Market Journal and Stock Market Outlook - Issue 12
Picking Up Steam Into Earnings
Welcome to the twelfth 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’ Stock Market Outlook & Opinion
Boy is this market difficult to wrap your head around.
From a bullish perspective, inflation has continued to trend lower, earnings kicked off to a solid start, and consensus sentiment may be too bearish and lead to a continued “melt up” so-to-speak.
On the other hand, bearish perspective is that valuations are too high, technicals show we are close to strong resistance levels, and there is still too much uncertainty surrounding global economic health, inflation, and rate movements.
This week was heavy with economic data that contributes to everyone’s potential differences in market perspectives (all of these releases will be broken down in the recap below). We received good news on the inflation front, but bad news in soft retail sales and rising unemployment claims.
The consumer sentiment report surprised with higher-than-expected inflation expectations. Q1 earnings from the big banks came in above analyst estimates, with more to come next week.
Last week we said that this week was technically bearish but positive data and earnings report could “flip the script”. That’s exactly what we saw. Two weeks ago, we also mentioned that April tends to be a relatively bullish month. Though the first week of the month didn’t hold true, this week definitely did.
Technicals-wise, the S&P 500 is nearing the upper end of the 3,800-4,200 range that was established in November. From a technical near-term perspective this skews favor to the bears.
It is possible that the uptrend continues and breaks above the range, but this may be difficult for a number of reasons. For one, the current forward PE multiple is roughly 19, and earnings revisions aren’t shifting up to justify a higher multiple.
We have a fair number of economic data releases next week, but none of them really stand out. All eyes will be on earnings reports which include some big names like $JNJ, $BAC, $NFLX, $WMT, $TSLA, $T, and $PG.
As these earnings reports roll in, expect volatility. But it’s impossible to know if they’ll be positive or negative for the market.
Therefore, I think the official and safe stock market outlook for next week is volatile and neutral with an expected week ending next week around current prices, especially since upper resistance on the SPX is close.
However, the bull in me really wants to see earnings surprises push the market higher to 4,200 and even above. But only time will tell.
Weekly Market Review
Summary:
The stock market had a mixed but overall positive showing for the week. All major indices made gains, but modest ones on the back of continued inflation and Fed concerns.
Early week was a slow trend up as investors awaited economic data and Q1 earnings reports from banks on Friday. Coinbase Global ($COIN) was an exception here, gaining 6.0% on Tuesday after Bitcoin breached $30,000.
Inflation concerns came up after the Consumer Price Index (CPI) came in for March. Total CPI fell YoY, which was a welcome development, but core-CPI did not. The total Producer Price Index (PPI) and core-PPI fell in March, but the uptick in core-CPI offset some excitement about PPI disinflation.
Also, comments from Fed officials this week indicated that the new inflation readings are not likely to convince the Fed to pause its tightening efforts just yet.
Fed Governor Waller (FOMC voter) said on Friday that the Fed hasn't made much progress on its inflation goal and that he thinks monetary policy needs to be tightened further and remain there for a while.
The data and comments did not change forecasts for the Fed's May FOMC meeting. According to the CME FedWatch Tool, the fed funds futures market is pricing in a 78% chance of a 25 basis points rate hike.
Q1 earnings season kicked off on Friday with $JPM, $C, $BLK, and $PNC all finishing the day with a gain on a good report. Strength from the financial sector was not enough to carry the market on Friday, though as regional banks were weak on Friday despite gains from their larger peers.
Still, the S&P 500 hit its best level since mid-February. Trading had noticeably light volume this week, which could be attributed to a larger wait-and-see mindset as investors await the bulk of Q1 earnings season.
Only 4 S&P sectors closed with a loss this week -- real estate (-1.35%), utilities (-1.32%), information technology (-0.28%), and consumer staples (-0.24%) -- while financials (+2.78%) led the outperformers by a decent margin.
Monday:
The stock market looked weak at the open as the main indices fell under the weight of mega cap losses. Even at session lows, though, the broader market showed nice resilience in front of several market-moving data releases later in the week.
The Dow Jones Industrial Average was the strongest of the day, declining just 0.4% at its low for the day, while the tech-heavy Nasdaq saw a loss of 1.3% at its low before settling the day close to flat. Monday's best performer, however, was the small cap Russell 2000 (+1.0%).
The main indices all improved noticeably when the mega cap stocks started to recover earlier losses. The Vanguard Mega Cap Growth ETF ($MGK) was down as much as 1.6% before closing with a 0.3% loss.
This recovery effort helped the market close near its highs for the day, which had the S&P 500 above 4,100.
There was no economic data of note for Monday.
Tuesday:
Tuesday continued the trend of relatively light volume, again showing resilience to selling efforts ahead of big events later in the week.
Some of the mega cap stocks were able to climb off their session lows as the broader market settled into a steady grind higher in the afternoon.
The main indices took a sharp turn lower, though, with about 30 minutes left in the session as names like Microsoft (MSFT), Apple (AAPL), and NVIDIA (NVDA) retested early lows.
