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Sunday's Coffee - The upcoming week 18/7 - 22/7

Sunday's Coffee - The upcoming week 18/7 - 22/7

Summary

  • Last week, U.S. June Inflation soared to 9.1%, a New 41-Year High. As a result, the US10Y-US2Y spread turned negative for the third time this year and went as low as -0.22, the lowest since 2000 which is a sign of recession.
  • Banks reported mixed earnings. Of the four major banks to report second-quarter results last week, only Citigroup topped expectations for revenue. The banks cited "challenging macro and geopolitical environment" for pausing buyback.
  • TSMC reported another quarter of record profits, booming sales, and high margins, which caused the Semiconductor sector to rally with the hope the chips booming is not over. The rally may put some bulls in euphoria, but we have to remember that TSMC is based on a big backlog of orders that the chip makers made in advance. Chip makers such as Intel and Micron Technologies lowered the guidance for Q2 Earning due to customers working through stockpiled inventory instead of placing new orders. I still believe the sector has yet to see the bottom.
  • In the upcoming week, the market will focus on Goldman Sachs earnings on Monday, Netflix earnings and Numbers on housing starts and building permits on Tuesday (one of the Fed's key metrics), Tesla on Wednesday, and Snap on Thursday. Snap's earnings will serve as a guidance for the social media market stocks (Meta, Twitter, and Pinterest).
  • We may see a big move in the Indices this upcoming week if we have bad guidance from the companies above. If not, I expect the market to keep consolidating between the price levels since June, before making a big move during FOMC week.  

Hi all,

Last week was a busy and volatile week with lots of important key data, earnings, and catalysts. This article will be divided into three parts: in the first part I will give a brief review of what we had last week. In the second part, I will talk about what data, catalysts, and earnings are expected in the upcoming week, and in the third part, I will do some technical analysis and talk about how to prepare and trade. This article will be a bit longer than usual, so for those who don't have time, I suggest reading the summary (above) and skipping to the technical analysis part.

  1. Brief Review 11/07 - 15/07

13/07 Wednesday, CPI June data was released and came hot. U.S. Inflation is near a 41-year high as CPI June hits 9.1% while forecasted at 8.8%. I suggested in the previous Sunday's coffee that any number above 9% will surprise that market, cause a big selloff and the market may price in 100bps on the next FOMC, and it happened exactly as I suggest. Following the report, traders increased bets that the Fed will raise interest rates by 100 basis points this month. the odds went as high as 80% while cooling off to 30% at the end of the week. In addition, while it did results in a big selloff in the premarket, later the market recovered and closed green. The equity market recovered on the hope that June Data was the peak of inflation as the commodities have fallen as much as 20% from their June highs this month. Bulls hope that the inflation will cool off quickly and the Fed will finally pivot and pause hikes.

The bonds market tells a completely different story. After the CPI Data was released, the US10Y-US2Y spread turned negative for the third time this year and dropped as low as -0.22, the lowest since 2000. The bonds market doesn't believe the Fed with the promise of a "soft landing" and is flashing a warning signal about the growth prospects for the US economy and predicting recession. History guides us that when the US10Y-US2Y spread turned negative, a year later the market enters a recession (you can see below: 1977-1982, 1990, and 2007).

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity

14/07 Thursday, The producer price index for final demand (PPI) increased 11.3% from June of last year and 1.1% from the prior month, Labor Department data showed Thursday. Three-fourths of the advance last month was due to goods, particularly energy. While the figures show persistent cost pressures, producers are starting to find some respite as commodities prices come off the boil on concerns about the demand outlook. As I wrote above, over the last several weeks, measures of food, raw industrial materials, and crude oil all fell sharply.

US PPI YoY 

In addition, on Thursday Federal Reserve Governor Christopher Waller said that the Market is “getting ahead of itself " with pricing in a high probability of a 100 basis point, or full percentage point, increase. Waller expects to raise the central bank’s benchmark interest rate 75 basis points this month but that he’s open to a larger move depending on incoming data.

On these two catalysts, the markets rallied and the odds of 100bps decreased to 30%.

15/07 Friday, the equity market continued to head higher as Retail Sales - Advance retail sales increased 1% for the month, better than the Dow Jones estimate of a 0.9% rise. It is important to remember that unlike many other government numbers, the retail figures are not adjusted for inflation, which rose 1.3% during the month, indicating that real sales were slightly negative. So I wouldn't trust the equity market's rally on this news.

Furthermore, The preliminary estimate of the consumer sentiment index published Friday by the University of Michigan increased to 51.1 in July from 50.0 in June, hovering near its all-time low. Although the equity market ignored this important data and continued rally into Friday, we should take this data seriously, as the last time it had been so low, the markets headed into recession as you can see below.

University of Michigan

16/07 Saturday, Biden back from its Saudia Arabia trip. While the White House hoped to reach an agreement regarding boosting oil production Muhammad Bin Salman said they don't have the capacity to increase their oil production beyond the current limit which is 13 million b/d. In addition, Saudi Arabia's foreign minister said their decision on oil production will not be based on 'hysteria' or 'politics' and these will be decided at OPEC+'s next meeting on August 3. While we may think it is not good for the Oil price, if the market will start fully price in recession, we will see a drastic decrease in oil price, as we saw in previous recession times.

