Daily Market Update for 10/22

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Summary: Despite consistent messages from Fed officials over the last few weeks, it took Jerome Powell's confirmation on bond tapering to finally impact investors. It didn't help that dismal earnings reports from Snap and IBM dampened optimism over the earnings season.

Notes

Ideas always welcome in the comments. Errors will be amended as comments on TradingView or corrected inline in my blog.

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Friday, October 22, 2021

Facts: -0.82%, Volume higher, Closing Range: 40%, Body: 39% Red
Good: Stayed above 15,000 support area
Bad: Lower high, lower close on higher volume
Highs/Lows: Lower high, Lower low
Candle: Red body above a longer lower wick, closing range 40%
Advance/Decline: 0.5, two declining stocks for every advancing stock
Indexes: SPX (-0.11%), DJI (+0.21%), RUT (-0.21%), VIX (+2.80%)
Sector List: Financials (XLF +1.40%) and Energy (XLE +0.94%) at the top. Consumer Discretionary (XLY -0.36%) and Communications (XLC -2.12%) at the bottom.
Expectation: Sideways

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Market Overview

Despite consistent messages from Fed officials over the last few weeks, it took Jerome Powell's confirmation on bond tapering to finally impact investors. It didn't help that dismal earnings reports from Snap and IBM dampened optimism over the earnings season.

The Nasdaq closed with a -0.82% decline but stayed above the 15,000 support area. Volume was higher than the previous day. The 40% closing range is right at the minimum we like to see for support, and the 39% red body sits above a longer lower wick. There were two declining stocks for every advancing stock.

The Dow Jones Industrial Average (DJI) had a record close, gaining +0.21% today thanks to large companies in cyclical sectors. The S&P 500 (SPX) declined -0.11%, and the Russell 2000 (RUT) fell -0.21%. The VIX Volatility Index rose +2.80% but remains low relative to the past few months.

Cyclical sectors rose to the top of the sector list, followed by defensive sectors. Financials (XLF +1.40%) and Energy (XLE +0.94%) were the best performing sectors of the day. Growth sectors were at the bottom, with Consumer Discretionary (XLY -0.36%) and Communications (XLC -2.12%) performing the worst. SNAP revealed to investors that Apple's privacy changes significantly impact ad revenue. That would also affect the other Communications stocks, sending them all down by 3% to 5%.

Manufacturing Purchasing Managers Index (PMI) came in at 59.2, lower than the 60.4 forecast. However, Services PMI beat the estimates, registering a 58.2 against an expected 55.1. Jerome Powell spoke in the morning and stated that economic indicators confirmed bond purchase tapering could begin.

The US Dollar index (DXY) declined -0.16% for the day. US 30y, 10y, and 2y yields declined for the day, with long-term yields dropping more sharply than short-term yields. High Yield (HYG) Corporate Bond prices fell sharply while Investment Grade (LQD) Corporate Bond prices rose.

The put/call ratio (PCCE) rose to 0.682. The CNN Fear & Greed index is in the Greed range. The NAAIM money manager exposure index rose to 98.02 from 64.46 the previous week.

All four largest mega-caps declined, with Amazon (AMZN) dropping -2.90% and Alphabet (GOOGL) falling -3.05%. Both moved below their 21d EMA and 50d MA lines. Apple (AAPL) and Microsoft (MSFT) declined, but their charts are still in an uptrend, closing above the key moving average lines.

Oracle (ORCL) was the top-performing mega-cap for the day with a +2.02% gain. Intel was at the bottom of the mega-cap list. The company dropped -11.68% after disappointing investors with missed earnings and revenue. Also at the bottom of the list were Facebook, Google, and Amazon.

Etsy (ETSY) topped the Daily Update Growth List, gaining +2.24%. Tesla (TSLA) was the second-best stock in the list, rising +1.75%. SNAP (SNAP) was at the bottom of the list with a -26.59% decline. Beyond Meat (BYND) also had a horrible session, declining -11.80% after the company lowered guidance for the quarter.

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Looking ahead

There are no significant economic events scheduled for Monday.

All eyes will be on Facebook (FB) earnings on Monday. T-Mobile (TMUS) and HSBC (HSBC) will also report on the first day of the week. Microsoft, Alphabet, Apple, and Amazon all report earnings later in the week.

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Trends, Support, and Resistance

The Nasdaq pulled back from its recent rally but remained above the 15,000 support area.

The five-day trend line points to a +1.19% gain for Monday.

The trend line from the 10/4 low ends with a +0.81% for the first day of the week.

Following the one-day trend line would result in a -0.67% decline.

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Wrap-up

I thought the consistent messages on bond tapering from Fed officials over the past few weeks would mean investors already priced in the news. However, markets sold off on Jerome Powell's confirmation that the tapering process could begin. Investors did find a footing and bought back some of the initial sell-off. Beyond the panic, investors should see that bond tapering does not necessarily mean a repeat of past taper tantrums.

All four major indexes closed higher for the week. The S&P 500 and the Dow Jones Industrial Average had record weekly closes, gaining +1.64% and +1.08%, respectively. The Nasdaq rose +1.29% for the week. Small-caps also had a great week, with the Russell 2000 (RUT) climbing +1.13%.

Real Estate (XLRE) was the top-performing sector this week, followed by Health (XLV) and Financials (XLF). Communications (XLC) led earlier in the week but ended the week in last place after the severe drop on Friday.

Next week is a busy earnings week with the five largest mega-caps all reporting. Those reports will likely set the mood for the market until the December government deadlines approach.

For Monday, the expectation is for Sideways.

Stay healthy and trade safe!