Coinbase Global (COIN) made an outsized move Tuesday after Bitcoin reached $30,000,
Moderna (MRNA) dropped 3.1% following its acknowledgment that its influenza vaccine candidate did not accrue sufficient cases at the interim efficacy analysis to declare early success, and CarMax (KMX) logged a nearly 10% gain after its better than expected fiscal Q4 earnings results.
Again, there was no economic data of note for Tuesday.
Wednesday:
The day started on an upbeat note as investors digested the Consumer Price Index (CPI) for March. The S&P 500 and Nasdaq logged gains of 0.6% and 0.9%, respectively, shortly after the open.
Early gains disappeared, though, as mega cap stocks rolled over and Treasury yields also climbed.
There was a subsequent rebound effort that took root after the S&P 500 dipped below 4,100. The market was moving cautiously forward into the release of the FOMC Minutes from the March 21-22 meeting.
The Minutes revealed that members agreed that inflation remains too high and that the banking problems increased economic uncertainty. Still, all agreed that it was appropriate to raise the target range for the fed funds rate even though the staff economic outlook included a mild recession starting later this year given the potential economic effects of recent banking-sector developments.
Things rolled over again in the late afternoon with mega cap stocks leading the slide.
The selling interest was likely also driven more by valuation concerns rather than a negative reaction to the Fed forecasting a mild recession, in my opinion.
The cyclical S&P 500 sectors pulled back along with the rest of the market, but still finished the day in a position of relative strength.
Wednesday’s data included the MBA Mortgage application index and the CPI numbers.
The weekly MBA Mortgage Applications Index rose 5.3% with purchase applications jumping 8.0% while refinance applications were flat.
Total CPI was up 0.1% MoM on February’s increase of 0.4%, 0.3% was expected. Core-CPI, which excludes food and energy, increased 0.4%, as expected, following a 0.5% increase in February. Services inflation was up 0.3% MoM, versus up 0.5% in February, and up 7.3% YoY versus up 7.6% in February.
Excluding shelter, services inflation was flat, compared to a 0.1% increase in February, and up 6.1% YoY versus up 6.9% in February. On a YoY basis, total CPI was up 5.0%, versus up 6.0% in February. That is the smallest 12-month increase since May 2021. Core-CPI was up 5.6% year-over-year, versus up 5.5% in February.
The key takeaway from the report is the disinflation seen in March. That trend doesn't necessarily take a rate hike at the May FOMC meeting off the table, especially with core-CPI tipping slightly higher, but it is fostering a belief that a rate hike in May could be the last hike in the Fed's tightening cycle.
Thursday:
Thursday was strong and only strong. Gains from the mega cap space gave the main indices a big boost. The positive bias was partially a reaction to the pleasing economic data in the morning and there was likely some short-covering activity contributing too.
The major indices spent most of the session in a steady climb, closing near their best levels of the day. The S&P 500 hit 4,150 at its high of the day, marking its best level since February 15.
By the close, bonds had given back all of their post-PPI, knee-jerk gains to settle the session with losses across the curve. Notably, stocks advanced as bond yields rose from their post-PPI lows, which were set around the time the stock market opened for trading, suggesting perhaps that there was some asset reallocation within the day.
For Thursday, we had the PPI report and Initial unemployment claims.
The Producer Price Index for final demand declined 0.5% MoM in March compared to an expected 0.1% and following an upwardly revised 0.0% reading in February.
Excluding food and energy, the index for final demand fell 0.1% MoM. YoY, the index for final demand was up 2.7% versus 4.9% in February. Excluding food and energy, the index for final demand was up 3.4% versus 4.8% in February.
The key takeaway is that producers are seeing some welcome disinflation, aided by declines in energy prices; however, the stickiness of core CPI in March has offset some of the excitement about the improvement in the PPI data in March.
Initial claims for the week ending April 8 increased by 11,000 to 239,000, above expectations by 3,000, and continuing claims for the week ending April 1 decreased by 13,000 to 1.810 million. The key takeaway from this report is that it reflects some softening in the labor market but not any clear-cut weakness.
Friday:
Friday was the big day. Trading sent many stocks lower. The main indices tried to move higher, but quickly fell below their flat lines and remained in the red through the close. Investors were digesting a slate of economic data and corporate news ahead of the open, including some pleasing Q1 earnings results from several large banks.
$JPM, $C, $BLK, and $PNC were among the top performing stocks Friday, driving a 1.1% gain in the S&P 500 financial sector.
While the financial sector was providing support for the broader market, mega cap losses offset much of that support and drove a lot of the index level weakness.
Names like $META, $AMZN, $GOOG were able to recover their losses and finish with at least a modest gain. This coincided with the broader market rebounding from its lows of the day.
Investors were also reacting to Fed Governor Waller's remarks in a speech before the open that the Fed hasn't made much progress on its inflation goal and that he thinks monetary policy needs to be tightened further and remain tight for a substantial period of time.
Also, some added selling pressure kicked in after the preliminary Consumer Sentiment Index for April showed year-ahead inflation expectations rising to 4.6% from 3.6%.
Economic data for Friday included import and export prices, retail sales, industrial production, and the consumer sentiment index.
