Market Journal - Issue 11
A Slow Start To Q2
Welcome to the eleventh edition of the 3X Trading Market Recap & Outlook Report. The 3X Trading Team reviews economic data releases, notable earnings, and other remarkable news and uses that information in alignment with technical analysis to establish opinions on the market’s outlook. That information is consolidated and compiled into this report every week for publication on the Dividend Dollars website and 3X Trading. The members of the 3X Trading Team are not traders nor investment analysts by practice or profession. They are learning within this server just like many of our members. Therefore, nothing should be taken as financial advice. Rather, this report is just another resource within our toolbox and should be used to provide additional information and opinions on the market and its happenings. Enjoy reading!
Dividend Dollars’ Outlook & Opinion
Be careful what you wish for was the theme of this week. The Fed has been telling us for months that labor market deterioration would be needed in order to slow inflation. This is a risky ask as consumer spending accounts for about 2/3s of the US economy, job losses significant enough to dent inflation are likely to lead to a recession.
This week was about as choppy and directionless as we can get. This action tells me that the market is at an inflection point, one where we must decide if bad news is good news (because it might mean the end of the rate hike) or if bad news is bad news (because it might mean a recission is unavoidable0. It may be a while before we have the answer to that question.
Last week, our indicators and thoughts pointed to moderate bullishness with high volatility. At the close of Thursday, the $VIX was $0.42 lower for the week at $18.40. Volatility ended lower, but it was not without it spikes close to $20.00 four times throughout the week. SPX ended slightly lower for the week at 4,105 compared the close last week at 4,109. I’d say the jury is out on whether the forecast was on target or not (I’m thinking not)!
Technically, because of the lack of moves, things haven’t changed much for SPX. It is still about the long term downtrend and all of the significant SMAs. We did break above and then back under the significant 4,100 level.
Remember last week when I said, “Historically, markets tend to switch directions at the beginning of a new quarter and April tends to be a relatively bullish month”? Well the first half of that was true! This week was a definitely a switch away from the strong upward direction we had to end March.
Various indicators have worsened through the course of this week. SPX open interest put call ratios and the volume put call ratio of the major indexes worsened to moderately bearish levels.
SPX volume put call ratio worsened to neutral levels from moderately bullish last week. Meanwhile, VIX open interest changed to moderately bullish. Overall, there was not much shifting in the indicators, but they’re just enough to lean a bit more bearish next week compared to this week.
Additionally, the reaction to the march employment report will be felt on Monday, the CPI and PPI follow midweek, and the unofficial start of Q1 earnings season from several banks is certain to bring volatility next week.
Next week appears to be learning bearish via the indicators and technical resistance around the 4,100. Positive data and earnings reports may flip that script.
Weekly Market Review
Summary:
The stock market ended the week slightly down. The Dow Jones Industrial Average squeezed out a slim gain, thanks to money flowing into blue chips, while the major indices made losses due to renewed growth concerns.
There was not a ton of conviction to start the week after OPEC+ surprised markets with a 1.16 million barrels per day production cut announcement. This sent oil prices on a tear, rising 6.4% this week to $80.70/bbl.
Then, growth concerns carried the price action for the remainder of the week. Lingering slowdown concerns were stoked by a slate of weak economic data and a contention by JPMorgan Chase ($JPM) CEO Jamie Dimon in his annual shareholder letter that the regional banking crisis is not over yet and have unseen repercussions for a time.
Many of the economic releases this week came in weaker than expected, adding to the uncertainty surrounding this week.
With an increasing concern of slower growth, investors anticpate further cuts to earnings estimates. Cyclical sectors were the biggest losers this week while defensive-oriented sectors enjoyed nice gains.
The industrials, consumer discretionary , and materials sectors were the top losers while the utilities and health care sectors rose to the top of the leaderboard. The energy sector was another top performer this week despite its economically-sensitive status thanks to the OPEC+ announcement.
Monday:
The stock market kicked off this holiday-shortened week with mixed price action. There was not a lot of conviction in the market except for oil-related trades following the OPEX+ announcement.
The main indices traded in narrow ranges Monday, with the Dow Jones Industrial Average leading throughout the session. The S&P 500 climbed to 4,127 in early action but gave back those gains and then some as it slid to 4,098 before staging an afternoon push that left it close to its high for the day at the close. Nasdaq slumped throughout the day but ended above its lows as mega cap stocks pared larger losses in the late afternoon run.
