YOUR WEEKLY ROADMAP

Earnings should be at the forefront of all traders' minds, but headlines out of the Middle East and the rapid rise of treasury yields are what are and will continue to move this market.

After last week’s sell-off, we are back to many key technical levels in this market with some important areas being breached. If the seasonal 4th quarter strength narrative is going to come to fruition, we will need the megacaps to charge back to the lead and do the heavy lifting. Last week we failed to get a clear direction from the financials and small caps.

The Megacaps Report. We will break down the four “Magnificent 7” stocks that report earnings this week a bit later, but why are they so important? The answer is simple. The S&P 500 is a weighted market cap index, so the bigger the size of the company the more impact they have on the index.

Microsoft (MSFT) is the second largest company in the world and makes up 6.5% of the entire S&P 500 on its own. It is also a member of the Dow Jones Industrial Average - and is the highest weighted stock in the SPDR Technology Select ETF (XLK) where it makes up 23.3% of that ETF. So to say it is an important stock to the overall market is a major understatement.

Add in Amazon (AMZN), Alphabet (GOOG) and Meta Platforms (META) reporting and that equates to over 14% weighting of the S&P 500. Given their leadership in the Consumer Discretionary Sector and the Communications Sector, they too are going to move markets.

Personal Consumption Expenditures (PCE) known as the Fed’s preferred inflation measurement is expected to drop from 3.9% to 3.7% when released on Friday.

The Fed prefers this inflationary measure more than the CPI because it covers a broader range of spending. The core PCE previous reading of y-o-y 3.9% was its lowest reading since June of 2021. This month economists are expecting a drop to 3.7%.

Seeing that Jay Powell claimed the Fed will continue to be data dependent when discussing the future path of rate hikes, this number will be scrutinized under a microscope. While the PCE hasn’t moved the needle as much as the CPI in the past, given this is the last big economic data point ahead of next week’s FOMC meeting, a number not inline with the 3.7% expectation could cause unexpected market gyrations.

Five Charts to Watch

This week we want to focus on five key charts you need to know. They are all nearing or at critical technical levels. How they pivot from here will dictate how we finish 2023.

Chart One - SPX - The S&P 500.

We have been sharing this one for weeks and are finally at that “line-in-the-sand”. The Index breached one of three key support areas last week as it closed below its rising 200-day moving average for the first time since March.

It is now at that major level of support around 4200 which is also a key Fibonacci retracement level going back from its October low to its August highs. The index is not yet officially oversold and the MACD momentum indicator is showing a negative crossover which may indicate another push lower is in the cards. We should find out by week’s end as the megacaps report earnings.

Chart Two - TNX - The 10-Year Yield Index

The 10-year yield and its climb to 5% has been all the talk of the floor. It briefly got there after hours on Thursday, but we don't like to count after hours activity. That said, the yield continues to have a dramatic negative effect on rate sensitive stocks like small caps and financials.

We are getting closer to major resistance levels going back to the start of the Great Financial Crisis. The yield peaked at 5.31% in June of 2007 and traders are hoping any further push in the 10-year will find major resistance at this level.

Chart Three - IWM - iShares Russell 2000 ETF

Rates have had their deepest impact on both the small caps and the financials. For the IWM to rally, rates need to retreat. Last week shares of the small caps closed at their lowest levels for 2023.

They are not in oversold territory as seen in its RSI, but getting closer. The next level of support if it fails to rally are the 2022 lows just under $160. That’s roughly 4% below current levels.

Chart Four - KRE - SPDR S&P Regional Banking ETF

Most of the regional banks have reported earnings. Despite mixed results, price action is breaking downward. The KRE closed below its $39.50 support level for just the second time on Friday. It has failed to close above the 50-day moving average and momentum as seen in its RSI is still not oversold.

Currently momentum remains to the downside, but there are levels of support if the ETF experiences a washout. Like the IWM, it is broken but may be at that level where an oversold condition could occur and buyers may step in. However, that washout is still another 10% below last week’s levels.

Chart Five - NVDA - Nvidia

This has been the best performing stock of 2023 and is still up an astonishing 183% year-to-date. However, the chart formation is looking more and more like a major head and shoulders top and could spell danger if it breaks lower from here. Given its weight in the index and its leadership within the semiconductor space and relevance to the entire AI story, we need to watch this development closely.

If this formation plays out to the downside and breaks $400, there are two major levels to watch. First, the $373 level. This is another 9.5% below current levels. It is the old low from its gap up after May’s big earnings release. It would likely test that level. If this fails to hold then there’s that HUGE gap to fill.

