Weekly Trader's Outlook for January 27, 2023

Weekly Market Review:

Stocks have trended higher this week, which appears to have been supported by “better than feared” Q4 earnings and economic data. The “not too hot, not too cold” data points that have been rolling in may be supportive of an economic soft landing, despite the Fed’s determination to tame inflation. We’ll have a better feeling as to where the Fed stands following next week’s FOMC meeting, but the bias appears to be higher in the meantime.

This Week’s Notable 52-week Highs:

Aehr Test Systems Inc. (AEHR - $0.88 to $35.62)

Applied Industrial Technologies Inc. (AIT + $1.42 to $137.82)

BP PLC (BP + $0.11 to $36.36)

Caterpillar Inc. (CAT + $0.77 to $262.89)

Chubb Ltd. (CB - $1.12 to $229.99)

Crane Holdings Co. (CR - $0.74 to $116.20)

Exxon Mobil Corp. (XOM - $0.90 to $116.86)

Five Below Inc. (FIVE + $0.44 to $194.09)

General Electric Co. (GE + $0.65 to $81.79)

Hess Corp. (HES - $1.53 to $158.91)

Incyte Corp. (INCY - $0.29 to $85.72)

Las Vegas Sands Inc. (LVS + $0.04 to $58.41)

Marathon Petroleum Inc. (MPC - $0.20 to $135.15)

Oracle Corp. (ORCL - $0.19 to $89.64)

Paccar Inc. (PCAR - $0.45 to $111.78)

PinDuoDuo Inc. (PDD + $0.84 to $105.50)

Starbucks Corp. (SBUX - $0.10 to $108.66)

Steel Dynamics Inc. (STLD + $1.56 to $123.00)

United Rentals Inc. (URI + $3.44 to $434.92)

Yum China Holdings Inc. (YUMC - $0.38 to $61.86)

This Week’s Notable 52-week Lows:

Alerus Financial Corp. (ALRS + $0.54 to $20.54)

Community Bank system Inc. (CBU + $0.14 to $55.27)

Customs Bancorp Inc. (CUBI + $0.89 to $27.65)

CVS Corp. (CVS - $0.19 to $87.47)

Global System Dynamics Inc. (GSD - $0.02 to $10.35)

Digital World Acquisition Corp. (DWAC + $0.02 to $15.33)

Innovative Industrial Properties Inc. (IIPR - $0.40 to $86.02)

National Fuel Gas Company (NFG - $0.44 to $56.97)

Sandy Spring Bancorp Inc. (SASR + $0.44 to $33.53)

Veritex Holdings Inc. (VBTX + $0.16 to $27.13)

Tailwind Acquisition Corp. (TWND + $0.06 to $8.67)

Q4 Corporate Earnings

Fourth quarter earnings season is underway and so far, we have heard from 147 of the S&P 500 companies. From those that have reported, 50% have beat on the top line and 69% on the bottom line. This compares to the respective 59% and 69% beat rates from the third quarter. The 50% revenue beat rate should it hold, would represent the lowest top line beat rate since before the pandemic. We’ve got a barrage of reports on the earnings next week, highlighted by several prominent mega-cap tech names (AAPL, AMZN, GOOG, META) that are reporting next Wednesday/Thursday after the bell:

Monday (30th): GEHC, NXPI, WHR, AGNC

Tuesday (31st): XOM, PFE, MCD, UPS, CAT, MPC, GM, AMGN, AMD, CB

Wednesday (1st): TMO, NVS, TMUS, MO, BSX, HUM, META, MCK, AFL

Thursday (2nd): LLY, MRK, BMY, COP, HON, AAPL, AMZN, GOOG, QCOM, SBUX

Friday (3rd): SNY, CI, REGN

Volatility:

The Cboe Volatility Index (VIX - 0.68 to 18.05) has been in a downtrend so far this year and should it close at its current level of 18.05, would represent a fresh 52-week low. Additionally, the VIX futures term structure has flattened quite a bit over the past two months, ranging (incrementally higher) from 19-23 when you look out to the September expiration. This suggests option traders on the SPX/VIX have become more comfortable in the current environment and do not expect significant volatility in the near-term. Are traders too complacent? Tough to say for sure, but we’ve seen the VIX reverse course when it gets this low in the past. For reference, a VIX around 18 suggests a ~0.94% daily move (either higher or lower) in the SPX which translates into ~38 points.