Tesla ($TSLA) was a notable laggard from the mega cap space, falling more than 6.0% on Monday after reporting Q1 production and delivery numbers.
Economic data for Monday had the Manufacturing PMI, ISM manufacturing index reading, and Construction Spending update.
The March IHS Markit Manufacturing PMI fell to 49.2 from 49.3.
The March ISM Manufacturing Index fell to 46.3% (Briefing.com consensus 47.5%) from 47.7% in February, the consensus was 47.5%. This is the lowest reading since May 2020.
The line between expansion and contraction is 50.0%, so the sub-50.0% reading for March reflects a general contraction in manufacturing activity for the 5th straight month. The ISM says this level corresponds to a change of -0.9% in real GDP on an annualized basis based on the past relationship of the PMI and the overall economy.
Total construction spending declined 0.1% MoM in February, compared to flat expectations. Total private construction was flat MoM while total public construction fell 0.2% MoM. On a YoY basis, total construction spending was up 5.2%.
New single-family construction remained a weak spot, as higher interest rates and increased building costs make financing expensive at a time when concerns about a future economic slowdown/contraction are taking root.
Tuesday:
The Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 hit modest losses on Tuesday as the resistance to Monday’s selling efforts dissipated.
Initially, the main indices all moved higher, but gains quickly faded and the market traded near its worst levels for most of the session. The S&P 500 was able to close right on top of the 4,100 level thanks to a last minute move higher.
Banks stocks came under some added selling pressure, undercut by economic slowdown concerns that followed the day’s weaker than expected economic data and a stark warning by JPMorgan Chase (JPM) CEO Jamie Dimon’s annual letter.
In addition to the financial sector, other cyclical sectors felt the pinch of slowdown concerns and underperformed Tuesday, while defensive areas received modest gains.
Still, the S&P 500 held up okay Tuesday despite being overbought on a short-term basis following big gains in Q1. Losses would have been more pronounced if not for gains in a few heavily-weighted stocks.
Additionally, Finland has joined NATO as the 31st member through a swift addition that began in response to Russia’s invasion of Ukraine.
“What we see is that President Putin went to war against Ukraine with a declared aim to get less NATO,” Jens Stoltenberg, NATO Chief, told reporters. “He’s getting the exact opposite.” Following the announcement, Russia claims it will bolster their border defenses.
As for economic data, we received the Factory orders report and the JOLTS job openings report.
Factory orders fell 0.7% MoM in February, compared to an expected 0.5% fall. This follows a downwardly revised 2.1% decline in January. Shipments of manufactured goods fell 0.5% MoM after increasing 0.3% in January.
This report is backward looking, yet it fits the understanding that manufacturing conditions have weakened, evidenced by the more current March ISM Manufacturing Index which was lackluster on Monday.
The JOLTS report showed that job openings totaled 9.931 million in February following a downwardly revised count of 10.563 million in January.This was the first reading below 10 million since May 2021.
Wednesday:
The stock market had a weak showing Wednesday. Blue chip names continued to get bought while more economically-sensitive sectors logged decent losses following another batch of weak economic data Wednesday morning.
the ADP Employment Change for March was weaker than expected, the February trade deficit widened more than, and the March ISM Non-Manufacturing Index was weaker than expected.
Buying interest for Treasuries picked up following the data releases. Stocks didn't respond positively to the drop in market rates due to a sense that a weaker economy will translate into further cuts to earnings estimates.
The main indices spent most of the morning in a slow grind lower, but climbed above their worst levels of the day by close. Nasdaq fared the worse while the Dow Jones Industrial Average squeezed out a slim gain, benefitting from blue chip favoritism, with big wins by $UNH and $JNJ for the day.
Shares of Johnson & Johnson moved on news that its subsidiary LTL Management re-filed for voluntary Chapter 11 bankruptcy protection to resolve claims from cosmetic talc litigation and will pay an $8.9 billion settlement, while UnitedHealth surged on an upgrade to Strong Buy from Raymond James.
Data for Wednesday included the ADP employment report, the February Trade Balance Report, the IHS Services PMI, and the ISM non-manufacturing index.
The ADP Employment Change Report for March showed private sector employment increasing by 145,000 compared to a 205,000 expectation. Interestingly, Services Hiring surrounding financial activities and business services fell the most this reading. Weak pockets included manufacturing (-30,000), financial activities (-51,000), professional/business services (-46,000), and information (-7,000).