If price enters that void in pink, the rising 200-day moving average could provide support. However, a trip back to the $320 area would equate to the measured move from the head and shoulders topping formation when calculating the distance from its head to neckline. That could spell a dramatic drop of 22% from current levels. Not saying it will happen, but the set-up is getting there and needs to be watched.

Earnings. Buckle up! The next two weeks are the biggest on the earnings calendar. Besides four of the so-called “Magnificent 7”, we get ⅓ of the Dow Jones Industrial Average (10 stocks) reporting, major energy names and two of the big three automakers in Ford (F) and General Motors (GM).

Magnificent Stocks in Focus…

Microsoft (MSFT) reports after the close on Tuesday. The stock peaked at all-time highs a week before last quarter’s earnings report. Since that $366.78 high, the stock has sold off as much as 15%. It has been stuck in a neutral range around its 50-day moving average for weeks. Let’s break it down a bit more.

Here’s MSFT on a daily chart going back three years. The stock has a nice rounded bottom base with a handle formation. It has tried to break out on two prior occasions above the $340 level and failed. This has become major resistance. For it to take a significant move higher it needs to get and stay above this level, but the set-up is there.

Can positive earnings be the catalyst? Will it even rally on positive earnings? It didn't last quarter. If price action sputters then look for a retracement back to its rising 200-day moving average at the $300 level.

Alphabet (GOOGL) has been the outperformer of this group as it has yet to have any significant pullback outside a brief -6.5% drawdown in September. The stock has gained over 31% since its April earnings report and is up 55% year-to-date.

If anything, it's been the most stable of the group. The stock hasn’t had a move of +/- 10% after an earnings release since 2019. The average move for shares of GOOGL on earnings day is +/- 4.6%. Results have been mixed as of late. Analysts expect EPS to come in at $1.44 a share when they report after the close on Tuesday.

Meta Platforms (META) is the second best performing stock in the S&P 500 year-to-date, trailing only Nvidia (NVDA). It’s up an amazing 156%. The stock has traded higher over its past three quarterly releases (see green boxes) and remains one of the more volatile stocks after reporting. The average move after earnings is +/- 8.2%, so it’s safe to think a big move may be coming.

Technically, the stock has been stuck in neutral since late June. It seems tired, possibly toppy, and needs a catalyst to move it out of its range. Earnings could be just that spark. The question is - in what direction will it go?

For a new leg higher it will need to breakout and stay above $330. A breakdown below its range at the $288 level and the stock could fall rather quickly to its rising 200-day moving average near $250. It’s not the best risk/reward set-up and traders should probably wait to see how the dust settles before jumping in.

Amazon (AMZN) finishes out the week of major earnings when they report after the close on Thursday. Shares are up 50% year-to-date, but like many of its megacap peers, it’s fallen roughly 15% from its peak.

There are a couple of statistics that don't bode well for shares. Over the last 12 quarters, despite beating EPS 9 out 12 times, the stock has traded lower 9 out of those 12 times. According to Bloomberg data, there are 64 analysts covering the stock and 62 rate shares a buy and 2 a hold. So the chances of any notable upgrade helping shares outside of a revised target price are slim to none.

Lastly the technicals, like Tesla (TSLA) which we featured last week, are at a critical level. The $125 area is a solid support level for AMZN. It's close to that test now. Will it break that level like TSLA broke its critical support area? If so, a trip to its 20-day moving average around $116 is likely.

Economic Calendar

Tuesday - Case-Schiller home price index 9:00

Wednesday - New Home Sales 10:00

Thursday - GDP Q3, Jobless Claims 8:30

Friday - PCE Index 8:30, Consumer Sentiment 10:00

THE WEEK THAT WAS

Geo-political events continue to overshadow all headlines as markets have been swinging on each new development. On Friday, traders sold-off the market as they lightened positions into a weekend filled with uncertainty.

Volatility was the theme of the week despite earnings reports, some mixed economic data and comments from Fed Chair, Jay Powell.

Earnings Reactions. Beating doesn't mean rallying. We saw this theme start to evolve in big-tech last quarter. Companies like Apple (Apple), Broadcom (AVGO), Salesforce (CRM), Nvidia (NVDA) and Microsoft (MSFT) beat but failed to rally. So far this quarter it is happening in many of the financials.

In fact, according to Bloomberg Intelligence data, companies in the S&P 500 that have beaten projections on earnings per share and sales have underperformed the benchmark by an average of 0.1% within a day of reporting. That is well below the norm of the past six years. Meanwhile, those that fell short trailed by 6.2%, the biggest negative reaction in a year.

