Stock Market Outlook - Issue 13
A flat week as earnings provide no direction and a rate hike looms
Welcome to the thirteenth 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
If you read last week’s outlook, you’ll know that our outlook for this week was for volatility on account of earnings only to end the week flat. Last Friday, $SPX closed at 4,137 and this week it closed at 4,133. Sorry I was off by 4, but if we are understanding I would say we were spot on this week.
Price action was choppy as earnings are better than feared but market positioning and sentiment are bearish, valuation is full at a forward P/E of 19 and the Fed could still make rate moves soon. Next week will likely help decide direction for the market as a result of mega-cap tech earnings.
First quarter 2023 earnings have rolled in this week with 87 of the 500 S&P companies reporting. 54% of those beat the top line and 75% on the bottom line, compared to 58% and 70% respectively last quarter. Next week is busy with earnings from mega-caps such as $KO, $PEP, $MCD, $MSFT, $GOOG, $V, $META, $AMZN, $BA, $INTC, $XOM, $CVX, and more.
Technicals-wise, the S&P 500 seems to be stalling around the top of the 3,800-4,200 trading range. Near term, the upside vs downside potential is in favor of the bears assuming the range remains intact.
However, next week’s earnings could easily swing the stock market outlook in either direction. If $SPX is able to break above 4,200, it could see buyers scramble to scoop up more as sentiment shifts away from the bearish scope we are currently in.
This week we got a decent dose of economic data and the results were mixed. PMIs were hot, jobless claims were in line, and housing/construction disappointed.
Next week we’ve got consumer confidence reports, retail, GDP, and PCE readings to look forward to. GDP will likely be the key. Of course inflation is still very important to the market, so Friday could prove particularly volatile.
Stocks were flat across the board. The market appears to be waiting for mega-cap tech earnings reports or the May FOMC meeting. Given the fact that many of the major indices are sitting on near range level highs and earnings have the potential to move us in either direction, my outlook for next week is breakout.
I am loath to call a direction, because really it is up to the earnings reports and economic data releases. It is entirely possible that we just hang out at resistance for another week to see what the Fed says, but to me it feels like the tech stocks have the power next week to swing us higher or lower, entirely dependent on their earnings reports.
Weekly Market Review
Summary:
The stock market didn't move in either direction this week. The S&P 500 closed at 4,137 last Friday, then closed at 4,133 this Friday. Investors were playing a waiting game ahead of a big batch of earnings results next week. These reports will follow disappointing Q1 results from Tesla ($TSLA), which fell nearly 10% on Thursday.
On the other hand, Dow component Procter & Gamble ($PG) rose 3.5% on Friday as investors digested its pleasing fiscal Q3 results and affirmation of its FY23 EPS outlook.
Bank stocks were weak this week following earnings reports from some regional banks like Zions Bancorporation ($ZION), Truist Financial ($TFC), and Western Alliance Bancorp ($WAL). Despite regional bank weakness, the S&P 500 financial sector was among the top performers with a 1% gain.
Other top performing sectors include real estate (+1.58%), consumer staples (+1.85%), and utilities (+1.06%). The communication services (-2.6%) and energy (-2.5%) sectors were the worst performers by a wide margin.
Weak economic data also contributed to the hesitant mindset that slower growth will put pressure on future earnings. Data releases this week featured the highest continuing jobless claims level since November 2021, the weakest reading for the Philadelphia Fed Index since May 2020, the weakest level for the US Leading Economic Index since November 2020, and a 22% YoY decline in existing home sales in March.
The market shows a belief that the Fed will keep rates higher for longer. Philadelphia Fed President Harker said the Fed is going to need to do more to get inflation back down to target, New York Fed President Williams also showed support for another rate hike at the May FOMC meeting.
Unlinked here, but Fed President Bullard and Fed President Bostic also supported higher rates for longer in talks this week.
This commentary from Fed officials contrasts the fed funds futures market, which is pricing in two rate cuts before the end of the year, according to the CME FedWatch Tool.
Monday:
The stock market spent most of the day in a range that included modest losses for the Dow, Nasdaq, and S&P 500. There was no conviction ahead of earnings news this week. Earnings results so far have been better than expected/feared, which helped limit selling interest, but valuation concerns kept the market from moving noticeably higher.
The market was able to log gains, though, thanks to a late afternoon rebound effort. The indices all finished at their best levels of the day, leaving the S&P 500 just above 4,150. Even semiconductor equipment makers, which had been a notable spot of weakness, came along with the rebound.
Economic data for Monday included the Empire State Manufacturing Index and the NAHB Housing Market Index.
The April Empire State Manufacturing hit a reading of 10.8 versus a consensus of -19 and the last reading of -24.6. This is the first reading of solid business activity increase in New York in five months.
The April NAHB Housing Market Index came in at 45, in line with expectations and just above lost month’s reading of 44.
Tuesday:
Tuesday's session was mixed. The main indices spent most of the day trading right around their flat lines. Investors were reacting to a slate of earnings news, some positive economic data, and commentary from a few Fed officials as previously mentioned.
