Mr. Powell Goes to Washington, FedEx Earnings on Tap

Market Recap

Markets endured its worst week since March of 2020. The move comes as we exit the artificial world of predictable massive liquidity injections.

The S&P tumbled -5.8%, while the Dow and Nasdaq both declined -4.8%. The Dow fell below the 30,000-psyche level for the first time since January of 2021.  Small caps were hit particularly hard as the Russell 2000 slipped -7.5%. Volatility remained elevated with the CBOE Volatility Index up 12% for the week.

Every sector in the S&P saw a decline. Energy was hit particularly hard, falling 17% during the week. Some forced selling was at play as margin calls led to investors selling winners to meet increased demands. The defensive Utility sector witnessed the same issues as it fell -9.2%. Materials (-8.3%), Industrials (-5.8%), Consumer Discretionary (-5.5%), Information Technology (-4.9%), Financials (-4.9%), Telecom (-4.6%), and Consumer Staples (-4.4%) all witnessed aggressive selling.

The United States was not the only region to see losses as the central bank tightening squeezed liquidity across the board. Japan (-6.7%), India (-5.4%), France (-4.9%), Germany (-4.6%), London (-4.1%) and Hong Kong (-3.4%) all saw big declines. The one stand-out was China (+1.1%) as investors expect to see the country exit from its Zero Tolerance COVID policy and perhaps offer stimulus to its economy.

The Fed moved forward with quantitative tightening as it implemented its largest rate hike since 1994. The move comes amidst weaker economic data which is increasing expectations for a stagflationary environment around the globe. This continues to lead investors to the sidelines ahead of the Q2 earnings season.

Markets are showing some early signs of stabilizing as we open a holiday-shortened trading week. The key question is whether this is a deadcat bounce or the start of a potential rally. Investors will continue to follow economic data for signs of a potential recession. Traders will be on high alert for potential pre-announcements from companies and the price reaction to any news.

Capital Building

Early Market Thoughts

Markets are off to a solid start. The early debate is whether this is a dead cat bounce or a potential oversold rally that will have some legs.

Commodities are for sale in early trade with copper, iron ore, cotton, palm oil, wheat, and corn all for sale. Of course, copper and iron ore are also proxies on economic activity so this could also be an ominous sign highlighting a weaker global economy.

Crude is rebounding after a difficult week. It is still down $10 from its recent highs. The moves come ahead of a meeting between the Biden Administration and big oil companies to discuss ways to ease pressure on consumers at the pump. Black gold will remain volatile as investors await President Biden’s trip to Saudi Arabia in July.

The Fed will remain in focus as Jerome Powell heads to Capitol Hill for a two-day testimony. This is not an envious position as the Fed Chair will be pummeled by both sides of the aisle. Both Democrats and Republicans will look to distance themselves from the inflationary woes facing constituents. The Fed is trying to re-establish its credibility but it will be difficult to achieve in a scenario where the head of the central bank is being raked across the coals.

It is a light week for earnings but there are a few key names that will provide us some insight into the economy. Homebuilders Lennar (LEN) and K.B. Homes (KBH) post results. LEN already reported a decent round of results early Tuesday but did have a cautious outlook on the industry. FedEx (FDX) sets up as a key read on the economy when it posts its numbers Thursday after the close.

The preliminary PMI Manufacturing and Services surveys are due out Wednesday night and Thursday morning. This will give us anecdotal evidence on how the global economy is performing. These will collectively be a key update on sentiment.

How markets react to each of these data points will give us a read on how aggressive sellers will be following steep haircuts to valuations across a wide variety of equities, commodities, and bonds.

Key Support/Resistance levels.

S&P 500 (ES U22)

  • Support: 3650 set up as a key bottom last week. We held that level on multiple tests. A break of 3650 will set us up for a ride down around 3500 which is a key area in that August through November 2020 period ahead of the elections and the Pfizer vaccine news.
  • Resistance: Bears will have to push the S&P above 3800 to give worry bears.

