Ever watch a youngster climb up to the high board at the town swimming pool, and freeze? Maybe once upon a time it was even you? Oh, markets were indeed open for business. Trading volumes though well off of Monday's levels... were far from paltry. Major indices did little to be honest on the first of three highly concentrated days of headline level quarterly earnings releases. For the regular session, just scanning across our favorite large cap indices, one sees that from among the Dow Jones Industrials, S&P 500, Nasdaq Composite and Nasdaq 100, nothing moved more than 0.15% for the day. This while GameStop (GME) traded once again in a $70 range during that regular session before tacking on more than another $100 overnight. By the way, I have been known to day trade volatile issues just for fun. I have not touched this one this week nor last. It's not that I don't trust the fundamentals, it's that in this one traders can not even trust the intraday technicals. That, and if one commits to trading GME, then they are unlikely to focus on anything else until finally flat the name, to include human functions such as eating and using the restroom.
Market breadth on Tuesday was once again mixed at best. I think we usually see a little more optimism ahead of an FOMC policy decision. Then "they" (traders) will unleash the hounds as the Fed Chair works his/her (in this case his) way through the press conference. On Tuesday, losers beat winners at both the New York Stock Exchange and the Nasdaq Market Site. Yet, again advancing volume topped declining volume at both exchanges, though just by a hair at the NYSE.
Whatever Happened To The Dinosaurs?
I think traders need to have an eye on three factors that seem to be taking shape. Growth has retaken, for the most part, market leadership away from value, as more cyclical sectors have started to populate the bottom of the daily performance tables semi-regularly. In addition, though small-caps had been fourth quarter market darlings, we now see what might be a divergence between the two major small cap indices. The Russell 2000 has started to form a possible rounding top, while the S&P 600 appears to remain in somewhat better technical shape. Hard to take anything away from that.
Very important, I think, as this group would be directly responsive in a good way to a reopening economy resulting in increased velocity would be the transports, and the transports are underperforming the entire large cap space of late.
Readers will note that the Dow Transports have formed more than a rounding top and now test the average's 50 day SMA (12,603) for already the second time in 2021.
Zooming out, readers will also see that aside from a few days of weakness last October ahead of the election that this (blue) line has been staunch support for this average since mid-May 2020. Dow theorists will be watching this, as the S&P 500 generally correlates well to the Dow Jones Industrial Average, and historically, theorists look for the industrials and transports to confirm each other.
Of course the theory requires one to believe in the idea that financial market output (price discovery) is a model in efficiency. Clearly, investors can point to the recent action in several stocks of lesser quality, fundamentally, as proof that as algorithms have replaced human traders at the point of sale over the last 15 years or so, that well developed price discovery has not just been damaged, it has been lost.
Has anyone been creative enough to suggest that once certain stocks reach thresholds for either increased volatility or reduced liquidity that these stocks maybe should be moved to a special "side" exchange where they could trade in fractions instead of decimals (thus thickening both sides of the book), and the market model moved back toward something closer to a centralized open outcry model with a specialist working as market maker and human traders acting as agents for the public. That would slow down the pace of execution, and permit actual price discovery based on massed supply and demand at given price points.
Makes too much sense, huh? Maybe this would cost the big boys too much money as order flow would be difficult for the sell-side to internalize, while serving the best interest of the public? Would not exposing order flow to a slower auction at a central point of sale not do a better job of ensuring best price execution? Can you imagine agents (public orders) on both sides of a trade? What? No answer? I can't hear you. That's what I thought.
Good News
The Biden administration announced on Tuesday that the federal government would ramp up delivery of Covid-19 vaccines to the states by 16% over the next three weeks. More importantly, the administration appears to be making progress toward purchasing an additional 200 million doses, 100 million each from both Pfizer (PFE) and Moderna (MRNA) . The idea is to vaccinate the general public by the end of summer 2021. This would be in addition to the possibility that Johnson & Johnson (JNJ) published results from Phase 3 testing for that firm's "one and done" vaccine candidate as early as later this, or early next week. JNJ is believed to be able to bring 100 million doses to bear in short order and one billion doses this year, should the firm be granted an "Emergency Use" authorization by the FDA.
