multiple Levels: S&P 500 Chart

Stock futures are trading with cautious gains this morning as inflation data overseas met expectations as traders look ahead to today’s all-important CPI report in the U.S.

Economically, German and French CPI headlines both met estimates in June, holding steady from May levels which is offering hope that global inflation pressures have peaked while several growth metrics in the EU topped estimates.

Today, the focus will almost entirely be on the June CPI report with the headline expected to rise 1.1% m/m and 8.8% y/y from 8.6% in May while core CPI is expected to moderate with a rise of 0.5% m/m and 5.8% y/y from 6.0% previously.

There are no Fed officials scheduled to speak today but the Treasury will hold a 30-Yr Bond auction at 1:00 p.m. ET that could move markets in the afternoon.

Bottom line, markets are at a tipping point here and today’s CPI report could cause a breakout if the data suggests we are beyond peak inflation and peak Fed hawkishness, while conversely, we could see sharp declines if the data comes in hot again

When Could the Selling Stop?

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What’s in Today’s Report:

  • When Could the Selling Stop?
  • Weekly Economic Cheat Sheet

Stock futures are solidly higher this morning, rebounding from last week’s more than 5% selloff while global markets stabilized following a mostly quiet weekend.

President Biden and St. Louis Fed President, Jim Bullard, both downplayed the threat of a severe recession on Monday which is helping drive risk-on money flows this morning while there were no market-moving economic reports overnight.

From a catalyst standpoint, there is just one economic report today: Existing Home Sales (E: 5.40M) and two Fed officials are scheduled to speak: Mester (12:00 p.m. ET) and Barkin (3:30 p.m. ET).

Bottom line, for this morning’s relief rally to continue today the market will need to see stable price action in bond markets, economic data meet or beat expectations and Fed officials to maintain an optimistic tone as that could see the S&P 500 test near term resistance between 3,780 and 3,840.

Market Multiple Levels: S&P 500 Chart

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What’s in Today’s Report:

  • Market Multiple Levels Chart: S&P 500

U.S. futures are tracking European shares lower this morning amid hawkish money flows ahead of tomorrow’s ECB meeting announcement.

Economically, Eurozone Q1 GDP was revised up to 0.6% vs. (E) 0.3%, bolstering bets that the ECB could raise rates by 50 bp in July which is driving bond yields higher and pressuring equities this morning.

There are no notable economic reports and no Fed officials are scheduled to speak today but there is a 10-Yr Treasury Note auction at 1:00 p.m. ET.

Bottom line, investors remain focused on high inflation and uncertain economic growth right now and if we see rates begin to meaningfully move higher again today, especially in the wake of the 10-year auction, then the S&P 500 test and potentially break down through key near term support at 4,080 today.

Tom Essaye Quoted in Forbes on April 26, 2022

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Bear Market Looms As ‘Relentless Selling’ Batters Stocks—Not Even Lower Inflation Can Help Now

While major stock market indexes plunged as much as 2% Tuesday, analyst Tom Essaye of the Sevens Report warned clients he remains “cautious” on the S&P 500 as stocks struggle to stabilize, pointing to “relentless selling” on Friday as a potential predecessor to a sharp downturn of as much as 5%. Click here to read the full article.

Omicron Update: The Two Key Questions We Need Answered

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What’s in Today’s Report:

  • Omicron Update:  The Two Key Questions We Need Answered
  • Weekly Market Preview:  How Big A Risk is the New Variant?
  • Weekly Economic Cheat Sheet:  A Very Busy Economic Week:  Jobs Report Friday, Final PMIs.

Futures are solidly higher as markets bounce following Friday’s COVID related steep declines.

The new COVID variant, named Omicron, was identified in numerous countries over the weekend, and governments enacted more travel bans to try and stop the spread.  But, beyond those measures, the market didn’t learn anything “new” about the variant over the weekend.

Regarding today’s bounce in futures, Friday’s steep declines were due in part to light liquidity and attendance, so we’re seeing that portion of the declines reversed this morning now that people are back to work.

Today we get the Pending Home Sales Index (E: 0.7%) and we have one Fed speaker (Williams at 3:00 p.m. ET) but the focus will be on COVID headlines.  It’s safe to assume the variant is already in the U.S. but a headline confirming that might create a short-term headwind.  Beyond the short term, however, the major unknown is whether the variant can evade the current vaccines, and that will determine whether this COVID pullback in stocks is brief, or something more extended.

Two Potential Sources of Volatility Into Year-End

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What’s in Today’s Report:

  • Two Potential Sources of Volatility Into Year-End
  • Oil Update and EIA Analysis

Futures are bouncing from yesterday’s declines thanks to solid earnings and following an otherwise quiet night of news.

Widely held chipmaker Nvidia (NVDA) posted strong earnings after the close and that’s helping to ease some anxiety around chip supplies.

There were no notable economic reports overnight.

Today there are two notable economic reports, Jobless Claims (E: 261K) and the Philadelphia Fed Manufacturing Index (E: 21.4), and given every major economic report this week has been very strong, markets would like to see a solid number but nothing so strong that adds to the narrative that tapering may need to be accelerated.

Regarding the Fed, we have multiple speakers today including: Bostic (7:30 a.m. ET), Williams (9:30 a.m. ET), Evans (2:00 p.m. ET), and Daly (3:30 p.m. ET) although none of them should move markets.

Finally, as we explain in the issue, COVID and the Debt Ceiling are starting to become headwinds on stocks, and the headlines that imply further rising global case counts or lack of progress on the Debt Ceiling could be mild headwinds on stocks.

As Tech Goes, So Goes the SPY (And Tech Is Facing Headwinds)

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What’s in Today’s Report:

  • As Tech Goes, So Goes the SPY (And Tech Is Facing Headwinds)

Futures are enjoying a modest bounce following yesterdays’ declines after a generally quiet night of news.

Economic data was solid overnight as both EU (56.2 vs. (E) 56.1) and UK (54.9 vs. (E) 54.1) September Composite PMIs beat estimates, reflecting stability in the global economic recovery.

On inflation, Euro Zone PPI rose 1.1% vs. (E) 1.3%, implying inflation pressures could be starting to ease.

Today focus will be on economic data and specifically the ISM Services PMI (E: 60.0).  Markets will want to see stability in this number to further confirm the COVID spike in July/August didn’t have a lasting impact on the recovery.  We also get two Fed speakers today, Barkin (10:30 a.m. ET) and Quarles (1:15 p.m. ET), and markets will continue to be on the lookout for any signs of a compromise on the reconciliation/debt ceiling bill (although nothing material is expected today).