Economic Data. Retail sales came in stronger than expected as they doubled analyst expectations. The resiliency of the consumer continues to be a surprise and isn't helping the narrative that the Fed should be done with its rate hikes.

Jobless claims remain remarkably resilient as well. They came in lighter than expectations yet again and continue to be the one area of the economy where the Fed’s action seems to have little to no impact.

Lastly, home sales fell in September to its slowest sales pace since October 2010. Sales were down 15.4% vs a year ago. Mortgage demand hit its lowest level since 1995. The biggest reason why - mortgage rates! They hit 8% last week - its highest level since June 2000.

Chip-wrecked? The Department of Justice announced that it plans to ban the export of more artificial intelligence chips to China. The purpose of the new restrictions was to close loopholes that were found after last year’s round of restrictions went into effect.

The companies with the most exposure to China that will be affected the most include Nvidia (NVDA), Intel (INTC) and Advanced Micro Devices (AMD). The concern now becomes what could China do to retaliate and what will that impact be on the entire chip sector.

Shares of the VanEck Semiconductor ETF (SMH) closed lower by -4.2%. Individually, shares of NVDA fell -9%, INTC was lower by -2.9% and AMD dropped -3.1%.

Heat Map. Staples got a bit of a bounce back thanks to strong earnings from Procter & Gamble (PG). Other surprises from the likes of AT&T (T) and Netflix (NFLX) helped the Communications sector avoid any major damage.

The semiconductors were the hardest hit sector and the financials also failed to rally despite some earnings beats. Overall a rather dismal week with only a few bright spots.

STOCKS IN THE NEWS

American Express (AXP) shares suffered their worst trading day since 2022 despite beating handily on both the top and bottom lines. Its network volume missed estimates, but this should hardly be a reason for shares to sell-off given the overall results. Shares sold off -5.4% on the news.

We also saw the beat and sell-off pattern with Morgan Stanley (MS). They beat on the top and bottom lines as well. The headline became about a negative focus on lack of M&A and a decline in their wealth management clients assets. As a result, MS shares suffered their worst day since July 2020 dropping -6.8% and closed at a new 52-week low.

Tesla (TSLA) missed on both EPS and revenues when they reported last Wednesday. Wedbush analyst, Dan Ives, when describing Tesla’s conference call to CNBC said “if you looked up disaster in the dictionary, there would be a video of last night’s conference call”

Shares of Tesla fell -15.6% for the week and closed at its lowest levels since May. We showcased the chart here last week highlighting its wedge pattern and that it was coming to a critical price pivot. Sadly that pivot resolved to the downside and targets indicating the next levels of support at its August lows and 200-day moving average around the $212 area were met. The next question is, can it find its footing here or does it have further to drop?

Netflix (NFLX) beat earnings expectations and experienced a surge in its subscriber growth thanks to its new cheaper advertisement model and password crackdown. As a result shares popped 12.7% after its earnings release. Remarkably, the stock was able to hold onto those gains despite turbulent market conditions.

Looking at the chart above, shares popped on the news on near record volume. They were able to hold the initial gain despite major weakness in the market. Given its resiliency, watch to see if shares can hold that $400 level and stay above its 50-day moving average. Its next resistance level is $430 and a market rally should help it get there. If it fails to hold, look for shares to retrace back to its 200-day moving average at the $375 level.

MARKET STATS

There were few places to hide last week as all major indexes lost ground. The Nasdaq 100 (NDX) was the biggest loser as it dropped close to 3%. It still remains the best place to be for 2023. It will face quite the test this week as its top weighted stocks report quarterly results.

The Russell 2000 (RTY) continues to get hammered as rates climb. The small cap index has given back all of its yearly gains and is now down -4.6% year-to-date.

Fun Fact - The S&P 500 has finished higher for the past 15 consecutive Monday’s! (We weren’t open Labor Day and closed lower on that Tuesday if you want to get petty 😁) One has to go back to June 26th to find a losing Monday. Here’s hoping that streak continues this week.

SECTOR WATCH

The market experienced broad based weakness across the board last week. Only two sectors were able to manage a small gain. Energy (XLE) and Staples (XLP), they each gained just over 0.7%.

It was the loser board that stood out. Industrials (XLI), Materials (XLB) and Materials (XLB) all dropped by 3%. Real Estate (XLRE) lost 4.6% on rising rates, while Discretionary (XLY) was hurt by its second largest holding, Tesla (TSLA) which accounts for over 18% of the ETF, fell by 15.6% on the week.

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Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.

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