- Friday’s surge in oil prices has traders a tad defensive, but overall the indexes managed to eke out a gain last week.
- Speaking of getting defensive, stocks within the defense sector experienced a swift rally. These names could remain hot if the conflict expands.
YOUR WEEKLY ROADMAP
Earnings, earnings and some more earnings were supposed to be the primary focus this week. Yet, sadly, due to the terror attacks in Israel, on-going geo-political tensions and the uncertainty that surrounds the situation, traders attention will remain focused on the news wires.
At this time, despite the volatility, the market has taken this news in stride. Friday’s surge in oil prices has traders a tad defensive, but overall the indexes managed to eke out a gain last week.
Speaking of getting defensive, stocks within the defense sector experienced a swift rally. These names could remain hot if the conflict expands. We discuss the defense sector in greater detail below in “The Week That Was”.
Economic Data to Watch. This week will be busy. On Tuesday retail sales numbers could speak to a changing narrative about the current spending habits of the US consumer. Wednesday brings us housing data that could truly show the impact of the Fed’s rate hikes and spike in mortgage rates. Lastly, Thursday’s weekly jobless claims continue to draw scrutiny as the resilient labor market has yet to see any dramatic cooling effects from the continued rate hikes.
Fed Speak. Fed Chair, Jerome Powell, will speak at noon on Thursday to the Economic Club of New York. This is his first public speech since September’s CPI, PPI and unemployment data was announced. Expect him to play things close to the vest and scripted, but let’s hope he keeps with the narrative that we are near the peak in the rate hiking cycle.
Sectors to Watch - Financials (XLF) and Small Caps (IWM)
As we hit earnings season the financials and small caps remain under pressure and are testing critical support levels going back to pre-Covid highs. If these sectors break down it could lead to broader selling.
Another leg lower in the Russell 2000, as seen above in the IWM chart - the ETF tracking the index, could signal widespread expectations for slowing growth. The reason being is that economic sectors like energy, financials and industrials make up more of this index than the S&P 500.
If this current level can hold and serve as support it could mean the worst of the pain due to sharp rises in yields has passed - for now. The Fed could change that narrative if they decide another rate hike is in the cards at one of their final two FOMC meetings in 2023.
Earnings. The financials are the biggest group to report this week, but we get key reports from the highest weighted Consumer Staple stock in Procter & Gamble (PG) and the third most weighted stock in the Healthcare ETF in Johnson & Johnson (JNJ).
Stocks in Focus…
Procter & Gamble (PG) makes up over 14% of the Consumer Staples (XLP) ETF and could dictate the direction of its peers over the coming quarter. Just last week, analysts at Barclays and SC Bernstein lowered their price target ahead of this Wednesday morning’s earnings release.
One of the reasons the analysts cut their target was due to concerns over its snack food business. Many people took Walmart’s (WMT) comments about weight loss drugs like Ozempic seriously and fear that this new wave of weight suppression drugs will hurt the bottom line of many of the consumer staples. It should be interesting to see if PG addresses this on the call.
Heading into earnings shares of PG are off by -4.5% year-to-date. Technically, the risk/reward setup looks to favor the bulls. The stock has formed a good support level in the $141/$142 area - a potential double bottom coinciding with the June lows.
The stock’s RSI just broke back above an oversold condition and its MACD is on the verge of a bullish crossover. Add in a bullish 3-day candlestick morning star pattern and the reversal could likely continue into earnings.
Johnson & Johnson (JNJ) makes up 7.75% of the Healthcare (XLV) ETF and has been a drag within the sector all year as it is down -11.1% YTD.
The New Brunswick, New Jersey based healthcare giant has consistently beaten its earnings projections for the last decade. However, EPS beats don’t always translate into stock gains. Shares have failed to rise after four of its last five results.
The stock is trading within a stone’s throw of its 52-week low at $150.11 and hopes that a positive report and solid guidance can help shares rally into year’s end. The good news for JNJ is that the stock has rallied during the fourth quarter each year, over the past four years with an average gain of 7.75%.
Tesla (TSLA) is always one of the most anticipated quarterly earnings releases. It’s the first of the “magnificent 7” to report this quarter and whenever they do and their CEO Elon Musk speaks, the market tends to react. The average price move after earnings is +/- 7.2%.
Shares are up roughly 14% over the last 52-weeks and are at an interesting inflection point when analyzing price action. Over the last quarter shares have consistently made higher lows and lower highs. The range is narrowing and Wednesday afternoon’s earnings release should be the catalyst to determine which direction it will break.
Economic Calendar
Tuesday - U.S. Retail Sales 8:30
Wednesday - Housing Starts 8:30
Thursday - Jobless Claims 8:30; Housing Starts 10:00
THE WEEK THAT WAS
Geo-political concerns due to the potential of a full-fledged war in the Middle East was the biggest concern last week. After an initial drop on the open Monday, the market reversed course and was able to rally. In fact all 11 sectors closed higher on both Monday and Tuesday.
Volatility ensued the rest of the week with a larger sell-off on Friday. Due to a sharp spike in oil prices and investors going risk-off into the weekend, the markets closed relatively flat for the week.
