Market Thoughts
While markets were lulled into a peaceful rest at All Time Highs, fully expecting a trade agreement to be announced at the end of the week between the U.S. and China, now we have proverbial smoke detectors going off and causing quite a market stir. President Trump tweeted this earlier today, saying in short that tariffs on $200 billion worth of Chinese goods will increase from 10% to 25% Friday instead of a Trade Deal – and he would further slap a 25% duty on another $325 billion Chinese imports. Now, maybe it’s posturing to force China to make concessions by Friday. Maybe he never had a chance of a deal in the first place and he’s blustering. Either way, futures are selling off with Dow down 450 pts at one point with USDJPY having broken critical support below $110.68 and USD/CNH up a whopping 500 pips back above 6.79. With that, the US Dollar is on track for its biggest jump against offshore Yuan since last summer. China markets reopen after a holiday and Japan remains closed – which can stoke fear of another Yen flash crash as happened early January.
Assuming markets stay down overnight, Implied Volatility should be bid by market open. This is indeed a solid test as every market dip or morning gap down has been bought. I personally don’t need or expect Volmaghedden. And I realize the quants have much leverage to contain this VIX bump, but I contend it was due. I see and have warned to clients in my recent Intermarket Analysis posts that $VIX is an outlier that can Revert with Velocity. Just needs a trigger. We have a good one – US-China Trade Deal falling apart. The market has not priced this probability in. In addition, future earnings have not priced this in either, so I would expect revisions to start re-evaluating earnings expectations which could further take the wind out of the sails of market bulls.
Tops happen when markets stop going up on good news.
We haven’t moved higher in 16 mos. Some call that consolidation before moving higher. I call it distribution before turning lower.
We need the expansive results from trade – not talk, not tariffs, + certainly not trade wars. https://t.co/iH4JEI9tbs
— Samantha LaDuc (@SamanthaLaDuc) May 5, 2019
There were signs the deal might be falling apart …
1. Copper took out 3 mos of gains in one day last wk
2. $HYG/JNK/WTIC spiked down hard mid-week
3. Trump/Kudlow pushed Fed to drop rates 1%
4. $2T Infrastructure Bill made the media rounds
5. My $NYSE price targets were hit: $11,250 to $13,000
https://laductrading.com/2019/a-prediction-come-true-then-and-now/
SPY Has Gaps To Fill
SPX closed at $2945.64 Friday after bouncing off 21D support. Given news of Trump’s new Tariffs, tomorrow should be lower – likely on its way to breaking $2893.42 support (previous gap fill level) on its way to ~$2700 area. I have marked the open gaps (yellow arrow, white horizontal price level) – to be filled – with corresponding price targets short. I would not be surprised if we move down, level by level, until all gaps fill – which would also correspond to the 38.2% Fib Retracement level of the entire December rally.
Offshore yuan putting in a huge move tonight – taking out the 100D.
We don’t often see moves of 0.8% in the CNH….h/t for chart from @themarketear
‘Melt-Up’ Bull Thesis Test In Progress
Before the last January 2018 plunge in the equity markets, the SP 500 peaked on January 26th, 2018 at 2,872 – so Friday’s close of 2,945 gave SPX (excluding dividends) a 2.5% gain – for the past 16 months – despite the YTD return of 17% off the Dec lows.
Bespoke thinks we are correcting in time not price:
I can’t even list all the analysts, banks and money managers I have seen of late predicting a market melt up – and with some really good reasons.
Corporate High-Grade and High-Yield credit markets as well as market breadth data, continue to support higher SP 500 prices and valuation, not to mention what I think will be improved SP 500 earnings data as we move through 2019. Brian Gilmartin
It’s true, YTD returns for the HYG in 2019 is already higher than in 2017 – when HYG returned 6% against SPY 22.5% return. To me that’s an obvious divergence or outlier that needed to revert. Now that it has, I’d say the snapback in Oil and HY will not act as tailwind any more to the SP 500 but serve as a drag as risk to global demand is tested. In the same way that build-up inventories in China, Europe and US need to be drawn down which further pulls future GDP lower and with it future earnings.
I have remained of the opinion that the market is guilty until proven innocent, and that:
If/when Brexit and/or US+China Deal fail, the air pockets will be filled. Until then, US rate hike reversal and ROW negative yields are all that matter. @SamanthaLaDuc, April 4, 2018
Now we will see if the Market cares about Trade Deals.
