1/29 Daily Market Note: Pivotal Week Up Ahead
Big Events This Week
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Hi Everyone -
This week we’re going to see critical earnings from Big Tech as well as get the Fed’s latest thinking on rates in the upcoming FOMC. We’ll also get more information from the upcoming Treasury Quarterly Refunding on the status of treasury issuance (whether it’s going to be at the short end of the curve or at the long end). Any lift in long-duration rates is likely to press down Small and MidCaps, while the effect on large caps and Big Tech is likely to be muted/temporary.
Last week, we saw a volatile batch of earnings releases with several companies such as NFLX being rewarded for subscriber growth while TSLA, KLAC, and Intel were punished quite severely as they reduced investor expectations on the growth outlook. Longer-term, these companies which disappointed traders will bounce back just fine but in the near-term, they may be range-bound to a new equilibrium.
Of all the major Big Tech companies reporting this week - AMD, AAPL, AMZN, META, GOOG - I believe that as long as they continue discussing “cost cutting” initiatives and keep margins elevated, any big dips are likely to be bought. Big Tech has laid off about 24,000 employees in 2024 alone, and should this trend continue, we are likely to see these companies stay well bid. While this basket of stocks is overheated from a technical standpoint and rather risky for traders looking for new positions, there is actually no reason to touch them on a longer-term basis as their fundamental outlook is strong.
It is a rather somber observation that increased layoffs are correlated with tech’s rising stock prices, but I believe this correlation to be quite reliable at the FANG companies given that investors are always looking to squeeze more free cash flow, EBITDA margin growth, and EPS out of the firms. The way I see it, the more the A.I. theme rallies, the louder the signal that a greater number of employees may be displaced as firms replace traditional workers with A.I.
Given that companies are in the process of trying to figure out how to “do more with less”, the long-term secular tailwind for semiconductors and their ability to answer this question is clear.
So, I see the A.I. rally as a catch-22. It’s good for shareholders. But not so much for the workers who work at these companies.
Ahead of Big Tech’s results, the market doesn’t yet show any evidence of breaking down. For the S&P 500, Dips are shallow, and only last about 30-45 minutes during the day. Short-sellers who hold shorts overnight in this environment are going against this environment’s backdrop.
While the QQQ has been softer on a relative basis, the most sellers have been able to do is convert a bullish structure into a range-bound structure since mid-last week.
This is hardly bearish, and the only forces that can bring down markets are a shock from FAAMG earnings, FOMC, or the Treasury Refunding Announcement.
We can also see below that the VIX term-structure is still very much in Contango - an upward sloping curve pattern that means investors do not yet fear a dramatic turn of events in the short-term.
The strongest sector in the market is currently Semiconductors (viewed through the lens of the SOXX ETF). A retracement for this ETF is healthy, and entering a new equilibrium between 565-580 serves as a resting spot for the next leg higher (if that’s what the market wishes to do). Only violation of 565 and lower sustainably on the ETF in a convincing manner will mean the near-term backdrop has deteriorated.
Even then, SOXX is likely bought on a revisit to 533 - an important neckline that investors may try to defend.
Last week, we discussed Selling Puts on NFLX beneath 530 strikes and TSLA 170 strikes and under strikes for high-probability areas where the options expire worthless (out-of-the money) for the weekly expiry.
With FAAMG earnings coming up, similar setups may be available if there is a significant gap-down or gap-up post earnings and I’ll share them if I think it’s appropriate.
Sellers have a window of opportunity with the upcoming events to reset the tone. If they fail to do so this week and next, S&P 500 drifting towards 5000 (2% from here) is a rather high-probability event.
More to come. Have an awesome day folks, make to subscribe and share.
Larry