Following their better-than-expected Q1 earnings, Bank of of America ($BAC) and Lockheed Martin ($LMT) were among the more influential winners on Tuesday. BAC, which was down as much as 1.9% at one point, helped drive a 0.3% gain in the S&P 500 financial sector and LMT helped propel the industrials sector (+0.5%) to the top of the sector leaderboard.
Meanwhile, Dow components Johnson & Johnson ($JNJ) and Goldman Sachs ($GS) registered large losses following their earnings reports. Both companies reported better-than-expected Q1 earnings, but GS came up shy with its revenue.
Bank stocks in general were weak. Notably, homebuilders were a pocket of strength after the better-than-expected housing starts data from March, which was accented with welcome gains in both starts and permits for single family units.
Economic data for Tuesday included the Housing starts report.
Total housing starts fell 0.8% in March to a seasonally adjusted annual rate of 1.420 million, 1.407was expected. The decline was due to falling multi-unit starts. Single-unit starts were up 2.7% MoM. Building permits fell 8.8% MoM, driven by a 24.3% decline in permits for 5 units or more, whereas single-family permits increased 4.1% MoM.
The key takeaway from the report is the growth seen in single-family starts and single-family permits (a leading indicator) which is needed given the limited supply of existing homes for sale.
Wednesday:
Again, the market had a lackluster showing. Major indices were in narrow trading ranges, registering only modest gains or losses throughout the session. The sideways action was the culmination of wait-and-see mindset ahead of earnings reports from most mega cap stocks next week and Tesla ($TSLA) after Wednesday's close.
The market had more negative bias initially, but several mega cap stocks recovered from early weakness and boosted index performance. The main indices closed off their lows of the day with $AAPL, $AMZN, and $NVDA as some of the notable winners.
Outsized moves were mostly reserved for stocks with specific catalysts in earnings surprises. Morgan Stanley ($MS) closed with a nice gain, rebounding from an opening 3.7% decline following its earnings results.
Treasury yields rose Wednesday, which acted as a headwind for equities. Price action in the bond market was a reflection of concerns about Fed policy. Some persistently high core inflation data for the eurozone and UK in March also contributed to selling interest.
Wednesday economic data included only the MBA Mortgage Application Index. The index fell 8.8% with purchase applications tanking 10% and refinance applications dropping 6%
Thursday:
Thursday was the day we finally say some solid intraday moves. Economic data was weak and disappointing earnings results from Tesla ($TSLA) kept us down. Bank stocks were also a big drag following several earnings misses from regional banks.
Despite Tesla's sizable decline and other headwinds, index level performance was fairly resilient until mid-afternoon. Some relative strength from other mega cap names lead the rebound effort midday, then hit a pullback which looked technical in nature after the S&P 500 failed to break above the 4,150 level. SPX hit 4,148 at its high of the day.
There were some big outperformers Thursday, however. Homebuilders ran following D.R. Horton's (DHI) impressive quarterly results and outlook. This fueled buying interest in other homebuilders as evidenced by the 1.7% gain in the iShares U.S. Home Construction ETF (ITB) and a 0.7% gain in the SPDR S&P Homebuilder ETF (XHB).
Initial jobless claims for the week ending April 15 increased by 5,000 to 245,000 (Briefing.com consensus 242,000) while continuing jobless claims for the week ending April 8 increased by 61,000 to 1.865 million.
The key takeaway from the report is that continuing jobless claims are at their highest level since November 27, 2021, suggesting it is becoming more challenging to find new employment after a layoff.
The April Philadelphia Fed Index slumped to -31.3 (Briefing.com consensus -20.0) from -23.2 in March. That is the eighth straight reading in negative territory for this manufacturing survey and the lowest reading since May 2020. The dividing line between expansion and contraction for this report is 0.0.
With the diffusion index for general activity running at -1.5 (versus -8.0 in March), the key takeaway from the report is that respondents' expectations for growth over the next six months remain subdued.
Existing home sales declined 2.4% month-over-month in March to a seasonally adjusted annual rate of 4.44 million (Briefing.com consensus 4.50 million) versus a downwardly revised 4.55 million (from 4.58 million) in February. Sales were down 22.0% from the same period a year ago.
The key takeaway from the report is the recognition that the inventory of existing homes for sale remains extremely tight, which is due in part to the strength of the labor market (and ability to work remotely) and the jump in mortgage rates that is deterring existing home owners' interest in moving.
The Leading Index was down 1.2% in March (Briefing.com consensus -0.4%) after falling a revised 0.5% (from -0.3%) in February.
For all our BOIL/KOLD fans, weekly natural gas inventories increased by 75 bcf after increasing by 25 bcf a week ago.
Friday:
The market made a slim gain on Friday's options expiration day, but that wasn't an impressive feat. The market was little changed from Thursday's closing levels for the entire session.
In general, outsized moves were limited to individual stocks like Dow component Procter & Gamble ($PG), which reported pleasing fiscal Q3 results and affirmed its FY23 EPS outlook, and HCA ($HCA), which also reported favorable earnings.
Bank stocks were under pressure Friday after underperforming for most of the week. This weakness followed disappointing earnings from Regions Financial ($RF).
