All roads lead to AI and AI leads to NVDA
28 October 2024
By GalTrades.com
This week we will hear earnings from 5 of the Mag 7 stocks. As they will talk about how much they are spending on NVDA chips. The potential for intra-week volatility is there. If yields continue to move higher next week this could generate selling pressure, regardless of mega-cap tech earnings. Pre-election selling late next week is a possibility as well.
- SPX fell 1.74 points (–0.03%) to 5,808.12 to end the week down 0.96%;
- $DJI lost 259.96 points (–0.61%) to 42,114.40 to end the week down 2.68%;
- $COMP rose 103.12 points (0.56%) to 18,518.61 to end the week up 0.16%.
- 10-year Treasury note yield (TNX) added three basis points to 4.23%.
- Cboe Volatility Index® (VIX) climbed sharply to 19.95, nearing recent highs. The 20 level is an area to watch next week, as it traditionally signals more volatile markets.
The rise in yields puts the small caps trade on hold; high yields are not a positive for small caps. Which puts the rotation trade in question. When the FED started cutting rates the sentiment position for portfolio managers went in the direction of small and mid-cap and away from mega caps. Then we had TSLA report a good quarter, and the stock went up 20%.
S&P 500 posted weekly loss for the first time in seven weeks as rising bond yields trigger some profit taking. Yields have been on the rise recently, mostly driven by strong economic data and higher treasury issuance expectations. The last time we came out of a soft landing in 1995 software and financials were leading the market.
We didn’t see the standard seasonal market weakness in September or October to this point, so we have some jitters in the market which are becoming evident such as the VIX above 20 when the S&P is at record highs.
Futures:
Oil prices plunge 6% after Israel’s attack spares Iran’s energy facilities
During the week Crude oil volatility from the previous week has subsided as traders re-evaluate geopolitical events and conflict escalations threatening oil supplies in the Middle East. Over the weekend Israel attacked Iran’s defense systems and other facilities but did not target any oil infrastructure. As of this writing light sweet crude is trading at $67.31 the last lows for the past 3 months were $66.33 and $65.27. Oil is currently trading below both the 50- and 200-day simple moving averages, which is bearish.
“The recent Israel military action is unlikely to be seen by the market as leading to an escalation that impacts oil supply,” Citi analysts wrote in a note on Monday, cutting the bank’s Brent oil forecast by $4 to $70 per barrel over the next three months.
whether Iran will counter the attack in the coming weeks, which should lead to risk premiums rising again.
China: expectations for improved Chinese physical commodities demand have moderated despite an aggressive stimulus package and a reduction in interest rates.
Gold: chasing $3,000. other precious metals started playing catch up and might be an alternative. Silver, platinum, palladium.
Month to date leaders and laggers.
Bonds & Rates:
As of late today, traders see a 95% chance rates will fall 25 basis points at the Federal Open Market Committee(FOMC) meeting on November 6–7, based on the CME FedWatch Tool. There’s a 5% chance of no change from current rates.
10-year yield keeps going up, Analysts are saying if we get past 4.5% it may be a problem for stocks.
Paul Tudor Jones said this week “I am clearly not going to own any fixed income and am going to be short the back end of fixed income”.
What’s shorting the back end of fixed income?
“Shorting” the backend of fixed income refers to taking a short position in longer-term bonds or other fixed-income securities. In bond markets, “backend” refers to the longer maturity end of the yield curve—typically bonds with maturities of 10 years or more.
When investors short the backend of fixed income, they are betting that the prices of these longer-term bonds will decrease, which usually happens when interest rates rise. Bond prices and interest rates have an inverse relationship, so if rates increase, the value of existing bonds with lower yields drops.
This strategy might be used when investors expect long-term interest rates to rise, possibly due to inflation concerns or a tightening of monetary policy by central banks.
David Einhorn said “it is by many measures the most expensive stock market we have seen since the founding of Green Light” he also noticed what Warren Buffet has been doing, that he sold a bunch of stock and has been sitting on a mountain of cash, which express a long term view that right now is not the a great time to have a lot of equity exposure, and the opportunity set is expected to be better at some point in the not so distant future”.
Technical Analysis:
Technical perspective, uptrends largely remain intact, the COMP made new all-time highs but did not register a fresh all-time closing high.
SPX technical support remains near its 20-day moving average, now 5,787. That served as support earlier this month and again this week, with the index bouncing off it both times. However, market breadth, which had been rising, contracted a bit this week. About 73% of SPX stocks now trade above their respective 200-day moving averages, down from 80% a week ago. Typically, broader participation suggests healthy investor sentiment and supportive technicals.