Chart of VIX

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Unusual Options Activity:

Unusual Call Activity:

UiPath Inc. (PATH + $0.47 to $15.03): Calls are outpacing puts better ~14:1 on this provider of robotic process automation (RPA) solutions as option traders primarily target the February 17th 17.50 call. Volume on this contract is 7,290 versus open interest of 2,231, so we know that the volume primarily represents new positioning. The bulk of the transactions on this contract consisted of various-sized blocks that were being bought at various times at the ask prices of $0.15, $0.20 & $0.25 each, which suggests bullish intent.

Unusual Put Activity:

California Resources Corp. (CRC - $3.33 to $44.49): Puts are outpacing calls ~48:1 on this oil & natural gas producer which is primarily being driven by activity on the February 17th 45.00 put. Volume on this contract is 3,148 versus open interest of 21, so we know that the volume primarily represents new positioning. The bulk of the transactions on this contract consisted of various-sized blocks that were being bought at the ask price of $1.35 each, which suggests bearish intent.

Heavy Option Volume:

Buzzfeed Inc. (BZFD + $1.50 to $3.59): Option volume is running at over 20x the daily average on this digital media company which is primarily being driven by activity on the February 17th 3.00 call. Volume on this contract is 13,872 versus open interest of 5,413, so we know that the volume primarily represents new positioning. The bulk of the transactions on this contract consisted of various-sized blocks that were being bought for between $0.60-0.75 each, which suggests bullish intent. Shares of BZFD are extending yesterday’s 100%+ rally, which was fueled by a Wall Street Journal report that Meta Platforms was paying BZFD millions of dollars to bring more creators to Facebook & Instagram.

HDFC Bank Ltd. (HDB - $2.14 to $65.87): Option volume is running at over 14x the daily average on this India-based bank which is primarily being driven by a 2,450 contract block that was sold on the February 17th 65.00 put for $1.00 when the bid/ask spread was $0.80 x $1.25 (open interest is 286). We know that this block is a new position based on the open interest figure and we can assume that the block trader believes that HDB will close at or above the $65.00 price level and/or is comfortable taking a long 245,000 share position in the stock at an effective purchase price of $64.00 in the event that it closes below $65.00 at expiration.

Kyndryl Holdings Inc (KD - $0.02 to $13.01): Option volume is running at ~11x the daily average on this IT company which is primarily being driven by a 5,250 contract block that was sold on the February 17th 12.00 put for $0.28 when the bid/ask spread was $0.25 x $0.35 (open interest is 218). We know that this block is a new position based on the open interest figure and we can assume that the block trader believes that KD will close at or above the $12.00 price level and/or is comfortable taking a long 525,000 share position in the stock at an effective purchase price of $11.72 in the event that it closes below $12.00 at expiration.

Technical Outlook:

S&P 500 Index ($SPX + 18 to 4,079): The technicals on the S&P 500 have turned bullish in 2023 as the index has registered the highest number of daily closes above the 200-day Simple Moving Average since last Spring. However, the index is coming up against the next resistance level of 4,100, where it has reversed course in last September and twice in December (designated by the red arrows below):

Chart of SPX showing 4,100 resistance level

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Nasdaq Composite Index ($COMPX + 104 to 11,617): If the Nasdaq is able to close above 11,507 today, this would represent the first close above the 200-day SMA for the first time in a year. Additionally, the index is above the 11,500 resistance level. For now, the interpretation is bullish, but we’ve got a slew of mega-cap tech names reporting next week (AAPL, AMZN, GOOG, META) which have the potential to not only move the index value but also affect investor sentiment around technology.

Chart of COMPX showing index above 11,500 resistance level.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Russell 2000 Index ($RUT + 7 to 1,910): Similar to the COMPX, the Russell 2000 is currently above the 1,900 resistance level, which would earn a bullish interpretation provided it can hold gains until today’s close. Also encouraging for the bulls, after first rising above the 200-day SMA, it appears that the RUT survived a successful “throwback” (or re-test for bullish confirmation) to this indicator last week.

Chart showing RUT above 1,900 resistance level.

Source: Schwab StreetSmart Edge®

Past performance is no guarantee of future results.

