Weekly Preview / April 17
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Monday:
N/A
Tuesday:
China GDP Growth
Building Permits
Wednesday:
UK Inflation
Thursday:
Initial / Continuing Jobless Claims
Friday:
N/A
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Monday
Charles Schwab (SCHW)
Tuesday
Netflix (NFLX)
Bank of America (BAC)
BNY Mellon (BK)
Goldman Sachs (GS)
Interactive Brokers (IBKR)
Intuitive Surgical (ISRG)
Johnson & Johnson (JNJ)
Lockheed Martin (LMT)
United Airlines (UAL)
Wednesday
Tesla (TSLA)
Abbott Labs (ABT)
ASML (ASML)
International Business Machines (IBM)
Kinder Morgan (KMI)
Lam Research (LRCX)
Morgan Stanley (MS)
Nasdaq (NDAQ)
Thursday
American Express (AXP)
AT&T (T)
Blackstone (BX)
D.R. Horton (DHI)
Genuine Parts (GPC)
Nucor (NUE)
Philip Morris International (PM)
Seagate Technology (STX)
Taiwan Semiconductor Manufacturing (TSM)
Friday
SAP (SAP)
SLB (SLB)
The Fed is not done raising, company guidance in focus
Last week’s most important news piece did not exactly translate in price action like it used to: headline inflation was reported at 5.0%, below expectations of 5.2%. Usually, this outcome would send the market ripping higher, but that was not exactly the case this time. It was core inflation that spoiled the party (accelerating to 5.6% from 5.5% a month earlier), showing that inflation remains sticky despite the Fed’s hiking campaign.
The market did end the week higher, with all BUY signals still intact. No major levels have been breached, however, leaving SPY in an overbought condition.
SPY Analysis
Sigma Score extension at overbought levels, with SPY pushing above deviations from its moving averages.
The rally on Thursday, following soft PPI data was somewhat countered by Friday’s decline due to weak retail sales. The MACD signal is still clearly trending higher, with plenty of space to accommodate a further advance.
There is no doubt that the market action remains more bullish than bearish, despite all the volatility and headlines. Bears would need a close below $402 to really put any significant downside pressure. That has not yet materialized, despite the Fed’s projection of a “mild recession” in the back half of the year, as revealed in Wednesday’s FOMC minutes (it’s practically unheard of for the Fed to project a recession and keep raising rates):
“The staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.”
Traders are betting that the Central Bank will raise rates by 25bps at the next meeting in approximately 2 weeks, pricing in a 88.2% probability of a further hike. The first expected rate cut has been pushed back to September.
Earnings Season Underway
Last week we noted the exceptionally low bar companies are expected to beat this quarter:
During the first quarter, analysts lowered EPS estimates for the quarter by a larger margin than average. The Q1 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q1 for all the companies in the index) decreased by 6.3% (to $50.75 from $54.13) from December 31 to March 30. - FactSet
The fact that companies will “beat” expectations will not come as a surprise this quarter. Management guidance will be key in setting the tone of the market’s reaction after each call. We are looking for comments on revenue growth and profit margins, as those are at risk of a meaningful contraction.
Putting Net Margins into perspective reveals that they have contracted below the recent trend, but there is still a way to go until reaching the decade’s average.
Takeaway
On the equity side of the portfolio we continue to monitor levels and signals. It’s “so far so good” for the moment, with the market not doing anything “wrong” and plenty of room for further upside still left in the current advance. If anything materially changes, we shall change tack accordingly.
It’s the treasury market that’s failed an important support level last week. TLT has closed below the S2 $105.66 support and triggered a MACD SELL crossover. While the break may look like a decent entry point for longs, we need this position to recover rather soon, along with the BUY signal. We’ll re-evaluate the position after Tuesday’s strategy rebalance.
