The stock market had a strong week that saw the S&P 500, Dow, and Nasdaq register gains of 4.7%, 4.9%, and 5.2%, respectively. With October coming to an end, the outlook for the world economy continues to deteriorate as central banks remain stuck to their tightening plans to tame stubbornly high inflation, leading to substantial deleveraging activity with US mortgage demands drops to 25-year low. This phenomenal is likely to spillover to other parts of the world.
Investors now turn their focus to a busy week of earnings reports, with Alphabet ($GOOG), Microsoft ($MSFT), Twitter ($TWTR), Facebook ($META), Amazon ($AMZN), and Apple ($AAPL), among the major companies to report results. In terms of economic releases, third-quarter GDP data will fuel the debate on whether the world’s largest economy is heading toward a recession.
Here’s what you need to know to start your week.
1. Megacap earnings
The four largest U.S. companies by market capitalization are due to report in the coming week with investors keen to see how the corporate bellwethers are performing against a backdrop of soaring inflation and and the Federal Reserve’s aggressive rate hike path which have raised fears over the prospect of a recession.
Microsoft ($MSFT) and Alphabet ($GOOGL) are due to report on Tuesday, followed by Amazon ($AMZN) and Apple ($AAPL) on Thursday.
Third-quarter earnings season has so far has been better-than-feared after results from companies including Goldman Sachs ($GS), Bank of America ($BAC), Netflix ($NFLX) and Johnson & Johnson ($JNJ) boosted sentiment.
2. China
Investors will be awaiting the release of delayed Chinese economic data, including third quarter GDP figures along with reports on trade, retail sales, industrial production, and the housing market for September.
Stringent COVID-19 curbs along with supply chain disruptions caused by the war in Ukraine plus slowing global growth due to sharp increases in borrowing costs to curb inflation have weighed on the world’s second-largest economy.
Chinese President Xi Jinping secured a precedent-breaking third leadership term on Sunday and introduced a top governing body stacked with loyalists, with analysts watching closely to see what the implications for economic policy might be.
Key Economic Calendar (Weekly)
The U.S. is to release a first look at third quarter GDP on Thursday, with the economy expected to have expanded at an annualized rate of 2.1% after two consecutive quarters of contraction in the first half of the year. GDP data will fuel the debate on whether the world’s largest economy is heading toward a recession.
Market participants will also closely monitor the Federal Reserve’s preferred personal consumption expenditures inflation for further clues on the central bank’s rate-hike path. Also, it will be interesting to follow flash PMI readings for October.
All times listed are EDT
Monday
9:45 US – Flash Services PMI: forecast to increase from 49.6 to 49.3
Tuesday
10:00 US – CB Consumer Confidence: forecast to decline from 108 to 105.7
Thursday
8:30 US – Advance GDP q/q: forecast to increase from -0.6% to 2.3%
Friday
8:30 US – Core PCE Price Index m/m: forecast to decline from 0.6% to 0.5%
Top 3 Leading and Lagging Sectors (Weekly)
Energy was the top performer this week with a gain of 7.3%. Technology came in second place with a gain of 6.6%. On the flip side, healthcare (+1.8%) and consumer staples (+2.2%) showed the slimmest gains.
Market Breath (Weekly)
% of Stocks Above 20 DMA = 59.61% (+70.80%)
% of Stocks Above 50 DMA = 32.17% (+75.50%)
% of Stocks Above 200 DMA = 26.81% (+25.93%)
Market Technicals – (S&P 500, NASDAQ, Bitcoin, Bonds & Credit Spread, NAAIM)
$SPX (S&P 500) vs $RSP (S&P 500 Equal Weight) – (Net High/Low -216)
A hard landing for the economy was a prominent concern for market participants as the central banks ramped up their fight against inflation. It led to broad-based selling, rooted in worries that there will soon be large cuts to earnings estimates. Accordingly, there was a reticence to pay up for stocks and an inclination to take risk off the table.
$SPX reclaimed its posture with a significant rally above its flattening 10 & 20-day moving average, and finished the week higher (+4.74%).
Earnings were generally better than expected this week, which was a nice tailwind for stocks. Bank of America ($BAC) and Goldman Sachs ($GS) were standouts for financials; AT&T ($T) and Verizon ($VZ) were standouts for communication services; United Airlines ($UAL) and Lockheed Martin ($LMT) were standouts for industrials; IBM ($IBM) and Lam Research ($LRCX) were standouts for information technology.
With $SPX currently closing above its flattening 10/20-day moving averages from its month long accumulation phase within a range of 3,600 to 3,750, the golden question lingering every investor’s mind is if this is the market bottom, or a bottom in a bear market rally.