Expected Move
For the completed trading week ending May 3, 2019, the S&P 500 did hit the bottom of the weekly expected move before bouncing higher. S&P 500 moved all of 5 points higher for the week and once again finished within its weekly expected move. This has been happening a lot lately – the market moving very slowly up while very little intraweek. In fact, the SPY only traded below its 21D 3 times in the past 72 days. Some might say bears have been transfixed on “Market strength and breadth is weakening” while bulls have been convinced “Market is not in danger of overheating”. Well, as we look to Monday, we likely hit S&P 500 weekly expected move of $34/points by the open.
And isn’t it a tell that despite the the market calm, and complacent sentiment, underneath that façade the VIX has risen 3 weeks in a row – despite the usual Friday volatility crush. IN fact, more non-commercial short VIX Futures positioned with each successive week. There may not be enough fuel for a “Volmageddon” type event but we can still have volatility which reprices everything!
Earnings Calendar
- The forward four-quarter (19Q2 –20Q1) P/E ratio for the S&P 500 is 17.0.
- The estimated earnings growth rate for the S&P 500 for 19Q2 is 1.6%.
- Reuters is forecasting earnings to grow by nearly 1% with more than 1,100 companies reporting results this week, including 61 S&P 500 members.
#earnings for the week $DIS $ROKU $CHK $EA $JD $TTD $CRON $BHC $SYY $ETSY $TSN $KOS $MPC $DBX $REGN $TEUM $OXY $GLUU $GWPH $DNR $BUD $CTL $STMP $WFT $HEAR $AMG $ACRX $DSK $PLX $LYFT $CROX $HIIQ $CAMT $TWIN $BKNG $PLUG $AGN $OSTK $MTCH $DK $LITE $AIGhttps://t.co/lObOE0dgsr pic.twitter.com/OrVFjHCoc1
— Earnings Whispers (@eWhispers) May 4, 2019
Some implied moves for #earnings next week(1309 companies reporting):
$BHC 8.0%
$SYY 4.1%
$HTZ 13.0%
$GWPH 9.2%
$SEDG 11.2%
$TACO 8.4%
$CROX 11.5%
$BUD 4.6%
$AGN 5.7%
$REGN 6.7%
$MNK 15.3%
$EA 8.7%
$MTCH 11.5%
$PZZA 8.2%
$DDD 13.5%
$HUBS 8.3%
$TRIP 10.2%
$ICPT 7.4%
$ROKU 14.5%
$ETSY 13.2%
$HEAR 18.2%
$DIS 4.4%
$MCHP 7.3%
$SRPT 7.0%
$CVNA 13.8%
$PETQ 12.5%
$RDFN 12.8%
$RUN 10.4
$STMP 14.3%
$PRGO 9.5%
$TTD 15.2%
$OSTK 18.6%
$CRON 13.5%
$DBX 8.6%
$BKNG 6.1%
$YELP 11.6%
$AAXN 11.2%
Economic calendar
Not only do we have to contend with Trade War worries, and Theresa May making a last ditch effort for a soft Brexit, we do have some inflation prints worth watching in US PPI and CPI as well as Initial Jobless Claims. Europe and China catch up from the May day holiday with the release of their services PMI’s. We’ll naturally also then get the composite and global composite PMI’s as well.
Chinese CPI and PPI will be hotly watched Thursday given what has been going on with Swine flu and pig prices. Last print showed slightly softer” official China PMI data, attributed to a build-up in inventories in the previous month. Many companies likely increased production in March to take advantage of the value-added tax cuts that went into effect in early-April. But the insight from the data ddn’t only show a slowdown in growth for the Chinese manufacturing sector, it also pointed to a loss in momentum for the services sector — which accounts for more than half of China’s economy.
Monday May 06
Markets are closed in the UK, Ireland and Japan. China PMI will set the tone.
Tuesday May 07
After earlier Australian releases, the RBA official consensus is a hold, but some commentators are predicting a 25bp cut. Uncertainty predicts a material move in AUD. Another day with no scheduled US (or European) news of note. JPY BoJ MPC Minutes
Wednesday May 08
Supposedly, Chinese vice-PM Liu is scheduled to visit Washington. The only significant earnings release of the week is DIS, after the close. Guidance should include their new Disney Plus streaming service projections.
