For the first two weeks of July, it seemed like the seasonal rebound was faltering but better late than never, stocks have started to bounce back in the last few days. Although earnings season has been mixed so far, a sense that results may not be as bad as some had feared, appears to have eased some of the recent pressure on stocks and enabled them to bounce back a bit. For example, Netflix, which had been crushed last quarter when subscriber growth turned negative, rallied over 5% yesterday on the news that subscriber declines were less than forecast.
Over the next ten days, we move through the heart of the big cap phase of earnings season with results on the way from Big Rail, Big Pharma, Big Tech, Big Oil, along with senior companies in the consumer staples, social media, auto, food, credit card, and other sectors. Some big questions remain to be answered including 1) just because results aren’t a bad as feared, doesn’t mean they are good, so how high can markets bounce and for how long? 2) what about guidance? 3) is inflation squeezing margins for some companies, and if so, by how much? 4) last week IBM and J&J indicated a negative impact on results from the rising US Dollar, how widespread and how deep is the dollar damage to earnings and could it get worse?
Economic data released over the last week continues to indicate we have entered a period of Stagflation. Inflation reports from the UK, Canada and elsewhere indicate that price pressures are either continuing to risk or levelling off at a relatively high level. Meanwhile, economic reports, particularly those related to the housing market, continue to suggest a slowing economy that may have already fallen into recession. The implications of stagflation on monetary policy may become clearer with the European Central Bank meeting today and the Federal Reserve Board meeting next Wednesday. Some of the recent bounce in equities can be attributed to some investors thinking that a weak economy may encourage central banks to stop raising interest rates or even cut rates because that is what happened when inflation was low, but this time inflation is high, and circumstances are different.
Currency and commodity market action remains choppy. The recent US Dollar rally appears to have been put on hold for the moment, enabling the Euro to bounce up off of par and USDCAD to slide back under $1.3000. As with equities, some of the negative sentiment toward commodities has eased in recent days, but it remains to be seen if this is a lasting change or a trading bounce.
In this edition of the Equity Leaders weekly, we look at recent action in the NASDAQ Composite Index and the natural gas price as examples of recent changes in sentiment toward equities and commodities.
Just as the NASDAQ, with its higher weighting in Technology/Communications and Growth/Momentum stocks relative to its peers, took advantage of monetary stimulus in 2020 and 2021, in 2022, it has become the poster child of the bear market triggered by monetary tightening and investor enthusiasm changing to caution, with both earnings expectations and market valuations changing dramatically. After peaking in November of 2021, the NASDAQ drifted sideways to slightly lower through to the end of last year, then really broke to the downside starting in January. Other than a March-April bounce, the NASDAQ has been under distribution, establishing a downward trend of lower highs. The NASDAQ became extremely oversold in June and has bounced back into July with a bullish Double Top breakout signaling the start of a new upswing. NASD.I remains well short of previous breakdown points, however, near 12,400 and 12,650. Even with this bounce, NASD.I still has a bearish SMAX score of 1, indicating weakness relative to the asset classes. Initial support appears near 11,340 based on a 3-box reversal, followed by the previous low near 10,575. Earnings reports due in the coming week from several of the highest weighted companies in the index including Apple, Amazon.com, Meta Platforms, Microsoft, and Alphabet, combined with the market reaction to them may indicate whether this is a dead cat bounce or the start of a more significant rebound.
Natural Gas has the potential to attract a lot of attention from investors in the coming days and weeks from politics and seasonality. Tensions between Russia and its key natural gas customers like Germany have been high for months, with Europeans chafing at their dependence on Russian natural gas. Meanwhile the Nord Stream has been closed for maintenance for the last several days, but with sanctions stranding a key component in Canada and other issues, it remains to be seen whether the pipeline will be able to get back up to full capacity and when. The ongoing political tug-of-war between Europe and Ukraine may continue to spark big swings in the Natural Gas price. We also are approaching a seasonally more active time of the year for natural gas. Hurricane season is starting up in North and Central America, which sometimes leads to US production being curtailed for short periods of time. By the time that is over, investors start gearing up for home heating season, which starts November 1st. The first major natural gas rally this century was in the early 2000s, and ended when the price crashed down into the $1.50-$5.50 range where it remained stuck for over a decade. The price started to rebound out of the 2020 market bottom, but the start of a new uptrend became more evident when it broke out over $5.75 in September of 2021. In recent months, the price has continued to trend upward, as shown by the growing series of higher lows, but has been volatile lately, swinging back forth between $5.50 and $9.50. Last month, natural gas sold off, but it has rebounded this month. Current resistance appears between $9.35 and $9.85 near previous column highs, along with the $10.00 round number. Initial support appears near $6.65 based on a 3-box reversal, followed by $5.75.
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