Tuesday played out almost exactly as scripted. First, some hawkish Fed talk from a handful of regional district presidents put a wobble into U.S. equity index futures markets. Then, the Fed chair somehow soothed the beast at his confirmation hearing before the Senate Banking Committee. Not that Jerome Powell said anything that the senators participating or the public would like in particular, or look forward to. Rather, Powell sounded confident in his and in the central bank's ability to adapt to and tackle the Fed's dual mandates of price stability and maximum sustainable employment despite the obviously more difficult environment. Safe to say, and this is just the man in the darkened window's opinion, Powell has easily won confirmation for a second term in his current position, and has probably done so with broad bipartisan support.
Prior to even getting to the hearing, the public heard from Cleveland Fed Pres. Loretta Mester, and Kansas City Fed Pres. Esther George, both of whom sit as voting members of the FOMC this year, both of whom are thought of as policy hawks. The two did not disappoint. Mester, who is a Sarge fave, was rather reserved, but did lend support to the idea of lifting the target for the Fed Funds Rate in March should current economic conditions persist. George went right for the jugular (balance sheet)... "My own preference would be to opt for running down the balance sheet earlier rather than later as we plot a path for removing monetary accommodation." The two were joined by a third speaker who had not been on my pre-opening radar. Atlanta Fed Pres. Raphael Bostic, who voted in 2021, but does not vote in 2022, and has been seen as dovish earlier in his term, but more pragmatic of late. Bostic offered that the Fed could consider a rate hike in March, and could start reducing the balance sheet "fairly soon." Guess the ducks are lining up.
The Chair
Jerome Powell was just vague enough and sounded just confident enough to allow Treasury securities to rest just a bit, to allow U.S. dollar valuations to come in throughout the Tuesday session, and to allow risk assets such as equities, cryptocurrencies, and commodities (especially crude) to recapture some lost ground. Powell got to the point quickly without breaking anything.
On the Fed's dual mandate, Powell said, "To get the very strong labor market we want with high participation, it is going to take a long expansion. To get a long expansion, we are going to need price stability." Powell added, "High inflation is a severe threat to achieving maximum employment and to achieve the long expansion that could give us that."
Powell mentioned that the era of pandemic induced stimulus was indeed over, and that the Fed would set itself on the "long road" toward more normal monetary policy this year. The man in the window asks... "What is normal at this point?" The shadowy figure adds... "We haven't seen anything close to normal since at least prior to the "Great Financial Crisis" and in fact, really since the 1990's." From my desk, I tip my cap. The man in the darkened window is quite accurate there.
The central bank has certainly abused policy in order to prioritize the short to medium term benefits of debt super-cycle expansion over longer-term costs in an effort to bring forward growth and demand in a globalized fiat environment. Blame for that can go back to every Fed Chair since the late great Paul Volcker. He was one of a kind. No one like him. Talk about courage to act.
Back to the present, and perhaps, the best Fed Chair since, if only because this one does seem to learn from mistakes and adjust policy accordingly. Powell on the here and now... "I would expect this year, 2022, will be a year where we take steps towards normalization." On the balance-sheet run-off, that there mere mention of in last Wednesday's Minutes put the Nasdaq Composite albeit briefly into correction territory, Powell said that this would happen "sooner and faster" than the last time it did so, beginning in 2017.
Powell said it all. Basically, rate hikes are coming in groups, and later on, but still this year, the Fed will start removing this excess liquidity from the monetary base. The markets did not mind it on Tuesday, but they will. We will enter a regime of volatility that will persist either until the central bank accomplishes the mission at hand (not as likely), or breaks something and backs off (based on experience, more likely).
What Could Possibly Go Wrong?
Funny you asked. For one, economic growth could "normalize" more quickly than labor force participation, wage growth, or inflation. It seems obvious that even if things went relatively well, that economic performance from here could and probably will be quite lumpy where great leaps of faith will have to be taken at times not just by investors, but by the public at large.
Secondly, we have heard no word from the SARS-CoV-2 coronavirus regarding its intentions. Should Omicron be the last variant to surge globally causing economic disruption, then there would be some relief as supply chains that remain as kinked up as ever, unkink. Has anyone tried to buy meat, produce, bread or eggs lately? Good luck with that. You'll find some food. You won't complete your shopping list.
Should a new variant rise beyond Omicron that proves even more transmissible, or from the Delta variant's lineage that proves more lethal, with increased virility, then all bets are off. Currently, China, which somehow after all of this, remains the planet's engine for growth and home to corporate manufacturers... still locks down entire cities and regions as pockets of the virus show up.
China continues to pursue a "zero-Covid" policy, and this slows down production at factories, and business at seaports. How much will this impact firms such as Nike (NKE) or Apple (AAPL) and so many others? Not that ships can get into U.S. ports once they're here anyway.
Marketplace
Breadth was quite strong across U.S. equity markets on Tuesday. Winners beat losers by almost three to one at the NYSE, and by a rough five to three at the Nasdaq. Advancing volume comprised 83% of the NYSE aggregate on Tuesday and 76.4% of the Nasdaq aggregate. The tech heavy Nasdaq 100 (+1.47%) and Nasdaq Composite (+1.41%) led the way, followed by the Russell 2000 (+1.05%) and the S&P 500 (+0.92%).
Using S&P sector-select SPDR ETFs as proxies, eight of the 11 sectors closed in the green, easily led by Energy (XLE) , which was up 3.4%. Communication Services (XLC) , Technology (XLK) , and Materials (XLB) , all experienced gains of at least 1%. Only the highly defensive Utilities (XLU) sector gave up any ground considered remotely significant at -0.6%.
