Major equity indices traded mixed during the first half of Monday’s session. A Fed governor on Sunday told traders and investors to curb their enthusiasm after last week’s dramatic price moves, fueled by a rotation of 2022 winners, into all sorts of heavily shorted laggards.
The Dow Jones Industrial Average gained 0.2% in light trading Monday morning while the S&P 500 lost 0.1%. The Nasdaq composite fell 0.6%. The Russell 2000 Small Cap Index fared better, down 0.4%.
Volume fell sharply on the Nasdaq and NYSE from Friday morning levels.
The yield on 10-year Treasury bonds rebounded to 3.87% while crude oil fell more than 2% to $86.70 a barrel. Gold added a few dollars after hitting a three-month high on Friday.
SPDR Gold Stock ETF (GLD) is approaching moving average resistance. The positive action in recent weeks has dug the bottom of a 35-week consolidation pattern. But it will take weeks of buying pressure to confirm a bottom.
For now, gold bugs and other enthusiasts should keep a close eye on the critical 200-day moving average, which is at 168.
Crypto sentiment plunged further over the weekend after bankrupt exchange FTX was hacked, draining so-called hundreds of millions of dollars from exchange wallets. Bitcoin posted its worst losses in five months last week and tested Wednesday’s low overnight.
The digital currency traded at $16,450 early Monday, up 0.9%.
Fed governor warns investors
Fed Governor Christopher Waller warned on Sunday that the central bank has “some way to go” before rate hikes end. He chastised stock investors, telling them last week’s weaker-than-expected CPI report was just a data point.
Waller agreed the Fed could slow the pace of rate hikes to 50 basis points at the December meeting, but insists that would not constitute a shift in fiscal policy. He also warned that Fed interest rates would continue to rise and stay high until inflation fell near the Fed’s 2% target.
Finally, he notes that CPI reports in the coming months will need to show that inflation “is on the downward slope.”
Friday’s The Big Picture highlighted currency tailwinds that could support higher stock prices.
He notes that “the strong dollar has been a big headwind for the stock market, but signs of spike inflation have seen the currency tumble in recent days. Friday’s weakness in the US dollar index extended a move which began on Thursday in cooler-than-expected U.S. consumer inflation data.”
This reversal should support equities as “many companies have seen their results hit by high exchange rates. If the dollar continues to weaken, it will conversely boost earnings for companies with overseas operations. “.
The U.S. dollar index traded up 0.5% on Monday morning, but has fallen 7% from its peak in September.
CME tool FedWatch now forecasts an 80.6% rating for a 50bp rise at the December meeting, while the 75bp crowd fell to just 19.4%.
IBD raised its outlook for “market in confirmed bullish trend” last week, supporting equity exposure between 20% and 40% of a portfolio, while major indexes probe long-term moving averages.
Walmart and Nvidia Top Earnings Calendar
Dow Jones Components walmart (WMT) and Home deposit (HD) topped a long list of retail earnings releases this week. Target (TGT), Macy’s (M), TJX (TJX) and Lowe’s (DOWN) also signals.
Meanwhile, most tech watchers will focus their attention on Cisco Systems (CSCO) and Nvidia (NVDA), both of which report Wednesday night.
Nvidia is expected to report third-quarter earnings of 71 cents per share on $5.83 billion in revenue.
The chipmaker ended a torrid growth streak last quarter when profits fell 51% year-over-year and sales rose just 3%.
Earnings growth is expected to fall 25% this year. But analysts are more optimistic for 2023, looking for a 31% increase. Funds are yet to be convinced, with property falling flat over the past two quarters.
NVDA stock is down 52% from the all-time high recorded in November 2021, but is up 51% from October’s two-year low at 108.13. However, it is still trading below the 200-day moving average.
This week’s economic calendar features October retail sales, the producer price index (PPI) and housing starts.
Goldman Sachs now predicts that the core personal consumption expenditure (CPE) price index, the Fed’s preferred inflation gauge, will drop from 5.1% currently to 2.9% in December 2023. The company expects cleaning up supply chains to drive down property prices, wage growth and rental costs, contributing to a more stable economic environment.
The New York Times recently reported that one million apartments are currently under construction or have new permits. This is the largest pipeline since 1974. Housing costs are expected to decline as this massive supply comes online.
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Stock market movers and shakers
The Innovator IBD 50 (FFTY) ETF traded up 0.5%.
Advanced micro-systems (AMD) jumped 2.9% to a two-month high after double upgrades from UBS and Robert Baird.
AMD stock fell over 65% from November 2021 to the October 2022 low at 54.57. It has gained more than 20 points from the low, but is still trading below the 200-day moving average.
AMD’s earnings per share rating climbed to 93, underscoring superior earnings performance in recent months. However, fund ownership has dropped after an accumulation phase and it will take months to restore lost sponsorship.
Solar leader IBD 50 Enphase Energy (ENPH) marked the buy zone with a handle cup base and sold on Friday, triggering the 7% sell rule. ENPH stock added 3.0% on Monday morning.
Friday was a bad day for most market leading bands. However, leaders that are sold before the end of the year often become aggressive buying targets. This happens because the funds want their portfolios to show strong annual returns to their investors, a market phenomenon called window dressing.
Also in IBD 50, Diamondback Energy (FANG) entered a buy zone, breaking above the buy point of 162.34 from a 104-day cut basis. FANG stock is near a record high, up 0.6%.
It has near-perfect composite, EPS and topical ratings, but annual EPS growth is expected to flatten in 2023, following the bumper earnings of 2022.
However, investors don’t seem to care about this hurdle at the moment, with energy prices holding firm at elevated levels.
Follow Alan Farley on Twitter at @mstrader.
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