Walmart’s news rattles retail.
Our View
This week we obviously have a ton of earnings reports, but the Fed is at the center of it all. It will begin its two-day meeting today with the FOMC Minutes released tomorrow afternoon at 2:00 ET. That will include the group’s planned rate hike.
Currently, the market is pricing in a 75% chance of a 75 basis point hike and a 25% chance of a 100 basis point hike. When the CPI report came in hot in mid-July, the market began pricing in a 100 bps hike, but several Fed members talked that down. My gut tells me it’s probably a 75 bps hike. The Fed has been behind the 8-ball, but it’s telegraphed its intentions pretty well.
The importance of the Fed is less about today and more about what it will do in the future. Specifically, the market is trying to figure out (and won’t until at least Wednesday) if the Fed is starting to price in a pause.
They have hiked aggressively lately, including a 50 bps hike in May, a 75 bps hike in June, and likely a 75 bps hike in July. According to Morgan Stanley:
“With equity markets seemingly shrugging off bad news on the economy and earnings, we explore the idea that it may be trying to get ahead of the eventual pause by the Fed that is always a bullish signal. The problem this time is that the pause is likely to come too late.
This cycle is not like recent ones…In the last four cycles, the Fed paused its tightening campaign before the recession arrived and the period between the last hike and the recession was good for stocks, often VERY good. However, this cycle is different than anything we have experienced since the early 1980s, due to the high rate of inflation–the last time the Fed had to tighten right into a recession.”
Our Lean
If you are trading, it’s a good idea to remember the S&P was recently up 10% to 11% from the June low. That’s a solid bear-market rally. This week is loaded with earnings, economic reports, and the Fed’s (most likely) 0.75% rate hike.
I think there are three possibilities.
- The summer rally continues
- The S&P starts selling off and shakes out some weak longs
- It just keeps chopping in a 200-point range
On the upside, 3965 to 3970 is a resistance area I’m watching. On the downside, the key levels I’m watching are 3945, then 3920 and 3900.
Daily Recap
The ES opened Monday’s regular session at 3971.25, traded up to 3980, and then sold off down to 3954 at 9:39. From there, it rallied up to a lower high at 3974.50 at 9:45, and then sold off down to a new daily low at 3951 at 10:27 before climbing back to another lower high at 3971 at 10:56. The PitBull calls this type of price action “water in the bathtub.”
After the rally, the ES fell back down to the 3957 area at 11:18, rallied 20 points up to 3977, dropped back down to the 3961 level, rallied back up to the 3979 level and then sold back down to 3946.50 at 3:09. After the low the ES rallied up to 3960.50 at 3:49 as the MIM showed over $400 million to sell.
The ES traded 3960 as the 3:50 cash imbalance showed $190 million to sell and quickly traded above the VWAP at 3966.25 at 3:52 and traded 3971 on the 4:00 cash close. After 4:00, the ES traded up to 3975 and then dropped when Walmart cut its Q2 and full-year guidance. The ES settled at 3962 on the 5:00 futures close, down 1 point or -0.03% on the day.
In the end, there was an immense amount of chop. In terms of the ES’s overall tone, it fought off the weakness in the NQ all day. In terms of the ES’s overall trade, volume was steady at 1.49 million contracts traded.
- Daily Range: 42.75 points
- H: 3988.75
- L: 3946
Technical Edge
- NYSE Breadth: 65% Upside Volume
- NASDAQ Breadth: 45% Upside Volume
- VIX: ~$24
Game Plan: S&P 500, SPY, Nasdaq, COST
Yesterday was a quintessential mid-summer session — it was full of mindless chop and it makes sense why.
We have the end-of-month trade coming up (as funds reposition their allocations) and a huge week of earnings with AAPL, AMZN, GOOGL, META and MSFT all reporting, among many others. Then there’s also the Fed on Wednesday.
All of this leads to hedging and increasing/decreasing exposures to protect institutional portfolios…and when they do that, you get sessions like the one we had yesterday.
S&P 500 — ES
We had an inside day on Monday, so any sort of range break through the high or through the low could create some follow-through.
Keep in mind, WMT stock is down about 10% after cutting its guidance. It did that in May as well and the S&P did not react kindly at the time. How the ES reacts today could hold some clues (ie whether it’s able to shrug off bad news or if it’s still vulnerable).
Daily-down below 3946 opens the door down to the 3920 area, a level we discussed yesterday.
Daily-up over ~3989 opens the door to last week’s high, at ~4016. Above that and we can see some upside fuel.
A Trade on the S&P 500 Futures
Yesterday’s buy-the-dip into the 3950s was a great trade and because it was so choppy, it triggered a few times.
Off the open I’ll be watching 3965 to 3968 and looking to sell the initial rallies to this area. If it pushes through this zone, then 3975 could be in play, followed by 3989.
S&P 500 — SPY
No change:
We have clear lines in the sand for SPY.
On the upside, bulls need to break through $400 to $401.50. On the downside, bears need to break through $390 (and the 10-day and 50-day moving averages).
Nasdaq — NQ Trade
Keep an eye on yesterday’s low of 12,266.50.
Remember on Monday we were looking at a dip down to 12,250 and the 10-day. We almost got it yesterday.
If we undercut Monday’s low, tag the 10-day at ~12,240 and bounce back up through the prior low, bulls can try to take this for a long trade with a stop just below the session low, assuming it finds support near the 10-day. I’m not interested in a wide-risk setup.
COST
COST is obviously getting hit on that WMT headline this a.m. and is falling right into our support level from yesterday. Now it’s up to traders to decide their risk tolerance.
Aggressive longs can get long into this dip to $515. There is a small gap-fill near $513.50 if it overshoots on the downside a bit. $500 is a reasonable stop if you position smaller and allow for a bit of wiggle room.
Conservative longs can skip the trade on COST. There is absolutely no shame in doing so. Remember, in this game it’s preservation first, opportunities second. Especially in this environment.
Go-To Watchlist — Individual Stocks
*Feel free to build your own trades off these relative strength leaders*
- Numbered are the ones I’m watching most closely.
- Bold are the trades with recent updates.
- Italics show means the trade is closed.
Trade Sheets: Down to 1 individual holdings against a profitable stop-loss.
- MCK — We have hit two trim zones so far on MCK. Feel free to cash the last ⅓ of the position as you see fit. $335 to $340 is a potential upside target (and has since been hit).
- Moving stop-loss up to $315 and given the consolidation, I am thinking of holding my last ⅓ for a push to $348 to $350.
Relative strength leaders (List is cleaned up and shorter!) →
- DLTR — cruel action on our stop-loss, but “defense first!”
- COST
- PEP — Still watching Weekly-up over $171.25
- ABBV
- UNH
- XLE
- VRTX
- DG
- MCK — trying to break out.
Economic Calendar
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
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