Thursday May 09
The third major print from China this week is inflation, and may set the initial tone in the absence of European releases, although the US Trade Balance will be watched closely. CNY China CPI (YoY e 2.5% p 2.3%)
Friday May 10
Today is the most important news day this week, with the key US CPI release, estimated to improve despite last week’s PCE miss. Canada’s NFP comes a week later than the US this month. It would normally be a chance to see CAD reaction in isolation, but the US CPI print is simultaneous. Plenty of Fed speakers today, with Bostic, Evans, Brainard and last but not least Chair Powell on the roster. USD US CPI (Core YoY e 2.1% p 2.0%)
Seeking Alpha Events and Stocks To Watch:
Ira Sohn Conference on May 6 and SALT on May 7-10.
Uber time: Uber (UBER) is expected to start trading on May 10 to high expectations. The pricing is expected to fall in a range of $44 to $50 a share, with the company setting a valuation range of $80B to $91B vs. initial expectations for a +$100B debut. By the numbers, Uber showed an operating loss of $3B last year on $11.3B in revenue and negative free cash flow of $2.1B. Still, Atlantic Equities prefers Uber to Lyft (LYFT). “Given the benefits of scale, we prefer Uber, with its market-leading ridehailing position augmented by the fast growing Eats business and freight brokerage opportunity. We forecast ’18-22 27%/34% gross bookings/adj gross profit CAGRs, driven by high-teens ridehailing growth, rapid Eats/freight expansion and eventual easing in promotional intensity,” said the firm. Meanwhile, Wedbush is starting off coverage with an Outperform rating and price target of $65. “The brand loyalty of Uber is hard to dispute as the company continues to attract drivers and consumers illustrating an impressive formula to go after a $5.7 trillion opportunity globally on transportation which swells to$7-$8 trillion when including third-party food delivery and freight/logistics,” notes analyst Dan Ives. As for Lyft, the company is due to disclose earnings on May 7 in a highly-anticipated report that could set off some volatility and provide metrics to compare to Uber. The plans of Uber and Lyft will be closely watched by Avis Budget (NASDAQ:CAR), Hertz Global (HTZ), Tesla (TSLA, General Motors (NYSE:GM) and Ford (NYSE:F).
Airlines on watch: Traffic reports and guidance updates are on tap for the airline sector.
Data watch: Same-store restaurant sales for April are due out next week.
American Academy of Neurology 2019 Annual Meeting: One of the biggest events in the healthcare sector next week is the AAN meeting scheduled for Philadelphia. Key presentations are expected out of Allergan (NYSE:AGN) on ubrogepant PTC Therapeutics (NASDAQ:PTCT)-Roche (OTCQX:RHHBY) on risdiplan, Ionis Pharmaceuticals (NASDAQ:IONS)-Biogen (BIIB) on tofersen, Alexion Pharmaceuticals (NASDAQ:ALXN) on soliris, Jazz Pharmaceuticals (NASDAQ:JAZZ) on sunosi, GW Pharmaceuticals (NASDAQ:GWPH) on epidiolex, Ra Pharmaceuticals (NASDAQ:RARX) on zilucoplan, Biohvane Pharmaceutical (NYSE:BHVN) on rimegepant and Ovid Therpeutics (NASDAQ:OVID) on OV101. Also at AAN, Eli Lilly (NYSE:LLY) has a first-time presentation of lasmiditan clinical data on the onset of response for the acute treatment of migraine and Exicure (OTCQB:XCUR) plans to present a poster on “Spherical Nucleic Acids Show Increased Distribution and Longer Persistence than Linear Oligonucleotides in Rat Brain Following IT Administration.”
Fundamental Analysis Reads
TSLA Truths – Why Robotaxis in 2020 Are Impossible and More Truths About #AutonomousVehicles, via @beth_kindig
A bottom in Gilead (GILD). (John C. Ogg, 24/7 Wall St.)
Personal Note: A reminder that I will be traveling for a week to Spain – evening of May 7th to evening of May 14th. I will of course look in on both markets and trades, but my live trading room will be closed. I wish you a great week of trading!!
Samantha
