Stock Market Overview for the week of July 18, 2022
This past week we got new red-hot CPI numbers, more drama in the Elon Musk and Twitter saga, and the start of earnings season.
Let’s look at the technical picture in the main indicators.
A downtrend pattern in the S&P 500 is now in danger, as a minor lower high (red arrow) was formed. At the time of writing late Thursday, it is retesting that high low. A break through a higher low makes it very likely that the previous swing low (black arrow) will be tested, if not broken outright, to continue the strong downtrend.
With fears of a recession, the possibility of a 100bps hike by the Fed this month, and a record-high CPI print this week, the news is very negative, though the market is still having trouble making new lows. It looks like a lot of supply is filling up in a small multi-week range.
Energy is one of the most critical parts of the economy right now. It is an important driver of inflation and significantly hampers economic growth and consumer disposable income. In the past month, energy commodities like natural gas and crude oil have drawn blood with their equity counterparts.
This week was interesting for the fact that natural gas futures rose 10% while crude oil futures fell 8%:
CPI for June was 9.1%. Since May’s tepid inflation print, tons of traders and analysts have been calling for peak inflation and expecting June’s numbers to come in meaningfully lower. Some of these points are worth noting.
This ‘peak inflation’ narrative has dominated the markets for a few months now, and to take some cues from market prices, it makes perfect sense.
The 10-year inflation breakeven rate, which is the market’s estimate of future inflation, has been falling since April:
Additionally, raw commodities, which are the primary driver of inflation, have also bled over the past month, as you can see below in the Bloomberg Commodity Index:
With energy commodities being such a key component of inflation, a look at the recent price action of crude oil tells you that ‘peak inflation’ may be a point of failure:
The market reaction to this inflationary impression was also telling. While S&P futures initially sold off quickly, there was relatively little follow-through. Instead, the S&P repeatedly tried and failed to rally before testing the lows and bouncing back to the upside.
Given that the market was expecting a downside surprise, you would expect a more dramatic reaction. Part of that could be all the preparation the White House did to push the report. The market was ready for a hot report and had plenty of time to sink into it.
Federal Reserve Watch
Jerome Powell will speak at the next Fed meeting on July 27. Hot CPI pressures and unexpectedly A strong jobs report last week Pressure the Fed to raise rates faster.
According to CME FedWatch, at the start of the week, most traders (66%) expected the Fed to hike 100 basis points. However, as several regional Fed presidents came out in support of a 75 basis point hike, the market has recovered slightly, with current indications placing odds at 57% for a 100bp hike and 42% for 75bps.
Last week’s news
- For the first time since 2002, the euro and the US dollar have reached 1:1 parity. Europe is a great time for a trip if you are planning it.
- Elon Musk and the Twitter drama continues. Twitter Sued Elon Musk in Delaware court, and the lawsuit is pretty hilarious. Activist short seller Hindenburg took a significantly long position in $TWTR, sending the stock higher.
- Cannabis stocks like Tilray (TLRY) are jumping on news that Senate Democrats are introducing a federal marijuana legalization bill next week. The cannabis sector loves these kinds of speculative catalysts, so be on the lookout for a rally.
- Activist hedge fund Elliott Management took a >9% stake in Pinterest ( PINS ), sending the stock up 25%.
- The head of AI and Autopilot at Tesla has left the company.
The next catalyst
- Senate Democrats are introducing a federal marijuana legalization bill next week. Stocks in play:
- Earnings season is in full swing
Upcoming earnings reports
Earnings season is upon us, and several large caps are reporting this week, heavy on financials and telecoms.
Most earnings seasons are marked by easy-to-beat analyst forecasts, which means companies generally exceed expectations as long as operations run as expected.
But this earnings season has been marked by a series of headwinds, including high inflation, rising interest rates, low consumer confidence and supply chain disruptions. Some of these factors have been present in past earnings seasons, but this one looks different.
The market is at a critical turning point from a fundamental, sentiment and technical point of view, and bearish reports likely mean significant downside for the S&P 500 from here.
Forecasts for the second quarter have barely risen to reflect the changing reality of the economy, as earnings are expected to grow at a rate of 5.7%. This is a factor that many traders have pointed out recently, as the internal conditions of these companies are as bad as the stock market and some economic indicators suggest, we have a bad earnings season.
This week of reports is too big to highlight every company’s reporting, we’re only posting the most notable reports.
- Bank of America (BAC)
- Goldman Sachs (GS)
- Charles Schwab (SCHW)
- Synchrony Financial (SYF)
- Johnson & Johnson (JNJ)
- Lockheed Martin (LMT)
- Netflix (NFLX)
- Novartis (NVS)
- Manpower Group (MAN)
- Halliburton (HAL)
- JB Hunt Transport Service (JBHT)
- Ally Financial (ALLY)
- Hasbro (HAS)
- Interactive Brokers (IBKR)
- Silvergate Capital (SI)
- Tesla (TSLA)
- Abbott (ABT)
- United Airlines (UAL)
- Baker Hughes (BKR)
- ASML (ASML)
- Steel Dynamics (STLD)
- Find Financial Services (DFS)
- AT&T (T)
- Domino’s Pizza (DPZ)
- Philip Morris (PM)
- Dow Chemical (DOW)
- Nucor (NUE)
- Tourists (TRV)
- SAP (SAP)
- Capital One (COF)
- American Airlines (AAL)
- DR HORTON (DHI)
- Danaher (DHR)
- Autonation (AN)
- Freeport-McMoRan (FCX)
- Union Pacific (UNP)
- Blackstone (BX)
- Verizon (VZ)
- HCA Healthcare (HCA)
- American Express (AXP)
- Schlumberger (SLB)
- Cleveland Cliffs (CLF)
- Nextera Energy Partners (NEE)
Upcoming economic data
Last week we got some notable surprises in the form of a strong jobs report and a red-hot CPI print.
This week’s data release is about housing. By the end, we should have a pretty good picture of where the murky housing market stands.
Home sellers are sharply reducing their asking prices and overall housing volume has decreased. Redfin:
“A record-high share of home sellers are cutting their prices after this month’s historic mortgage-rate hike hit homebuyer activity. But there are early signs that demand is taking off… Pending sales continued to decline, their biggest drop since May 2020“
Rising mortgage rates, low consumer confidence and low consumer savings continue to weigh on demand, but one potential saving grace for housing is the supply chain crisis. According to some homebuilding executives, homebuilders cannot build enough inventory to support demand.
- Building permit
- Housing begins
- Initial and continuing unemployment claims
- S&P Manufacturing and Services PMI