The support to watch for this week remains at 3,490 level, a breakdown of the lowest level established year to date.
Bull Case: Reclaim above 3,900 50-day moving average level.
Bear Case: Breakdown of 3,490 level, the lowest level established year to date. Next support at 3,400 level.
$QQQ (Nasdaq 100) vs $QQQE (Nasdaq 100 Equal Weight) – Higher Treasury Yields To Continue Painful Transition For Stocks
Tech and growth names have been hard hit since the start of 2022 by a rapid rise in Treasury yields on the back of expectations that the Fed will hike interest rates aggressively to combat high inflation as higher rates can hurt their companies with high valuations based on the prospect of future profits.
$QQQ gained +5.63% for the week, but remains as the weakest major index year to date with -30.6% return.
The support level to watch for $QQQ this week remains at 254 level, a breakdown of the lowest level established year to date.
Bull Case: Reclaim above 292 50-day moving average.
Bear Case: Breakdown of 254 level. The next support level is at 230.
$BTCUSD (Bitcoin / USD) – Bearish Pennant Forming Below 10/20-Day Moving Average
Bitcoin declined -0.43% for the week. $BTCUSD remains below its declining 10 & 20 day-moving average. Similarly, long term moving averages such as 200-day and 50-day are all in declining fashion.
$BTCUSD’s Bearish Pennant pattern remains in play, a consolidated price action behavior that may prompt a further sell off in near term.
The level of support to watch for $BTCUSD this week remains at $18,157, the lowest level of the previous month before reaching its year till date low $17,590.
Bull Case: Reclaim above its existing 50-day moving averages at $20,000.
Bear Case: Breakdown of $18,157, a immediate support before reaching its year till date low $17,590.
$PCCE (Put/Call Ratio Equity) & $VIX (Volatility S&P 500) – Persistence in Reflection of Imminent Major Sell Off Ahead
VIX >30 is assumed to accompany large volatility, resulting from increased uncertainty, risk, and investor fear. VIX <20 generally correspond to stable, stress-free periods in the market. Higher VIX levels equates to more expensive options premium and vice versa for lower VIX level.
The spike level to watch for $PCCE in the last 24 months period is at 1.00. The current reading is 0.825 (-4.50%).
Similarly, the VIX volatility index, also known as Wall Street’s fear gauge declined to 29.67 (-7.28%).
The weekly build up in momentum of both $PCCE and $VIX is reflecting a major sell off remains imminent for the equities market ahead.
$VIX/VXV – Reading at 0.96 (Tranquility)
The VIX/VXV measures the ratio between 1-month implied volatility and 3-month implied volatility, which is helpful as it filters out higher baseline readings on VIX.
- If it is greater than one, it implies uncertainty, negative for equities. On the contrary, such high reading (i.e. spikes) coincide with market bottoms.
- If it is less than one, it implies tranquility, favorable for equities.
- If it is below 0.82, the returns for S&P500 are often less than stellar.
$IEI/$HYG (Credit Spread) & $TNX (10YR Treasury Yield) – 10-Year US Treasuries Yield On Track For Year Till Date High
Market participants are keeping a close watch on credit spreads as one of the better economic signals. Junk bond issuers are perceived to be bigger credit risks, so if economic growth slows or contracts, there will be increased angst that these issuers won’t be able to make good on their interest payments. Hence, a widening high-yield spread is regarded as a leading indicator of difficult economic times which, in turn, often invites a more challenging period for the stock market since difficult economic times translate into weaker earnings prospects.
Credit Spread reduced to 1.56 (-0.02) for the week. The year to date high level is at 1.64 set in early July.
The 10-yr note yield ($TNX) rose further by 20 basis points this week to 4.21%. Notably, the 2-yr note, which is more sensitive to changes in the fed funds rate, did not exhibit the same outsized reaction as the 10-yr note. The 2-yr note yield only rose one basis point this week to 4.51%.
NAAIM Exposure Index 43.28 (+118.1%)
The NAAIM Exposure Index represents the average exposure to US Equity markets reported by members of the National Association of Active Investment Managers. It provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks. The blue line depicts a two-week moving average of the NAAIM managers’ responses.
This week’s NAAIM Exposure Index number is: 43.28 (Wednesday)
Top Trading Ideas for the Week
$LXU$TOST$CROX$PDCE#Trading #MomentumLeaders #RelativeStrength #TradingView #jsTradingIdeas pic.twitter.com/0EVhUz0Exw
— Jeff Sun, CFTe (@jeffsuntrading) October 22, 2022
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