Trade The Journey

Trade The Journey

The big drop !!

Top of the Morning! Stocks dropped at the end of the week, with a hawkish fed communicating the need for aggressive monetary policy to tackle inflation. A 50 basis point rate hike at the next Fed meeting is on the table with further rate increases forecasted.

There were even some comments that indicated a 75-point basis hike may be needed to help quell inflation. There hasn’t been a 75-point basis hike since the mid-nineties. The probability of the Fed engineering a soft landing is decreasing while the probability of an economic slowdown is increasing.

The markets look to the future, and now the markets are signaling a slow down in economic activity. Initially, the Fed thought that inflation and supply chain challenges would change as time went on however that didn’t happen.

Instead, prices continued to rise and although the supply pressures have eased, companies are still struggling with higher input costs. Companies for the most part were able to beat earnings forecasts but most still dropped along with the market on the news of an overly aggressive Fed.

Tesla beat on both its top and bottom line and improved on its margins although supply challenges still remain. Netflix on the other hand dropped over 30% on the news and it lost close to 200,000 subscribers. Netflix also issued forecasted guidance that was less than pleasing to its investors regarding subscriber growth.

Schwab, Hasbro, Carvana, Baker Hughes Co., and Xerox are some of the notable companies that missed earnings forecasts.

Moving on to the Economic news, housing continues to remain a bubble near bursting with higher rates and home prices slowing down the single-family residential market. Multifamily units have seen an increase in building and sales.

Mortgage rates are now at 5.20%. Mortgage applications, purchase volume, and refinancing decreased for the week. The NAHB housing market index decreased two points to 77 from 79 the previous month. Here is an explanation of the NAHB index:

The NAHB/Wells Fargo HMI is a weighted average of three separate component indices: Present Single-Family Sales, Single-Family Sales for the Next Six Months, and Traffic of Prospective Buyers. Each month, a panel of builders rates the first two on a scale of “good,” “fair” or “poor” and the last on a scale of “high to very high,” “average” or “low to very low”. An index is calculated for each series by applying the formula “(good – poor + 100)/2” or, for Traffic, “(high/very high – low/very low + 100)/2”.

Housing permits increased 0.4% with most of the increase being attributed to buildings with 5 units or more. Permits for single unit housing decreased 4.9% from last month and permits for 2 to 4 units were unchanged from the previous month. Housing start numbers were similar to the housing permits numbers for the month.

Housing completions decreased for the month, mostly attributed to the significant decrease in completions for single units. Acquiring supplies for building remains a challenge for builders. Existing home sales also fell for the month. Existing home prices have increased a little over 15% from the previous year while sales of existing homes fell 3.8% from the previous year.

The Feds beige book echoed the sentiments of challenging supply chain backlogs, labor market tightness, and elevated input costs facing the seven districts reported. Demand for workers remains strong although higher wages have encouraged workers to leave jobs and pursue workplaces that are more flexible and pay higher wages. Demand from consumers is also strong and companies are still able to pass on the higher costs to customers.

China’s zero-tolerance policy on Covid remains a challenge to supply chains as does the Ukraine/Russia conflict.

The leading economic index decreased slightly. If you aren’t familiar with the leading economic index, I included the indicators used in this index below:

  • Average weekly hours worked by manufacturing workers 
  • The average number of initial applications for unemployment insurance
  • The volume of manufacturers’ new orders for consumer goods
  • New orders index
  • The volume of new orders for capital goods
  • Number of new building permits for residential buildings
  • S&P 500 index
  • Inflation-adjusted monetary supply 
  • Spread between long and short interest rates 
  • Average consumer expectations for business conditions

 

Here are a few links you might find helpful:

The census bureau’s list of economic indicators:

https://www.census.gov/economic-indicators/

The Conference board business cycle indicators:

https://data-central.conference-board.org/#

The conference board requires you to sign-up as a member to view its content. It’s free to sign-up.

The indices fell following the hawkish tone of the Fed. All of the sectors closed lower on Friday. Did the market overreact to the sentiment of the Fed?

Russell 2000

S&P 500

Dow Jones

Nasdaq

 

Sector Summary:

I won’t include the sectors chart as I usually do, as each sector fell to close the week. Materials broke to the downside on heavy volume touching the 50 SMA. The technology sector came close to testing the 50 SMA but ended the week testing last month’s lows to the downside. Industrials gapped below the 50 SMA breaking through the $98.78 reference level. Energy dropped after reaching a new high, falling alongside the rest of the market.

Healthcare gapped down, breaking through its 50 SMA heading towards testing the 200 SMA to the downside. Utilities fell after testing a recent high. The financial sector is close to testing a recent pivot low, and the 50 SMA crossed the 200 SMA to the downside. The consumer discretionary sector broke through its 50 SMA after testing the 200 SMA above and failing. The 200 SMA has held as a resistance level. The consumer staples fell after making a new high.

Market Commentary:

Markets reacted negatively to the Feds’ hawkish statement. The week ahead may show a slight recovery, but resuming the bullish trend seems far-fetched for the moment. Across the economy, you can see how higher rates and input costs are affecting companies. Five-year yields ended the week higher than the ten-year yields and slightly higher than the thirty-year yields. Economic growth is slowing and higher rates aren’t helping. With Covid still lingering in the background, it’s hard to say how the months ahead will progress. I’d remain cautious moving forward, accepting that large market declines and heightened volatility will remain.

It is my belief that there will still be buying opportunities for diligent investors and traders.


Cash flow report for the previous week:

I, like others, still face cash flow challenges due to rising prices. This past week, I managed my finances quite well although I did have some hiccups. Hopefully, this coming week, I’ll be able to continue limiting my discretionary purchases. My largest expense has been gas from week to week even with the decrease in gas prices.

Grade: C-

Reason: Room for improvement

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