Hot Markets, China's Economy, Busy Week Ahead, Retail Earnings, Trading Lockheed

US Equity markets have been hot. Red hot. The S&P 500 has posted four consecutive “up” weeks and closed on the doorstep of its own 200 day SMA on Friday. The Nasdaq Composite and Russell 2000 each posted their fourth consecutive “green” weekly candlestick as well.

In the case of the Russell 2000, that small-cap focused index actually did manage to capture its 200 day line on Friday afternoon. The Philadelphia Semiconductor Index, which I focus on a lot in this column, has now put together six consecutive winning weeks, but still needs to tack on another 7.2% to meet its individual 200 day SMA.

Equity index futures traders pressured US markets overnight in response to alarmingly poor Chinese economic data that sparked a policy response from Beijing. On Sunday night (NY time), China’s National Bureau of Statistics released a bevy of data that show July growth for both retail sales and industrial production printing below June pace and well below expectations. Year to date fixed asset investment missed its mark for July as well. In addition, while Chinese unemployment may have hit the tape at 5.4%, unemployment among 16 to 24 year-olds reached 19.9%, which is an all-time high for China.

China’s Covid-zero policy is continuing to hamper both internal mobility and economic activity in the world’s second largest economy. As there is no sign of Beijing shifting in policy due to sustained economic underperformance, the PBOC (People’ Bank of China), China’s central bank has cut its one year lending facility rate to 2.75% from 2.85% and its seven day lending rate from 2.1% to 2%, while adding 2B yuan to the banking system through seven day reverse repo operations.

While Chinese equity markets were down small on Monday, US equity index futures appeared to be trading lower in response as the US dollar strengthened.

Marketplace

As mentioned above, US stocks have been on a positive run. The momentum, which had started to slow the week prior to last, picked back up last week in response to a spate of inflation based data released by the Bureau of Labor Statistics for July. Just days after the same BLS had published its July Employment report that was taken as reflective of a strong labor market (At least the establishment survey was. The household survey paints a decisive more negative picture.), markets braced for July’s snapshots of both consumer (CPI) and producer (PPI) inflation.

Much to the (happy) surprise of both Wall Street and the public at large, on a month over month basis, the CPI printed flat from June, while the PPI printed in outright contraction. In fact, inflation at the headline and at the core, on a month over month and year over year basis, surprised to the downside.

This provided the catalyst for portfolio managers to add risk over the course of the week. The hope? The gamble? That perhaps policy makers would slow down on aggressive short-term rate hikes, possibly allowing inverted yield spreads to ease as the nation moves into September and into a more serious phase of quantitative tightening. The place and time for such a pivot would obviously be Jackson Hole, Wyoming later this month at the Kansas City Fed’s economic symposium.

However, before we get carried away, any Fed officials who have spoken out in recent days have sounded more hawkish than dovish. Fed Gov. Christopher Waller, who has been hawkish of late, will speak publicly later this morning. Wall Street doesn’t, at least so far, appear to be buying the story that with inflation ebbing (really since March) and the economy hitting a series of bumps, that the FOMC can stay on its hawkish trajectory.

At last glance, futures markets trading in Chicago are now pricing in a 55% probability for a 50 basis point increase to be made to the target range for the Fed Funds Rate on September 21st and another 50 basis point hike on November 2nd followed by a 25 bps increase in December to get the FFR to 3.5% to 3.75% by year’s end.

On Monday morning that’s where changes to be made to the Fed Funds rate appear to stop. Just last (Sunday) night, futures markets were pricing in a series of hikes and cuts for the first half of 2023.

Where We Stand

Last week, the S&P 500 tacked on 3.26% to close down 10.26% year to date, but up 17.71% from its mid-June low. The S&P 500 closed at 1.1% discount to its technically important 200 day SMA.

That line just happens to be where potential trend-line resistance is likely to be found as both Relative Strength and the daily MACD appear to be extended.

The Nasdaq Composite gained 3.08% last week to close down 16.6% year to date, and down 19.52% from its November high. The Nasdaq Composite also closed up 23.49% on Friday from its mid-June lows, but still 3.54% short of its 200 day SMA.

Interestingly, readers will note that while the Nasdaq Composite, like the S&P 500 is chasing down its 200 day SMA, while experiencing relative strength that is nearly over-extended, this index has already captured what should have been trendline resistance in doing so.

