Technically Dead Market Rally, Slowing Economy, Earnings Expectations, Fed Week

We warned last week that the focus would be on the macroeconomy, and it did. The Fed had entered the media blackout period prior to the political decision, for which we were all grateful. Before entry it looked like it was going to be a light week on the earnings calendar.

As it turned out, the macro would be disappointing for the most part and the available earnings would have a profoundly negative impact on the financial markets. This would put Fed and Fed officials at the fore, regardless of their collective silence.

It all started last Tuesday with an August CPI report that showed both headline and core inflation for that month were warmer than expected. The fact is that the benchmark rate, on an annual basis, has come close enough to match the peak of the cycle, which came last March to scare off those (including this guy) who thought inflation was well beyond peak. .

By Wednesday, it was August producer prices that at least in the middle … would have printed hotter than expectations on both a month-over-month and year-over-year basis. This sent the futures markets, along with Treasury yields, trying to price the Fed Funds rate for the rest of the year and beyond … into a frenzy. A frenzy that has also done a lot on stocks and commodities.

Disappointing August retail sales would give no respite as polls from the Philadelphia Fed and Empire State Manufacturing print in a regional shrinking state for September. Overall, when all of this macro was recorded, the Atlanta Fed had revised its GDPNow real-time model for third quarter economic growth from an already shaky 1.3% to a very weak 0.5% (q / w). t, SAAR).

Understand that the US economy, in real terms, had already contracted for quarters one and two in 2022. My best guess is that when “they” finally manage to call this recession, it goes back to January 2022. The third quarter now it is on very shaky ground, as the current economic downturn, in real terms, threatens to extend to nine months.

Earnings situation

On the business side, Oracle (ORCL) provided a bearish outlook early last week, followed by the collapse of Adobe (ADBE). Adobe has announced the acquisition of Figma, a private company, and will likely have to weaken the balance sheet to do so. The company also provided a weaker-than-hoped-for future outlook. Nothing, however, prepared the markets for the pre-announcement of earnings and the poor guidance that both missed their votes in FedEx (FDX) all of a sudden. This has caused widespread demand for a global recession up and down Wall Street, as this company is seen as a leader in a business (package delivery) that can be seen as a proxy for economic health.

About a month into the season seriously, third-quarter expectations, according to FactSet for the S&P’s 500-year earnings growth, dropped from 3.7% to 3.5% last week. The consensus outlook for third quarter revenue growth fell to 8.7% from 8.8%. This led the full calendar year outlook to earnings growth of 7.8% on revenue growth of 10.7% from earnings growth of 7.9% on revenue growth of 10.8 %.

Actions

It has been a very difficult week for equities. By Friday night, there were no indices on my screen showing a weekly gain. In fact, the only two indices on my screen that lost less than 4% over the five-day period were the Dow Jones Utility Average and the KBW Bank Index. Those two lost 3.57% and 3.78% respectively.

The S&P 500 fell 0.72% last Friday to close down 4.77% for the week. The Nasdaq Composite lost 0.9% on Friday to close down 5.48% for the week. The Russell 2000 was beaten 1.48% on Friday and 4.5% for the week. The Philadelphia Semiconductor Index, however … actually managed to gain 0.53% on Friday, but still beat 5.83% for the week. Nine of the 11 SPDR ETFs selected by the S&P sector were shaded red on Friday and all 11 ended in red for the week. All 11 of those funds gave up at least 2.34% for the week, with nine of the 11 losing at least 3.5%. Five of the 11 lost at least 6%, led to the downside by Materials (XLB) and Industrials (XLI).

However, according to FactSet, the S&P 500 is now trading 16.4 times its forward earnings, down from 16.8 times a week ago. This ratio is now well below the S&P 500’s five-year average of 18.6 times and more than a little below its 10-year average of 17.0.

The real clue from last week was the new post-July lows for the major indices which cut the lows of 6 September. This action, coupled with the week’s high trading volume, which wasn’t just due to Friday’s expiry event, puts the market back into a confirmed bearish trend. The market rally attempt that started on September 7th and culminated on September 12th, even if you already knew it, is now technically dead.

Using the S&P 500 for illustrative purposes, the daily chart shows the lowest low on high trading volume, with technical room to the downside …

There is a positive side

I know … you hoped.

Readers will see a “descending widening wedge” on the weekly chart of the S&P 500, perhaps still in the early stages of development. This pattern takes a long time to fully develop but is considered a bullish reversal pattern. What is needed, at least in my opinion, are at least two trendline touches on both the upper and lower trendline. We have that. We would prefer up to five of these touches to confirm.

Is the cancellation guaranteed? This is the biggest league, boy. You will have your own bats, nothing else is guaranteed. In my experience, any breakout from this type of pattern is bullish about three-quarters of the time.

The Fed

Next week will obviously be all about the Fed. The FOMC will enter session on Tuesday and come out on Wednesday with its first policy decision from July 27 and the last until November 2.

The group will also present quarterly economic reviews that are almost always wrong. Such projections are nevertheless important, even though they are often somewhat bizarre and illustrate conditions at the median that could almost never coexist economically, because they still portray the thoughts, or lack thereof, that have entered and will go into policy implementation. As usual, the press conference, which will take place half an hour after the release of the Declaration, will be centered, as are the policy changes, as that is where the president sets the next meeting.

At first glance, I see that the futures markets traded in Chicago are currently pricing an 80% probability for a 75 basis point hike to the Fed Funds target rate on Sept. 21 and a 73% chance for another hike of at least. 75 basis points on November 2. Keep in mind that the Fed is also increasing the liquidity gap (quantitative tightening program) this month. Right now the futures markets are pricing in a year-end Fed Funds Rate of 4.25% to 4.5% and a peak of the cycle of 4.5% to 4.75% in March 2023. This that would be an increase from 2.25% today to 2.5%.

You need to know

Of all the corporate events scheduled for this week, there are two that I think stand out. Number one would be Nvidia’s (NVDA) GTC technology conference which takes place Monday through Thursday. CEO Jensen Huang will have the opportunity to put the spotlight on his company and product advancements. The event is popular with the Wall Street analyst community and one would expect that what those analysts post publicly will be tradable.

Number two, I believe will be the Wells Fargo (WFC) consumer conference this Thursday and Friday. Walmart (WMT). Dollar Tree (DLTR), Target (TGT), Chewy (CHWY), Sysco (SYY), and Five Below (FIVE), among many others, are expected to feature.

Economy (All Eastern Times)

10:00 – NAHB Real Estate Market Index (September): Waiting for 47, Last 49.

The Fed (All Eastern Times)

Fed blackout period.

Highlights of today’s earnings (Consensus EPS Expectations)

Before the Open: (AZO) (38.62)

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