Earning concerns and the 50% drop in the price of First Republic hammered the stock market last Tuesday with over a 2% drop in the Nasdaq Composite and Russell 2000. The 1.6% decline in the S&P 500 was followed by a drop of 0.40% on Wednesday that had many concerned about a sharply lower weekly close.
The Nasdaq Composite was higher on Wednesday and strong results from Meta Platforms (META) confirmed the created a bullish tone after Microsoft (MSFT) reported and others like Honeywell (HON) also had stronger reports than expected.
The too-high earnings expectations have been used as an argument by market skeptics this year as to why the stock market was going to see a sharp drop. But according to Bloomberg “81% of S&P 500 companies have beaten analysts’ estimates”. Of course, these are the same earnings estimates that many high-profile analysts had previously complained about being too high.
For the week the Nasdaq 100 was the leader gaining 1.9% a full % more than the S&P 500 and Dow Jones Industrials Average. On the downside, the Dow Jones Transportation Average was the weakest down 2.7% while the iShares Russell 2000 lost 1.3%.
There is still a big disparity in the year-to-date (YTD) performance with the Nasdaq 100 up 21.1% and the Dow Jones Utility Average down 0.8% So far YTD the SPDR Gold Trust is up 8.9% a bit more than the S&P 500.
My expectations for better-than-expected earnings I felt would pressure the those large traders who are short to start covering their large short position in the S&P 500 futures. The over 100 point rally from Wednesday’s low of 4049 to Friday’s close at 4169 I believe has started this process. A move in the S&P 500 above the widely watched 4200 area and could take it to 4300.
The Spyder Trust (SPY) has closed well above the former downtrend, line a, from the August 2022 and February 2022 highs. It was also overcome in the middle of April before the sharp pullback. There is resistance from last August in the $421-$431.73 area. The new pivot for May is at $411.80 with the 20 day EMA at $409.24.
The S&P 500 Advance/Decline dropped below its WMA on Tuesday then moved sharply back above it on Thursday and made a new monthly high for Friday. A strong move above the February 2nd high is likely to signal an even stronger rally.
The Invesco QQQ Trust (QQQ) had a low last week of $309.89 but then closed at $322.56. This was well above the May pivot at $318.37 and the 20-day EMA at $315.86. The 50% retracement resistance from the 2021 high is at $331.36 with the 61.8% resistance at $349.61.
The Nasdaq 100 A/D line has reversed sharply above its WMA and now has key resistance at line b. It would take a drop below last week’s low to turn it negative. The relative performance (RS) has moved back above its WMA indicating that QQQ is again leading SPY. In early January the RS identified QQQ as a market leader.
The economic data last week, like the GDP and Pending Home Sales were weaker than expected, as was the Consumer Confidence. The Fed’s favored inflation gauge indicated persisting inflation which many have concluded is consistent with a 25 basis point rate hike by the FOMC this week.
The yield on the 10-Year T-Note finished lower last week after the rebound failed below the resistance in the 3.65% area. A move below the support at 3.342% should signal a decline to the 3.21% area. The MACD analysis indicates that the rebound from the April lows may be over. A further decline in yields could be a reaction to signs from the FOMC that they will pause raising rates for a while.
Given that the recent data from the CFTC indicates a historic short position in the 10-year T-Note futures. If they were looking for yields to move higher on the GDP or the PCE inflation data they did not get it.
The short position in the Treasury futures of course could represent some hedging. However, the extremely high short levels in the Treasury futures and S&P 500 futures were last seen in early 2019. Those levels were followed in 2019 by a very sharp rally in the stock market and a precipitous decline in the 10 Year T-Note yield. It should be another interesting week in both the bond and stock markets.
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