Cryptocurrencies

Cryptocurrency prices have largely rebounded in 2023 and one of the biggest gainers for is Aptos (APT), which has more than tripled in price this year. Aptos, which was created by developers who had previously worked on Meta’s blockchain initiative Diem, is a layer 1 proof-of-stake blockchain that supports smart contracts and decentralized applications. What is layer 1 blockchain? According to Bitstamp, “the term layer 1 (L1) refers to the fundamental, base-level chain in a network. An L1 blockchain provides the most essential services to a network like recording transactions on the public ledger and ensuring adequate security.” Aptos uses a Rust-based programming language that, according to its whitepaper, may process more than 130,000 transactions per second. By comparison, Visa can process 1,700 transactions per second and Bitcoin’s blockchain can only process 7 transactions per second.

Economic Recap:

We received a relatively bullish batch of economic data this week, which was highlighted by a better-than-expected Q4 GDP read and further evidence of a tight labor market. Here’s a recap of the individual reports that came out this week:

Better than Estimates:

  • Durable Goods Orders: 5.6% vs. 2.5% est
  • Q4 GDP (Advanced): 2.9% vs. 2.8% est
  • Q4 GDP Chain Deflator (Advanced): 3.5% vs. 3.3% est
  • Initial Jobless Claims: 186K vs. 200K est
  • New Home Sales: 616K vs. 606K est
  • Pending Home Sales: 2.5% vs. -1.2% est

Worse than Estimates:

  • PCE Prices - Core: 0.3% vs. 0.3% est
  • Personal Income: 0.2% vs. 0.2% est

Worse than Estimates:

  • Leading Indicators: -1.0% vs. -0.5% est
  • PCE Prices: 0.1% vs. 0.0% est
  • Personal Spending: -0.2% vs. 0.0% est
  • University of Michigan Consumer Sentiment – Final: 64.9 vs. 65.0 est

Key take-aways form this week’s data:

  • The fairly large beat on December’s Durable Goods Orders (5.6% vs. 2.5% est) was largely driven by new contracts for Being passenger planes.
  • This week’s 186K Initial Jobless Claims number represented a 9-month low.

Here’s a look at next week’s line-up:

  • Monday (30th): --
  • Tuesday (31st): Chicago PMI, Consumer Confidence, Employment Cost Index, FHFA Housing Price Index, S&P Case-Shiller Home Price Index
  • Wednesday (1st): ADP Employment Change, Construction Spending, EIA Crude Oil Inventories, FOMC Rate Decision, IHS Market Manufacturing PMI, ISM Manufacturing Index, JOLTS – Job Openings, MBA Mortgage Applications Index
  • Thursday 2nd): Continuing Claims, EIA Natural Gas Inventories, Factory Orders, Initial Jobless Claims, Productivity – Preliminary, Unit Labor Costs- Preliminary
  • Friday (3rd): Nonfarm Payrolls, Nonfarm Private Payrolls, Average Workweek, Average Hourly Earnings, Unemployment Rate, IHS Market Services PMI

It’s going to be busy next week on the economic front with several reports (in bold above) bringing market moving potential. Of course, next Wednesday’s FOMC rate decision and follow-up press conference with Chairman Powell will take center stage. Bloomberg’s probability for a 25 basis point hike currently stands at a theoretical 100%, so the accompanying commentary will likely be the focus.

Summary:

Bulls appear to be in control near-term, but the potential for volatility next week is relatively high given the earnings & economic line-up.

Stocks are near their highs around the mid-day mark (SPX + 15, DJI + 63, COMPX + 131) as investors appear to be riding recent bullish momentum, supported by encouraging technical developments. The bond market along with equity investors appear to be hopeful that the Fed will convey a less aggressive stance towards rates & the fight on inflation. We’ve seen this optimism surface several times over the past year, but we have yet to see the Fed move firmly into a “stock friendly” stance (which likely means at this point in time that they will pause rate hikes). We’ll see what happens with the Fed next week, and we’ll have a better feel of what’s going on in tech when we hear from the mega-caps, but until then there appears to be a modest wave of bullish momentum heading into next week. Therefore, my outlook for the first half of next week is “Modestly Bullish”, followed by “Volatile” (either higher or lower) in the back half.

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