The Russell 2000 was the relative underperformer this week, and higher yields are the culprit. Last Wednesday (October 16th) the index finally notched a fresh two-year closing high, but subsequently turned lower as 10-year yields moved up 20 basis points since that day. The good news for the bulls is that the uptrend which began in early August remains intact, but the index could be challenged if bond yields continue to push higher.
Hot sectors: Cyber: Cybersecurity stocks are holding their own. The group is reacting to Morgan Stanley’s upbeat note on the industry. The analyst is bullish on network security stocks on the thesis of strong firewall refresh activity in the second half of 2025 and 2026 based on a four-to-five year replacement cycle, rising network traffic, and record levels of threat activity. Supporting this view is a recent Value-Added Reseller (VAR) and Chief Investment Officer survey by the analyst that showed network security as the top spending priority over the next twelve months.
Economic Reports:
The stronger than expected economic data over the past month will likely translate into a more patient Federal Reserve stance, but investors seem to be ok with tempered rate cut expectations assuming it is due to a strong economy versus re-inflationary trends.
This Friday’s reading on nonfarm payrolls, the unemployment rate, and wage inflation, among other key metrics, could influence the direction of yields.
- Monday (10/28): -no reports-
- Tuesday (10/29): Consumer Confidence, FHFA Housing Price Index, S&P Case-Shiller Home Price Index
- Wednesday (10/30): ADP Employment Change, Advanced International Trade in Goods, Advanced Retail Inventories, Advanced Wholesale Inventories, EIA Crude Oil Inventories, Q3 GDP – Advanced, MBA Mortgage Applications Index, Pending Home Sales
- Thursday (10/31): Continuing Claims, EIA Natural Gas Inventories, Employment Cost Index, Initial Claims, PCE Prices, Personal Income, Personal Spending
- Friday (11/1): Nonfarm Payrolls, Average Workweek, Average Hourly Earnings, Unemployment Rate, ISM Manufacturing Index
Earnings:
For the full S&P 500, FactSet’s third-quarter EPS growth consensus is now 3.6%, down from 4.3% at the start of earnings season. As of Friday, 37% of S&P 500 companies have reported third-quarter earnings and 75% topped analyst’s EPS estimates, FactSet said. That’s below the five-year average of 77%. Info tech and communication services enjoy the strongest growth so far.
- Monday (10/28): ON Semiconductor (ON), CenterPoint Energy (CNP), Waste Management (WM), Welltower (WELL), Cadence Design Systems (CDNS), Ford Motor Co. (F), SBA Communications (SBAC), F5 Inc. (FFIV), Crane Co. (CR)
- Tuesday (10/29): Novartis (NVS), McDonald’s Corp. (MCD), Pfizer (PFE), American Tower Corp. (AMT), BP PLC (BP), PayPal Holdings (PYPL), D.R. Horton (DHI), Alphabet (GOOGL), Visa (V), Advanced Micro Devices (AMD), Stryker Corp. (SYK), Chubb Ltd. (CB), Chipotle Mexican Grill (CMG)
- Wednesday (10/30): Eli Lilly & Co. (LLY), AbbVie (ABBV), Caterpillar (CAT), Automatic Data Processing (ADP), Trade Technologies (TT), Microsoft Corp. (MSFT), Meta Platforms (META), Amgen (AMGN), Booking Holdings (BKNG), Starbucks (SBUX), KLA Corp. (KLAC), Aflac (AFL)
- Thursday (10/31): Matercard Inc. (MA), Merck & Co. (MRK), Line PLC (LIN), Uber Technologies (UBER), Eaton Corp. (ETN), ConocoPhillips (COP), Apple Inc. (AAPL), Amazon.com Inc. (AMZN), Intel corp. (INTC), Atlassian Corp. (TEAM)
- Friday (11/1): Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Enbridge (ENB), Dominion Energy (D), Charter Communications (CHTR), Cardinal Health (CAH)
Memoirs of a trader: Whether trading futures or stocks I always try to trade with the trend therefore look to trade the futures and sectors that had the best week and look for continuation or pull backs. Remember not to chase, buying support usually works out better than buying resistance. TIP- fundamental news can change the trend on a dime.
Trading stocks, commodity futures and options involves a substantial risk of loss. The information here is of opinion only and do not guarantee any profits. Past performances are not necessarily indicative of future results. |