Not surprisingly, the sectors that rallied the most were defense stocks represented in the US Aerospace & Defense ETF (ITA) and Energy stocks found in the XLE.
Some of the biggest names in the ITA include Northrop Grumman (NOC), Level 3 Harris (LHX), Lockheed Martin (LMT) and General Dynamics (GD). The index, as seen in the chart below, rallied 4.4% this week and got back to some interesting technical levels.
Highlighted in purple is reaction to last week’s conflict as well as the beginning of the war in Ukraine. Reaction to both situations was a week-long rally. In the case of the Ukraine, price spiked and then retraced half those gains within a week. It didn't change the long-term trajectory of the sector, as its reaction didn't have a lasting impact on the ETF.
Last week we experienced a similar knee-jerk reaction. This time the ETF spiked back above resistance - the area shaded in pink - and started to pullback. This $107-$109 level is the key level to watch. Based on recent history the longer term impact may be muted, but seeing how volatile things remain we watch this level to determine the longer term direction of the sector.
On the economic data front, both the PPI and CPI numbers came in slightly higher than anticipated, but bond yields remained below their highest levels from the previous week. The Fed minutes didn't reveal anything alarming as the narrative remains that the interest rates will remain restrictive until inflation eases.
On the economic data front, both the PPI and CPI numbers came in slightly higher than anticipated, but bond yields remained below their highest levels from the previous week. The Fed minutes didn't reveal anything alarming as the narrative remains that the interest rates will remain restrictive until inflation eases.
The United Auto Workers Strike expanded this week as talks continue to stall. On Friday, the union announced they were striking at Ford’s (F) largest plant in Kentucky causing shares to dip. Shares of Ford are testing their recent lows and remain in reverse since the strike began.
Technically, as seen above, shares haven’t closed below $11.75 since May and appear to be testing this support level. As the strike drags on chances of holding this minor support area seem to dwindle. However, shares of the automakers are far less volatile than most sectors and traders looking for activity tend to look elsewhere.
Heat Map. It was a rather muted week in the markets. The megacaps traded relatively flat. The financials got a nice pop on Friday thanks to earnings and remain the sector in focus this week.
Healthcare was mixed as the healthcare plan providers rallied on positive earnings from United Healthcare (UNH) and rallies in drug makers Eli Lilly (LLY) and Amgen (AMGN).
STOCKS IN THE NEWS
Birkenstock (BIRK) made its Wall St. debut on Wednesday. The company founded in 1774 became the newest and, fun fact, also the oldest company to list at the NYSE.
Shares were priced at the midpoint of its range at $46 a share. Shares opened well below the initial pricing at $41, rallied as high as $42.50 and then reversed course. Shares struggled to gain its footing as investors didn’t find this to be a comfortable fit for their portfolios at this time.
The stock closed lower by over 20% to end its first week at $36.38 a share. Not exactly the ideal beginning for this year’s third largest IPO.
Pepsi (PEP) shares rallied 2% after beating analyst expectations. They raised forward guidance despite concerns over growth due to new obesity drugs that could change consumers' snacking habits. The one headwind they mentioned was the negative impact of foreign exchange on revenue, but overall a solid quarter.
However, by the end of the week, shares fell flat as they closed slightly lower. Pepsi shares finished down 29 cents to close at $160.00.
Pfizer (PFE) announced Friday after the market closed (nice time for a news dump) that they were lowering their full year fiscal guidance. They believe current EPS to be in the range of $1.45-$1.65. This was a major decrease from its expected range of $3.25-$3.45.
The main culprit behind the downward revision was due to lack of demand for its Covid antiviral pill, Paxlovid. Shares finished last week lower by -3%. After hours on Friday shares dropped another 3% and are trading at 52-week lows. Ironically, as sales of the Covid pill have dropped dramatically, the share price of Pfizer has taken a round trip back to its pre-Covid levels as well. Watch to see if this $30 level can hold.
MARKET STATS
The main culprit behind the downward revision was due to lack of demand for its Covid antiviral pill, Paxlovid. Shares finished last week lower -3%. After hours on Friday shares dropped another 3% and are trading at 52-week lows. Ironically, as sales of the Covid pill have dropped dramatically, the share price of Pfizer has taken a round trip back to its pre-Covid levels as well. Watch to see if this $30 level can hold.
The small cap Russell 2000 remains the laggard as the index lost another -1.5% and remains the only major index down for 2023. Next week could be telling for the RTY as many of the regional banks, which make up a significant portion of the index report quarterly results.
SECTOR WATCH
Given the geo-political uncertainty it was no surprise to see Energy (XLE) lead last week. A spike of over 5.7% in the price of crude on Friday lifted the sector to its highest level since the end of September. The other big winner was Utilities (XLU) which got a nice oversold bounce thanks to a decline in the 10-year yield.
Only two of 11 sectors failed to gain ground last week. The biggest losers were the Consumer Discretionary (XLY) stocks. The index fell by just over 1%, but remains up 24% year-to-date.
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