The February Trade Balance Report showed a growing trade deficit to $70.5 billion from a downwardly revised $68.7 billion in January. Exports were $6.9 billion less than January exports and imports were $5.0 billion less than January imports. The decline in both exports and imports is reflective of a slowdown in global trade activity.
The March IHS Markit Services PMI fell to 52.6 in the final reading from 53.8. The ISM Non-Manufacturing Index for March dropped to 51.2% from 55.1% in February. Again, line between expansion and contraction is 50.0%, so the March reading reflects continued growth in the services sector, but at a slower pace than the prior month.
Activity in our economy's largest sector is slowing noticeably with a cooling off in the new orders growth rate. The slowdown in activity and improved supply chain dynamics, though, have helped temper the pace of price increases for services.
Thursday:
The last day of this holiday-shortened week started on a softer note as investors digested another weak economic release. Things improved considerably around mid-morning thanks to some mega cap stocks staging a strong recovery from their lows.
The main indices all closed near their best levels on Thursday, but on below-average volume. Despite Thursday's gains, growth concerns that drove price action in recent sessions did not fade as seen by the underperformance of economically-sensitive sectors.
The energy (-1.5%), materials (-0.2%), and industrials (-0.03%) sectors were the lone laggards to close in the red. On the flip side, the communication services (+1.7%) and information technology (+0.7%) sectors were among the best performers, thanks to gains in their respective mega caps. Other notable outperformers were the utilities (+0.7%) and real estate (+0.7%) sectors.
Economic data for the day was primarily the weekly initial claims reading.
Claims came in at 228K and the last reading was revised to 246K from 198K. Weekly Continuing Claims also saw a slight increase to 1.823 million from the upwardly revised 1.817 million in the last reading. The report featured a revision to the seasonal adjustment factor, which resulted in big upward moves to figures from recent weeks.
This is a big miss as far as these reports are concerned. That said, the higher level of claims will invite some questions about the strength of the labor market after last week's release of the Job Openings and Labor Turnover survey for February showed a big drop in openings.
Friday:
Happy Good Friday yall! Enjoy your weekend and happy holidays!
Regards,
Dividend Dollars
Ticker Analysis - cjonny
Microsoft Corp (MSFT: NASDAQ) Last Price: $291.60 (Apr 6, 2023)
What they do:
Microsoft Corporation is a technology company. The Company develops and supports software, services, devices, and solutions. Its segments include Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
The Productivity and Business Processes segment consists of products and services in its portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment includes Office Consumer, LinkedIn, dynamics business solutions, and Office Commercial.
The Intelligent Cloud segment consists of public, private, and hybrid server products and cloud services that can power modern businesses and developers. This segment includes server products and cloud services, and enterprise services.
The More Personal Computing segment consists of products and services that put customers at the centre of the experience with its technology. This segment includes Windows, devices, gaming (Xbox), search and news advertising.
A new segment is the inclusion of ChatGPT into Bing (search), which puts them right at the front with introduction of this transformative technology.
Opinion:
With the inclusion of ChatGPT into Bing and language model AI being such a transformative technology, being able to build it into their entire eco-system (Windows, Office, LinkedIn & Search) gives MSFT a bullish view for the future.
In the graph below they are in an uptrend with bigger gaps (green lines) shown as my resistance lines on the way up to their high of $349. We also have more smaller gaps (orange lines) as my support lines to hold. Please listen to our tech talk presentations available in the server for more detailed opinions.
Plan:
MSFT has ER on Apr 27, 2023. I would look for MSFT to break and hold the next resistance line of $294.24 to go long and then aim for the previous high of $316.37. To be safe I would take profits along the way and only hold this position to ER, unless I’m able to have absolutely free runners (even though MSFT rarely misses it is an unnecessary risk unless this has been mitigated).
Hedge:
To hedge this, you could straddle the down-side with puts: enter these on strength when weakness is expected and take profits quickly. These would be scalps to lower the cost of your main thesis position.
Risk:
I am bullish on MSFT given what I see with them, however look at the analyst consensus above where the 12-month price target has a very wide gap from $241 - $411. The average PT of $297.25, which is just above the next resistance line. Given this, some volatility would be expected and make sure it breaks and holds above the next resistance line (see plan above).
Cheers!
cjonny