Bang The Drum
This afternoon the Fed's Federal Open Market Committee will publish the central bank's first official policy statement of 2021. Gone from the 2020 FOMC are Patrick Harker (Philadelphia), Robert Kaplan (Dallas), Neel Kashkari (Minneapolis), and Loretta Mester (Cleveland). Sliding into those spots will be Thomas Barkin (Richmond), Raphael Bostic (Atlanta), Mary Daly (San Francisco), and Charles Evans (Chicago). All in all, this exchange probably lends itself to a more dovish posture if that's possible, as neither Loretta Mester nor Esther George (Kansas City), probably the two most hawkish regional district presidents will serve on the committee this year.
What to look for this afternoon? I would expect that even if the statement itself is not dramatically altered, that Chair Powell will have to focus more on the recent weakness in labor markets and consumer spending than on recent strength in housing and in manufacturing. This will allow the Chair to move to conversation away from timing the eventual tapering of asset purchases, and toward emphasizing the intention to remain ultra-accommodative for the foreseeable future as well as how likely Powell himself and Treasury Secretary Janet Yellen will be to work not just closely but well with each other. The two are known to have great respect for each other as well as a comfortable working relationship from Yellen's days at the Fed. Powell joined the Board of Governors in 2012, before succeeding Yellen as Chair in 2018. Yellen ascended to the Chair in 2013 after already serving as Vice Chair under then Chair Ben Bernanke.
Expect to hear an abundance of fiscal cheerleading this afternoon as the U.S. legislative branch is currently bouncing President Biden's proposed $1.9 trillion Covid-relief bill off of the Capitol Building walls to see what sticks. My opinion, though I would rather sound hawkish, would be that most of this idea needs to pass as a bill into law. I do not want to get any closer to Modern Monetary Theory than we already are, but increased deficit spending while mired in a damaged and suppressed economy would seem the only path until said economy can function somewhat closer to normally than it is now. We can fight about the budget after more folks are working and eating. Infrastructure? That is also tomorrow's debate. Not today's.
Trading Thoughts
1) Microsoft (MSFT) roars. Beat. Beat. Upside guidance. Azure revenue +50%, Xbox hardware sales +86%, Xbox content +40%, Windows OEM non-pro +24%, LinkedIn +23%, Intelligent Cloud +23%. Basically, the firm is hitting the ball well to all fields. I remain long the name, and I reiterate my target price of $278.
2) Advanced Micro Devices (AMD) is trading lower on what was an excellent quarter. AMD also beat, and beat, and provided upside guidance. I never bet against Lisa Su. Never. I remain long. My price target remains $106, though I do have my eyes on the stock's 50 day SMA ($91). That level should hold. If it does not, that in my opinion will be my next opportunity to pay a discounted price for a few shares.
3) Raytheon Technologies (RTX) did beat, and beat, but earnings growth printed negative yet again. The real news for investors was the stated intention to boost the dividend (already yielding 2.8%). This stock has served its purpose for us, preserving the capital that had once been allocated to Lockheed Martin (LMT) . Lockheed, for that matter, also reported. LMT missed on earnings and disappointed on guidance. I think I need to see a little more capitulation in LMT, but the time draws near to rotate back into this stock and out of RTX. I have to do the math, but if I am not assigned an article at the time I pull that trigger, I will at least post the trade idea on Twitter. Just so you know where my brain is leaning.
Economics (All Times Eastern)
08:30 - Durable Goods Orders (Dec): Expecting 1.0% m/m, Last 0.9% m/m.
08:30 - ex-Transportation (Dec): Expecting 0.5% m/m, Last 0.4% m/m.
08:30 - ex-Defense (Dec): Expecting 0.5% m/m, Last 0.7% m/m.
08:30 - Core Capital Goods (Dec): Expecting 0.4% m/m, Last 0.4% m/m.
10:30 - Oil Inventories (Weekly): Last -+4.351M.
10:30 - Gasoline Stocks (Weekly): Last -26K.
The Fed (All Times Eastern)
14:00 - FOMC Policy Decision.
14:30 - FOMC Press Conference.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (ABT) (1.35), (T) (.73), (BA) (-1.61), (GLW) (.48), (GD) (3.54), (NSC) (2.48)
After the Close: (AAPL) (1.40), (CCI) (1.55), (FB) (3.19), (LRCX) (4.46), (NOW) (1.06), (SYK) (2.55), (TSLA) (1.03), (URI) (4.26)
(MSFT, AMD, ABT, BA, AAPL, CCI, FB are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