Readers will also note that the Philadelphia Semiconductor Index, which is often a (the) driver of broader Nasdaq performance, did hit a bump last week, did hit trend-line resistance and did at least for the moment, appear to pass that test, with plenty of room left in its reading for relative strength before reaching what most technicians would consider to be an overbought condition. That’s positive. However, just look at that daily MACD. That indicator is telling us, at least for right now, to proceed with caution. it’s a flashing yellow light.

Markets could be overtly searching for a reason to take something off on Monday morning and the news out of China, coupled with that negative GDP print out of the UK on Friday, tell the tale of a global slowdown. That might just be all the algos need to force a selloff until there is an upside catalyst (or not) of our own “domestic”.

After all, all 11 S&P sector-select SPDR ETFs shaded green for the past week, and a dark shade of green it was. Led by Energy (XLE) and the Financials (XLF) , all 11 sectors gained at least 1% last week, while nine of the 11 gained more than 2%, eight of 11 gained more than 3%, and five of 11 gained more than 4%. It was a pretty darned good week for the net-long crowd.

The Week Ahead

Despite the fact that earnings season is nearly over, this is going to be quite the busy week for data interpretation, and subsequently for those of us making a living off of or in financial markets. On the earnings front, there are still quite a few headline level names out there, mostly well known chain retailers that really need to say something positive.

This week, we’ll hear from two sets of rivals… Walmart (WMT) and Target (TGT) , who are both coming off of awful quarters, as well as Home Depot (HD) and Lowe’s (LOW) . In addition to those four, investors will also see results from the retail comedy troupe known as Kohl’s (KSS) and semiconductor equipment provider Applied Materials (AMAT) .

Beyond earnings, the focus will be on the Fed Minutes of the last meeting, to be released this Wednesday as well as a plethora of macroeconomic data-points. On tap are July numbers for Housing Starts, Existing Home Sales, Retail Sales, Industrial Production, as well as regional manufacturing surveys for August out of New York and Philadelphia. The Atlanta Fed will be updating its GDP Now model for Q3 (currently running at growth, yes growth of 2.5%) this week on both Tuesday and Wednesday.

Question… It’s early, and right now that model is running on the plus side, but if the economy does happen to contract for a third consecutive quarter, will anyone in Washington call that a “recession”?

Such a Deal

Anyone else notice the $7.63B firm-fixed-price, fixed-price incentive, undefinitized modification to a previously awarded advanced acquisition contract awarded on Friday by the Department of Defense to Lockheed Martin (LMT) ? The news was somewhat expected and was more or less priced in. The modification increases the ceiling to procure Lot 15 aircraft to 129.

Looks like, out of this lot, the US Air Force can look forward to receiving 49 new F-35’s, the US Navy will receive 15, the US Marines will get 10, non-US DoD participants will be getting 36 aircraft and 16 will be set aside for foreign military sales. The work will be done in Florida, California, the UK, Italy, and Japan and is expected to be done by October 2024.

While this news is not having an immediate impact on market price for shares of LMT, I do believe that these shares are setting up for an explosive move. Readers will see that support in July was found at almost a precise 61.8% retracement of the entire November through April rally and that over the entire time frame covered by this chart, the stock has experienced a series or lower highs as well as a number of higher lows.

In addition, the stock has just experienced an upward crossover of the 50 day SMA by the 21 day EMA which is short-term bullish. However, at the same time… that 50 day SMA has been pushed lower while the stock’s 200 day SMA has been pulled higher. Such a crossover, if it came to pass, would be considered bearish, confusing the picture.

Now, we’ll zoom in to the right side of the chart…

It appears that LMT has created a small, but evident double bottom pattern with a $434 pivot. Oh, look at the last sale… $434, which has been stiff resistance since late July. Hmm. Know what I think? I think if LMT can kick that door open, that the stock could make a run at much higher prices, I won’t even post a potential target price unless that happens, because my potential target price is semi-farcical. Conversely, should LMT fail here, a retest of the 200 day SMA becomes likely. I am still long the name.

Economics (All Times Eastern)

08:30 – Empire State Manufacturing Index (Aug): Expecting 5.2, Last 11.1.

10:00 – NAHB Housing Market Index (Aug): Expecting 55, Last 55.

16:00 – Net Long-Term TIC Flows (June): Last $155.3M.

The Fed (All Times Eastern)

10:50 – Speaker: Reserve Board Gov. Christopher Waller.

Today’s Earnings Highlights (Consensus EPS Expectations)

After the Close: (WWE) (.55)

(XLE and AMAT are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)

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