The Week Behind

In the shortened trading week, the NASDAQ underperformed the DOW and S&P 500. NASDAQ ended down ~2%, S&P down ~1%, and DOW was about even. The bear market continued in bonds as the 10 year treasury broke above 2.8%, recording a multi-year high. In my view, this was a continuation of positioning away from non-profitable, valuation-rich tech toward now-profitable, valuation-justifiable defensive that was further exacerbated by the rise in longer-duration interest rates. 

Headline CPI was hotter, but Core CPI showed signs of rolling over. I classify it as the first, not-terrible report. Energy and food prices remain elevated. However, Carmax’s terrible earnings corroborates the decrease in used-car prices. 

The indices reacted emotionally, unable to reach a bullish or bearish verdict as they recorded 1-2% swings in the days that followed based on the same headlines surrounding the print and “peak inflation”. 

Did March CPI provide definitive evidence for peak inflation? 

No. If you thought inflation was peaking before, you still do. If you didn’t, you still don’t. Based on the indices reaction, which was neither bullish nor bearish, the market still considers it an open question.

If it does suggest peak inflation, does it mean that inflation will begin to meaningfully cool? 

Most people would agree that it does not. 

As per the banks, we heard from a number of them. Personally, I liked what I saw. Specifically, JPM’s revenue. Revenue beat despite all segments being down aside from lending. However, lending was not overwhelming. This is the kind of report, alongside cooling core CPI, that gives the FED a little slack, which is bullish.

The Week Ahead

We are now entering the second week of earnings season. While I think Monday’s Housing Market Index and Wednesday’s FED’s Beige Book will dominate conversation, some companies are worth paying attention to. 

Monday – Bank of America (BAC) – insight on the strength of the American consumer and balance sheet. 

Wednesday – Tesla (TSLA) – insight on the Chinese economy that is enduring a major COVID shutdown. 

Friday – Cleveland Cliffs (CFF) – insight on the steel market. Primarily, updates on demand as well as supply chain costs associated with logistics and inputs.

NASDAQ: Reverse Head-and-Shoulders

A reverse head and shoulders pattern is a technical charting indicator associated with a bullish, upward reversal of a downward price trend. 

1. Price drops, creating the left shoulder (first blue line). 
2. The price rises before falling to a deeper level, creating the head (orange line). 
3. Then, the price rises near levels seen on the prior bounce, but ultimately fails to breakout. 
4. Price revisits levels similar to the left shoulder without revisiting levels seen at the head (the second blue line).
5. Price returns to the levels set by the two prior bounces. This level is known as the neckline (in green).
6. Breakout.

We are at step 4.

If the NASDAQ (as represented by the QQQ) can break above the neckline – line of resistance – we may have confirmation of a tradeable bottom. Sentiment is still overwhelmingly bearish, even if prices on the indices don’t necessarily reflect that. Consequently, I see many potential catalysts to bring us back to the neckline and challenge a breakout.

1. Resolution between Russia-Ukraine.
2. Bellwether companies reassure investors of easing supply chains and strong demand.
3. FED acts more dovishly than currently priced in.

However, be aware that there are still many risks overhanging the market: inflation could remain hot or get hotter, growth could slow, earnings could be revised downward, etc…The war between Russia and Ukraine could intensify. There could be vomit-inducing selling if the words “dirty bomb” or “chemical weapon” come across the news feed courtsey of algorithm-traders. To be precise, while the setup looks good right now, events that cause major moves to the downside can ruin these technical setups.