11/07 - 15/07 Earnings

Banks reported mixed earnings. Of the four major banks to report second-quarter results last week, only Citigroup topped expectations for revenue. The banks cited "challenging macro and geopolitical environment" for pausing buyback and some of them even decided to pause dividends. In last month’s Federal Reserve stress test, some banks were caught with less capital than needed ahead of increasingly stringent requirements. By freezing dividends and pausing buybacks, the banks can stockpile capital to help them hit their targets.

I remain firm with my opinion that Banks' stocks are set for more pain. Even though banks profit from the high-rate interests environment, I suggest that the more hikes the Fed will do, we will see a bigger slowdown in taking loans, and high debted companies declare bankruptcy.  

Besides Banks' earnings, TSMC also reported another quarter of record profits, booming sales, and high margins, caused the Semiconductor sector to rally with the hope the chips booming is not over. The rally may put some bulls in euphoria, but we have to remember that TSMC is based on a big backlog of orders that the chip makers made in advance.

TSMC, along with other chipmakers, are warning that weakened consumer demand and over-stockpiling by manufacturers and retailers may soon mark the end of record profits for the industry. Chip makers such as Intel and Micron Technologies already lowered the guidance for Q2 Earning due to customers working through stockpiled inventory instead of placing new orders. I still believe the sector has yet to see the bottom.

2. The upcoming week 18/7 - 22/7

The upcoming week will be less stuffed with data and catalysts. In terms of Key Data, I will be looking at Numbers on housing starts and building permits which due on Tuesday, July 19.  Why do I think these data are important? Last week Waller cited housing as one of the two key metrics (together with retail sales).

“My base case for July depends on incoming data,” Waller added. “We have important data releases on retail sales and housing coming in before the July meeting. If that data comes in materially stronger than expected, it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down.”

I think the data will come as forecasted, and the Fed will keep its plan with a 75bps hike and won't surprise the market with one full point percent hike.

Follow the Key Data and Events on our Economic Calendar.

The Earnings season continues this upcoming week with $GS, $SCHW, $IBM, $NFLX, $TSLA, $SNAP, $AAL, $AXP and $UAL.

I will be watching $GS, $NFLX, $TSLA, $SNAP and $AXP.

  • Goldman Sachs is one of the biggest investment banks in the U.S. and with the slowdown of funds investments and IPOs, I expect them to report a decline in profit and total revenue.
  • Netflix will serve as a guidance for the streaming industry ($ROKU, $FUBO, $SPOT, and $DIS), and Snap for the social media industry ($META, $PINS, and $TWTR).
  • Tesla had a challenging quarter and bad earnings and/or weak guidance will cause a selloff in the market.
  • American Express's report on Friday will be a guidance for customers' spending.
Source: Earnings Whisper

Bulls like to say "everything is already priced in the market". I'm not sure what they are based on, but in my opinion, a bad earnings season is not priced in and may lead the Indices to 10%-15% lower from the current price.

3. Technical Analysis.

  • $SPX and $NDX are still ranging between the price levels since June. $SPX 3750 to 3900, and $NDX 11368 to 12182. $VIX closed at 24.23, which for me it is a red flag. why? because it means it has more upside and will cause the market to sell off. I have 3 scenarios: first one, at the beginning of the week, the $VIX will drop to around 23 and the market will test the downtrend line of March ($SPX is 3890-3900 and $NDX is 12100-12182), then with the VIX Exp on Wednesday, we may see a spike in $VIX and a big selloff in the markets ahead of earnings on Wednesday and Thursday ($SPX back to 3700-3750 and $NDX to 11368-11500). The second scenario: the market will chop on the same levels as Friday ($NDX 11800-11996 and $SPX 3800-3860) and $VIX will stay on 24 before spike up. The third is a bullish scenario with good earnings and key data, $SPX testing 4000 and $NDX testing 12182-12200 levels. It is important to follow the levels and earnings and adjust our plans and trades accordingly.
  • $AAPL had an amazing month with a yield of 17%. The last time we had such a yield was in March, and later we were witnesses to a 20%-25% decline. the last Doji candle may also hint at this.
  • Goldman Sachs will report on Monday before the market open. Currently, $GS is in a downtrend. Good earnings will result in going higher to 300-303. bad earnings will result in heading lower to 278-290.
  • Tesla will report on Wednesday, that 728-730 and 756.85 levels are big resistances for tesla. If tesla will surprise us, we may see these levels again. But I wouldn't bet on tesla this time as they had a challenging quarter with Shanghai's factory shut down. I would look for 707.86, 687.65, and 660 as strong support. (If someone wants to short Tesla, there is a new ETF - $TSLQ for that).

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Wishing you all a great week!

Cheers,


This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision. The views, thoughts, and opinions expressed here are the author’s alone.