After a weak finish on Monday, futures are indicated higher as market players awaited earnings from Walmart (WMT) and Home Depot (HD) . Also, the PPI report is hitting at 8.30 am ET and will have an impact on expectations for the Fed's next interest rate hike.
The early strength is primarily driven by positive developments in China. President Xi met with President Biden, and that has helped to relieve some of the growing pressures between the two countries. In addition, China is taking action to shore up its troubled real estate market and is pushing to ease Covid restrictions despite a recent increase in cases.
The dollar is back under pressure, bonds are stronger, and the market is becoming more confident that the Fed is going to hike rates by 0.5%, rather than 0.75%, in December.
Technical conditions for more upside are good, but there are going to be some landmines along the way. The most likely issue that will slow down the bulls is a greater focus on economic growth. While Fed interest-rate hikes appear to be doing their job, they are going to slow the economy, and that has a delayed impact that the market is not yet embracing. We are seeing signs of economic slowing in real estate and some increased layoffs. There is also talk of slowing at places such as Apple (AAPL) and Amazon (AMZN) , but the market is far more concerned about inflation than growth at this point.
We will see what the reaction is to earnings and PPI Tuesday morning, but there is not a lot of news on the agenda that are high risk until we see the next CPI report and the Fed interest rate decision in December. While a big run-up into those events could be dangerous, we have a few weeks before that is an issue.
One of the big positives for the bulls right now is poor positioning. Many big investors were very cautious in October, and the huge jump in CPI was so sudden they had little time to reposition. They are now looking for pullbacks and dips that will allow them to put more cash to work.
Big institutional buyers typically do not like to chase strength. They prefer to buy pullbacks and are very focused on lower their cost basis in favored positions. They will provide strong support if they maintain a bullish position.
Home Depot earnings just hit and are ahead of expectations, but the stock is lower as it digests reaffirmed guidance of single-digit growth for 2023. The stock is trading with a trailing P/E of around 19 but sees growth of just 6%. In a slowing economy, that is not cheap.
Walmart is coming up.