The materials sector (-0.9%) logged the biggest Friday decline due to a sizable loss in Freeport McMoRan ($FCX) following its earnings report and a loss in Albemarle ($ALB) in response to reports that Chile is planning to nationalize its lithium industry.
Friday’s economic data included the IHS Manufacturing PMI and the Services PMI.
April IHS Markit Manufacturing PMI preliminary reading came in at 50.4, compared to 49.2 from last month. The Markit Services PMI was 53.7 compared to 52.6 last month.
Regards,
Dividend Dollars
Ticker Breakdowns
Las Vegas Sands Corp (LVS: NYSE) Last Price: $63.05 (Apr 21, 2023)
What they do:
Las Vegas Sands Corp (LVS). is a global developer of destination properties (Integrated Resorts). The Integrated Resorts features accommodations, gaming, entertainment and retail malls, convention and exhibition facilities, celebrity chef restaurants, and other amenities.
Its other amenities include luxury accommodations, restaurants, lounges, invitation-only clubs, and private gaming salons. It owns and operates Integrated Resorts in Macao and Singapore.
Its principal operating and developmental activities occur in two geographic areas: Macao and Singapore. In Macao, it owns The Venetian Macao; The Londoner Macao; The Parisian Macao; The Plaza Macao and Four Seasons Macao, and Sands Macao.
In Singapore, it owns Marina Bay Sands. It owns and operates a collection of Integrated Resorts in Macao of the People's Republic of China (China), through Sands China Ltd. It also offers players club loyalty programs at its properties, which provide access to resort rewards, privileges, and members-only events.
Opinion:
There are various factors for the play, as seen on the chart they reported on Wednesday, April 19, 2023 with an analyst beat, which is the first beat in the last 5 quarters and has gapped up.
If you look on the TradingView (TV) chart to the left, I have highlighted in red the impact of Covid on this stock. As we are entering phase of China re-opening more and these properties are based primarily in Macau and secondary in Singapore, there is a high probability of an increase in traffic and spending.
This week has also seen various analysts at Wells Fargo, Citigroup, HSBC and Deutsche Bank all up their price targets and maintain their buy ratings with a 12-month price target average of $70.36 (+11.59%) with a high of $80.50 and low of $64.50, which I have highlighted with the green target circle.
Plan:
I would open a position with common shares to start and then as these do not expire and can ride the volatility up to the price targets shown, please take profits when you are comfortable, or you can follow the yellow price levels on the TV chart to help you determine the next levels.
If your tolerance is more risky, short-term option puts to the downside on weakness and the upside calls on strength to lower cost basis of the common shares are a possibility.
Longer term leap options currently do not have a lot of volume associated and as such I would refrain from using those at this time.
Hedge:
To hedge this position, downside puts are an option, 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:
One risk I would like to point out is the RSI indicator at the bottom of the TV chart, LVS is entering the overbought territory which could indicate a pullback is nearing. In my opinion this will be profit taking, and I would consider this an opportunity on weakness.
Best,
Cjonny
CVS Health Corp (CVS: NYSE)
Last Price: $72.84 (April 21, 2023)
What They Do:
CVS is a retail healthcare company controlling a large market share. Over time, CVS has positioned itself as a one-stop-shop for all things health-related.
CVS has three main segments:
Healthcare Benefits Segment
Consists of healthcare insurance plans, including (Aetna which is wholly owned by CVS), government medical (to include most Medicare/Medicaid plans), and other commercial insurance plans. As of December 2022, the CVS network also had 1.6 million participating providers in its underlying nationwide provider network.
Pharmacy Services Segment
This segment includes the retail pharmacy, mail-order pharmacy, and various clinic services offered by CVS. The company also operates a group purchasing organization that negotiates prices for pharmaceuticals and rebates from manufacturers. 26.8% of all retail pharmacy prescriptions were dispensed by CVS in 2022.
Retail/LTC Segment
Contains the general sales from 9000 retail stores, and all 1100 MinuteClinic walk-in clinics.
Potential Risks Facing CVS:
Regulatory Risks:
Changes in healthcare policies and regulations can have a significant impact on CVS's business. For instance, potential changes in drug pricing policies could affect the company's profitability.
Competitive Landscape:
CVS operates in a highly competitive market, with major players like Walgreens, Walmart, and Amazon vying for market share. While CVS has managed to maintain a strong position, it will need to continuously innovate to stay ahead of the competition.
Economic Factors:
Economic downturns and changes in consumer behavior can affect CVS's financial performance. The company's reliance on prescription drug sales in particular makes it vulnerable to fluctuations in consumer spending.
Mr 1%'s CVS Forecast:
CVS is in a key position to turn Bullish as it has proceeded to make higher Lows despite being on a significant downturn from its 52-week high of 107.26.
That is almost a 35% discount off its peak yearly price. This bull case will be invalid should we break below the 72.00 area.
Keep that in mind in the coming week headed into earnings scheduled for the 3Rd of May. I have included a chart above detailing a key support demographic. It has a Divy Yield of 3.08% TTM and a PE Ratio of 23.34X earning which is still on the high side.
Cheers,
Mr 1% and Jenlivit