The large-cap indices struggled last week, as risk sentiment was pressured by increased rate-hike expectations and concerns over tensions between Russia and Ukraine. The S&P 500 fell -1.8%, the Nasdaq Composite fell -2.2%, and Dow Jones Industrial Average fell -1.0%. The Russell 2000, however, rose +1.4%.
Wednesday’s Fed minutes may provide a sense of how quickly policymakers want a rate-hike. The U.S. data calendar features January figures on producer prices, which will be closely watched after data last week showing consumer prices hit their highest in 40 years last month.
Meanwhile, earnings season is ending, but not before a last flurry of reports.
Here’s what you need to know to start your week.
1. Geopolitical tensions – Gold & Crude
Wall Street’s three main indexes closed sharply lower on Friday after the White House warned that a Russian attack on Ukraine could begin any day. While stocks got hit, prices for Treasuries, the dollar and other safe-haven assets, such as gold ($GLD) rose.
Crude prices also surged as the prospect of sanctions on Russia, a top producer, added to fears over already tight global supplies.
Some analysts believe soaring crude prices could exacerbate already high inflation, adding to pressure on the Fed to raise rates more aggressively.
2. Geopolitical tensions – Lessons from 2014
In keeping in line with history, we could draw lessons from when Russia invaded the Crimean Peninsula in 2014.
Tensions intensified over February through March in 2014 with the ensuing invasion drove a brief rally in the US 10-year Treasury note from a peak of 3.03% at the end of 2013 to about 2.58% by early February before stabilising in a 2.45%–2.6% range until June. There was a similarly mild and short-lived response in stocks and at a time of many other developments. The S&P500 sold-off by under 6% from late January through early February 2014 and then went on to rally for the remainder of the year.
Russia eventually got heavily sanctioned and the ruble eventually collapses and subsequently drives imported inflation much higher. That scenario in 2014–15 drove the Russian central bank to hike its key rate from 5.5% at the start of 2014 to a peak of 17% by the end of 2014. The Russian economy achieved no growth in 2014 and shrank by 2% in 2015.
Nevertheless, differences to 2014 include the facts that Russia’s military build-up appears to be much larger this time than in 2014 and both Europe and the US appear to be much more supportive militarily. Whether the net effect raises risk, or lowers it given a stronger counter presence is highly uncertain.
3. FOMC
With markets already pricing in a strong chance the Fed will hike rates by half a percentage point at its upcoming March meeting, Wednesday’s minutes from the Fed’s January meeting, will be scrutinized for any indications on how big a move officials are contemplating.
Last month Fed Chair Jerome Powell flagged a March lift-off and said there was “quite a bit of room” to raise interest rates without threatening the recovery in the labor market.
Last Thursday Bullard said in the light of the latest CPI reading he now wants a full percentage point of interest rate hikes over the next three Fed meetings.
On Friday, Goldman Sachs said it now expects seven quarter percentage point rate hikes this year, up from its previous forecast of five, as it updated its forecast following Thursday’s U.S. CPI data.
4. Earnings
Earnings season is drawing to a close, but this week will see a big flurry of notable reports. Airbnb Inc ($ABNB) reports on Tuesday, followed by semiconductor giant NVIDIA ($NVDA) and Cisco Systems ($CSCO), which are both due to report after the close of trade on Wednesday. Deere ($DE), the world’s largest maker of farm equipment reports Friday.
Retailer Walmart ($WMT), known for its everyday low pricing, reports Thursday, and is better positioned than other retailers to withstand rising price pressures. The pandemic has triggered inflation across the supply chain from labor to raw materials, forcing companies to pass higher prices onto consumers. However, many companies could still not fully offset the impact and that hit their profits.
Key Economic Calendar (Weekly)
Markets will get an additional update on the inflation picture with Tuesday’s release of producer price inflation (PPI) figures, which are expected to remain elevated.
Soaring inflation has seen consumer sentiment deteriorate so Wednesday’s data on retail sales will also be in focus this week. Retail sales are expected to have risen 1.8% last month, boosted by higher auto sales.
All times listed are EST
Tuesday
8:30: US – PPI: likely rose to 0.5% from 0.2% MoM in January.
Wednesday
8:30: US – Core Retail Sales: predicted to rise to 1.0% from -2.3% MoM.
8:30: US – Retail Sales: expected to jump to 1.8% from -1.9% MoM.
14:00: US – FOMC Meeting Minutes
Thursday
8:30: US – Building Permits: expected to retreat to 1.750M from 1.885M.
Friday
10:00: US – Existing Home Sales: anticipated to decline to 6.12M from 6.18M.
Top 3 Leading and Lagging Sectors (Weekly)
Eight of the 11 S&P 500 sectors closed lower, led by the communication services (-2.6%), information technology (-2.9%), real estate (-2.8%), and consumer discretionary (-2.1%) sectors. The materials (+1.1) and energy (+2.2%) sectors ended the week with decent gains.