The catch here, and it may indeed be a catch, is that this wonderfully optimistic, and quite bullish session occurred on sharply reduced trading volume from Monday or from most of the heavier selling days last week. Composite NYSE trading volume dropped 9% on Tuesday from Monday, while composite Nasdaq trading volume dropped 16.9%. Trading volume attributable to S&P 500 subordinate names landed 11% below the 50 day trading volume moving average for that index. That same deficit amounted to 10% for Nasdaq listed names.
On Energy
The Energy sector SPDR, XLE is already up 13.9% year to date. Tuesday was the seventh trading day of the year. At the fund's current pace... only kidding. I have done the math for fun, but certainly not worth mentioning publicly. Within the sector, on Monday, the Dow Jones US Oil Equipment & Services Index popped for 4.1% led by large-caps Halliburton (HAL) and Schlumberger (SLB) , up 5.4% and 3.9%, respectively. The Dow Jones US Exploration & Production Index moved 3.27% higher, led by large-caps Exxon Mobil (XOM) , BP PLC (BP) , and ConocoPhillips (COP) , up 4.2%, 3.3% and 3.2%, respectively.
Now, this is where it gets interesting. The Dow Jones US Integrated Oil & Gas Index produced an increase of 3.53% on Monday led by large-cap APA Corp (APA) , up 8.8%. APA is a Houston, Texas based holding company that is parent to the well known Apache Oil. The company, largely forgotten for years now, explores for oil and gas in the United States, primarily in the Permian Basin, in Egypt's western desert, the North Sea and in Suriname. You have probably heard me talking up APA on television and on Twitter Spaces late last year and so far this year. The name is an old-school Sarge fave from oil's glory days. I have also been building a long position in ConocoPhillips for their aggression in establishing a larger presence in the Permian as I have been expecting U.S. discipline to soon break at these market prices for crude.
On Tuesday, the EIA (Energy Information Administration) forecast that U.S. output is likely to hit a new annual high of 12.4M b/d (barrels per day) in 2023, eclipsing the previous record of 12.3M b/d set in 2019. This, despite Washington's overt attempts to shift the U.S. away from fossil fuel consumption. In addition, the EIA also now forecasts U.S. natural gas output to rise to a record 97B cf (cubic feet) per day in 2023, up from 93.5B cf in 2021. This would place the U.S. as the planet's top exporter of liquified natural gas, rising past both Australia and Qatar.
Can APA hold the ground gained? Relative Strength appears to reaching "overbought" territory. The Full Stochastics Oscillator is already there. The daily MACD is certainly extended. That said, the stock has just benefited from a "baby" or "swing traders'" golden cross (21 day EMA crosses over the 50 day SMA).
It really depends on what you see. Obviously you can see the successful breakout from the cup and handle pattern that I had previously laid out. Do we see another cup with handle pattern, with a $28 pivot? or do we see a cup with no handle? That would place the pivot at the left side apex of the cup ($31). My target price is currently $37. I am however going to move my panic point up to $26 ( a buck below the 50 day SMA) from $21 (a buck below the 200 day SMA).
Wall Street to the Rescue
The semis had been on the ropes. More specifically, long-time Sarge fave Advanced Micro Devices (AMD) had been on the ropes. Late Monday, five star (at TipRanks) rated and very highly esteemed (even among five stars) analyst John Vinh of KeyBanc Capital Markets upgraded AMD to "overweight" from "neutral" Vinh set a target price of $155 on the shares, writing that AMD is "one of the most compelling data center stories, given its exposure to cloud and continued market share gains."
Vinh adds, "We expect AMD to significantly outpace cloud industry growth in 2022.", while also mentioning that AMD is gaining share or business with Microsoft (MSFT) and Meta Platforms (FB) . On Tuesday morning, fellow five star analyst Aaron Rakers reiterated his "overweight" rating and his price target of $180. Rakers sees AMD potentially earning $6 per share by 2025.
While I remain long AMD equity, I put on a (long) 132/135 bull call spread (expiring on Friday) on Monday, and sold $125 puts expiring on Friday to pay for it (small credit). On Tuesday, I covered the puts as almost all of the value had already been drained and I was not going to risk three days in a volatile marketplace just to capture a few more dollars. The call spread is for now, still in place.
Readers will recognize this chart...
Readers will also note that the handle on my (orange) cup with handle turned out to be more than a handle. Now, however, Relative Strength is rising again, the Full Stochastics Oscillator is coming out of an "oversold" condition, and the daily MACD appears to be potentially setting up for a bullish crossover.
Now, I could be wrong, because quite honestly... last time I assessed AMD for you from a technical perspective, I was. That said, I really do trade this name, and my profit/loss ratio is impacted by my analysis, so this is the real thing, gang, not some drivel for a "made for TV" clown from a major investment bank with no personal skin in the game. This is what I now see...
I think (think, not know) that AMD has possibly gone into a basing period of consolidation. The top of the base would be $164. I also see the potential for a developing double bottom with a pivot of $156. I am going with that pivot for the sake of being conservative. So, Vinh's target price and my pivot are kind of married. Guess that kind of makes me aggressive. If I am right, that would place my target at $187 (higher if the true pivot is $164). My panic point will for now be $124 (a break of Monday's low).
Economics (All Times Eastern)
08:30 - CPI (Dec): Expecting 7.0% y/y, Last 6.8% y/y.
08:30 - Core CPI (Dec): Expecting 5.4% y/y, Last 4.9% y/y.
10:30 - Oil Inventories (Weekly): Last -2.144M.
10:30 - Gasoline Stocks (Weekly): Last +10.128M.
13:00 - Ten Year Note Auction: $36B.
14:00 - Federal Budget Statement (Weekly): Last $-191B.
The Fed (All Times Eastern)
14:00 - Beige Book .Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (SJR) (1.34)
After the Close: (KBH) (1.77)
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