Import prices fell 0.6% MoM and were down 4.6% YoY. Excluding fuel, import prices were down 0.5% MoM and down 1.5% YoY. Export prices fell 0.3% MoM and were down 4.8% YoY. Excluding agricultural products, export prices were down 0.2% MoM and were down 5.2% YoY.
Total retail sales fell 1% MoM in March, much lower than the expected -0.4%, and the 0.2% decline in February. Excluding autos, retail sales were down 0.8% MoM.
The key takeaway is that sales declines were seen across most retail categories, reflecting weakness in consumer spending on goods that should exacerbate concerns about an economic slowdown that cuts into earnings prospects.
Total industrial production rose 0.4% MoM in March. The capacity utilization rate jumped to 79.8%. The key takeaway from the report is that the entire gain in industrial production in March was driven by the increased output of utilities, which is to say the headline print contradicts an otherwise soft environment for manufacturing output.
The preliminary University of Michigan Consumer Sentiment Index for April was 63.5, above the 62.7 consensus and the final reading of 62.0 for March. YoY, the index stood at 65.2.
The key takeaway from the report is that short-run inflation expectations were up noticeably from the prior month, which is something that could compel the Fed to press ahead with another rate hike in May even though long-run inflation expectations remained stable.
Regards,
Dividend Dollars
Ticker Breakdowns
American Express Company (AXP: NYSE) Last Price: $163.22 (Apr 14, 2023)
What they do:
American Express Company (AXP) is a globally integrated payments company. The Company provides its customers with access to products, insights, and experiences that builds business.
It operates under four segments:
U.S. Consumer Services (USCS),
Commercial Services (CS),
International Card Services (ICS), and
Global Merchant and Network Services (GMNS).
USCS offers travel and lifestyle services as well as banking and non-card financing products. CS offers payment and expense management, banking and non-card financing products.
CS also issues corporate cards and provides services to select global corporate clients.
ICS also provides services to international customers, including travel and lifestyle services, and manages certain international joint ventures and its loyalty coalition businesses.
GMNS provides multi-channel marketing programs and capabilities, services and data analytics. It provides credit and charge cards to consumers, small businesses, mid-sized companies and corporations.
Opinion:
This is a highly risky play around ER, so please use your best judgement for risk tolerance accordingly.
AXP has earnings (ER) coming up in 4 days on Apr 20 (Thursday), look left on the corresponding chart for market response when they missed ER (purple circle).
This was the only ER which they missed in the past 4 quarters. According to reports, spending is up, travel is up, China is reopening (and please check LVMH as reports of an increase in luxury goods purchasing).
Currently, AXP is in the gap fill from the run circled in purple, but the stock has hit resistance at 165 a few times and this is something to watch as we are right below this level. This pick is a play off pure spending news, so I do have a bullish view for ER.
Plan:
I have started a small position for the week following ER AXP 4/28 170c (option call), but I believe it could hit that 171.94 (red circle) line easily and potentially the next level of 175.24
IF it runs and based on looking left. However, if AXP is up significantly before ER, I will take profits and then re-enter post ER for the reaction to results rather than holding through ER unless I have an absolutely free runner.
A less risky and longer term plan would be to buy common shares, I would wait until after ER to pick up shares and look for days of weakness to add to your shares. See the second graph for the analyst consensus and price targets which has a potential average of 13.51% upside.
Hedge:
To hedge this 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 to get you to a free runner.
Risk:
This is a high risk play, but I am bullish on AXP given what I see happening in the economy with spending and travel as mentioned above. Their peers Visa (V) and Mastercard (MA) would fall into the same category.
Best,
Cjonny
Amazon.com INC (AMZN: NASDAQ)
Last Price: $102.51 (Apr 14, 2023)
“When judging share price performance, it is crucial to also consider the risks involved.
To an extent we could ascribe this disappointing performance to Amazon's higher exposure to market risk, which is measured below by its 2-year beta coefficient. During market downturns, such as last year, it is reasonable to expect higher beta companies to fall more than their lower beta counterparts.”
-Vladimir Dimitrov
Our summary of AMZN is simple: We are holding Cash Secured Puts for September 15TH EXP with a strike of 85. We have been in this trade for over 60 Days and expect AMZN to hit its trendline with force.
Recent Inflation Numbers and a bullish posture in the market has kept the online retail giant in a range. We have seen buying at 93ish and selling at 103.
Although we would take assignment of these shares at 85, We feel AMZN has underperformed overall. Although we have a price target of 165, we also think there is room to collect premiums and lower price exposure. Below you will his chart. Mind the trendline as this can go either way.
This is not financial advice and 3X does not recommend specific trades. This is a MR1% holding shared from his trading account. His fill was $4.40, and these positions closed on Friday @ 3.25.
Cheers!
Mr1%
Costco Wholesale Corp. (COST: NASDAQ)
Last Price: $491.30 (Apr 14, 2023)
I believe is a strong company but personally longer term I’d like to see some lower pricing. For the short term $500 is key a break of this can lead to $509-510. However some more closes under 492, puts 475-476 on the table. Both ends of this range will act as strong resistance/support. If either side is broken has great breakout potential!
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