Nasdaq (NQ U22)

  • Support: 11,250 set up as a key support area last week. This is the key breakout area around the 2020 election/vaccine news. The 50-monthly moving average is a key trend line that sits at the 10,600 area.
  • Resistance: The NQs will need to break above 11,7450-11,800 to encourage buyers to come off the sidelines.

Dow Jones (YM U22)

  • Support: The 30,000 psychological number sets up as the key area for markets as we kick off the week of trade.
  • Resistance: If bulls can establish support at 30K then the next step will be to push back above 31,000 and open the potential for recovering some of last week’s losses.

Four Stories to Watch

Fed Chair Testimony– Fed Chair Jerome Powell will head to Capitol Hill on Wednesday and Thursday. His testimony comes on the heels of last week’s Fed decision. The central bank raised rates 75 bps, its largest increase since Bill Clinton was in office. Mr. Powell will try to re-establish credibility on the Fed’s ability to manage inflationary pressures. He will face a tall task as members from both sides of the aisle will try and distance themselves from these issues and place blame on the Fed as we head toward the November mid-terms.

Germany Pivots to Coal– The country announced it would return restart coal-fired power plants and offer companies incentives to curb natural gas consumption. The move comes as Russia halts some natural gas deliveries to Europe as the war in Ukraine continues. This is a country that is led by the Green Party which has based its entire run on an economy free of fossil fuels. Germany was joined by the Netherlands and Austria. Coal stocks will need to be on the radar for traders this week.

Manufacturing and Services PMI– The preliminary release of manufacturing and services sentiment will provide us insight into the progress of the global economy. Japan and Australia survey results will be released on Wednesday night. Europe, the U.K. and U.S. survey results post Thursday morning. The preliminary results contain 85% of the survey respondents. We will watch these figures closely for clues on the direction of inflationary pressures.

Monkey Pox– The World Health Organization will vote on whether to declare monkey pox a public health emergency. While we would not expect this to have a major impact on the global economy, it could be seen by some as a potential headwind given the sensitivity around the COVID pandemic. Traders will want to keep monkeypox stocks on the radar including SIGA Technologies (SIGA), Emergent Biosciences (EBS), and GeoVax Labs (GOVX).

Four Stocks to Watch

FedEx (FDX)– The company will report its Q4 results Thursday after the close. FDX is always a key proxy on the overall economic environment given its close ties to transportation of goods. FDX shares spiked last week after it announced an agreement with D.E> Shaw to add two new directors to its board. It also announced a change in long-term compensation to target lower CAPEX and a 53% increase in its dividend. Shares spiked 14% in reaction, its best single day performance since 1986. FDX is running into resistance at its 200-sma ($230) ahead of its earnings report.

Amazon (AMZN)- The e-commerce giant shares have been under steady selling pressure as concerns around the consumer continue to mount. The stock is down 36% YTD and -43% from its 52-week highs. The company hosts a four-day global event this week that will focus on its progress in machine learning, automation, robotics and space. Investors will want to hear updates on its Prime Day which will occur in July. AMZN will be kicking off its drone delivery service in Lockeford, California during its Prime Day.

Coal Stocks– The news out of Germany that it will re-start some of its coal plants is shocking. The death of fossil fuel may have been exaggerated. This will put coal names in focus this week. Arch Coal (ARCH), Peabody Energy (BTU), BHP Group (BHP), and Glencore (GLNCY) will see increased volatility around the news.

Homebuilders (LEN and KBH)– The Homebuilder group will remain under scrutiny as we get earnings reports from two key players. Lennar (LEN) already posted better-than-expected results this morning. It also provided a cautious outlook as it remains a difficult environment. K.B. Homes (KBH) will provide its numbers on Wednesday after the close.  With mortgage rates on the rise and materials in focus, this group promises to be in focus for traders.