1. $XLE (Energy) +2.19%
2. $XLB (Materials)+1.06%
3. $XLF (Financial) +0.02%
Benchmark: $SPY -1.84%
1. $XLK (Technology) -2.95%
2. $XLRE (Real Estate) -2.72%
3. $XLC (Communication Services) -2.61%
Market Breath (Weekly)
% of Stocks Above 200 DMA = 34.28% (+6.06%)
% of Stocks Above 50 DMA = 35.59% (+18.67%)
Market Technicals (Rally Cycle Count: Day 11)
$SPX (S&P 500) vs $RSP (S&P 500 Equal Weight) – (Net High/Low -65)
$SPX breached its 200-day moving average, as $SPX upward momentum faltered with a -1.90% plunge on Friday after National Security Advisor Jake Sullivan acknowledged there was a “distinct possibility” that Russia could invade Ukraine before the end of the Olympics.
$SPX ended the market week with a loss of -1.82%. $SPX remains resisted by a Downtrend Line coinciding with its all time high VWAP resistance.
It is worth to note further deceleration of deterioration on market technical is witnessed on US Market Net Highs/Lows, with only -65 companies for the week (comparing to -121 companies on previous week).
The immediate support to watch for $SPX this week is at 4,320 level. A breach of 4,320 level would be concerning in mid-term as it would confirm the establishment of a downtrend channel (lower highs, lower lows) on $SPX.
$QQQ (Nasdaq 100) vs $QQQE (Nasdaq 100 Equal Weight) – Below All Major Moving Averages
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 loss -3.06% last week with $QQQE also losing -1.58%, playing out its bearish inverse head and shoulder pattern, with rejection observed on its declining 20-day moving average, coinciding with ATH VWAP resistance during the week.
Both $QQQ and $QQQE remains below their major moving averages (10/20/50/200).
The support level to watch for $QQQ is at $340. Similar to $SPX, a breach of the mentioned support level would be concerning in mid-term as it would confirm the establishment of a downtrend channel (lower highs, lower lows),
$BTCUSD (Bitcoin / USD) – Morphing out a Bearish Head and Shoulder Pattern
Bitcoin ($BTCUSD) retraced -0.81% over the week, trading towards a convergence of major moving averages (10, 20 and 50 day). $BTCUSD is currently morphing out a right side shoulder of a mid-term bearish Head and Shoulder Pattern.
The key support level for $BTCUSD is at $40,990, a VWAP level anchored from its lower high established in late December 2021.
$PCCE (Put/Call Ratio Equity) & $VIX (Volatility S&P 500)
The spike level to watch for $PCCE is at 1.00. The the current reading of 0.972 this week was elevated from previous week’s 0.808 (+20.28%) affirming the sell off we witnessed in the major market indexes last Friday.
$VIX have also elevated to of 27.35 (+17.89%), remaining outside of its 24.50 upper boundary implying risk of a further sell off.
$IEI/$HYG (Credit Spread) – $TNX (10YR Treasury Yield) – Eyes on Spread
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 creeped up to 1.52% over the week (+0.02), conveying some jitters in the high-yield universe.
$TNX have also further edged up to 1.956% (+0.025), the highest pre-pandemic level.
The Fed is going to be raising its policy rate and implementing quantitative tightening measures. Market rates are moving higher in anticipation of that move. Similar actions are being pursued by other central banks. It’s no longer an all-in mentality. On the contrary, it’s now a pullback mentality with respect to the monetary and fiscal policy largesse.
That will inevitably fuel adverse changes on the margin. Economic growth can still be good for a while, but it will be sub-optimal. Earnings growth can still be good for a while, but it will be sub-optimal.
NAAIM Exposure Index – 66.8 (+4.26)
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.
This week’s NAAIM Exposure Index number is: 66.8, up from 62.54.
Top Trading Ideas for the Week
$BABA this is the only downtrending name in my WL. obeying its DTL with VCP, convergence of 10/20/50 MA with price action now.
ER on 15/2 (not 10/2 displayed on TV). im wishing for it to remain within the DTL before an earnings pop. 200MA is 35% away, good RRR if the trade works pic.twitter.com/busK9TAPUG
— Jeff Sun, CFTe (IFTA) (@jeffsuntrading) February 10, 2022
$DDS held onto $225 support on 3 occasion during the market correction in dec and jan, forming a very constructive cup and handle formation.
now trading above 10/20/50MA this week, but still have a ATH VWAP at $278 to recapture. that will be the cleanest breakout level imho. pic.twitter.com/JgZCnIEeHY
— Jeff Sun, CFTe (IFTA) (@jeffsuntrading) February 10, 2022
$BKKT is currently forming another bullish pennant within its AVWAPs with a inside day bar
microcaps like this are much more actionable in periods of uncertainty. their movement are not dictated by the market when it undergoes accumulation
10/2: $363mil Vol
11/2 $137mil Vol pic.twitter.com/asuKS8q9WC— Jeff Sun, CFTe (IFTA) (@jeffsuntrading) February 14, 2022
