1/11/2022

STOCKS – NVDA, TSLA, XOM AVGO

MACRO – SPY, TIPS, IEF

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• RTM: Markets Rebound, But Balance Sheet Run-Off Is Coming
• RTM: Earnings Estimates For The NASDAQ Are Dropping
• RTM Technical Update: Watching The SPX Reversal Pattern
• Live Q&A Session Friday, January 7 @ 12 PM ET
• RTM: A Pause In The Middle Of The Storm
• RTM- The Fed Is Going To Be Much More Aggressive Then The Markets Thought

Michael Kramer and the clients of Mott Capital Own TSLA

The S&P 500 broke its 5-day losing streak, rising by around 90 bps. It had to rally at some point. Maybe it was a dead cat bounce, maybe it was based on the perception that Powell was not as hawkish as expected, it is impossible to know, nor does it matter.

S&P 500 (SPY)

From a technical perceptive, the rebound could be part of the diamond pattern I noted the other day, with resistance around the trendline at 4735ish. It looks like that diamond pattern to me, maybe just a couple of days pulled forward.

TIPS

But what was notable and likely did help the market rally was that real yield moved sharply lower, with the 5-yr TIP falling to -1.41% from -1.27%, a huge move. That certainly helped put a bid into the NASDAQ names that have fallen sharply. It sent the breakeven inflation rate sharply higher to 2.92% from 2.82%.

(Refinitiv)

Why was the yield on TIPS down so much? I guess the market was feeling the balance sheet run-off was less certain, maybe some nervousness around tomorrow’s CPI.

If you listened to Powell closely, he initially said the balance sheet run-off would happen perhaps sometime later this year. He also noted at the 1 hr and the 32-minute mark that he likes to take 2 or 3 or even 4 meetings to work these kind of issues out. So clearly, as noted in the minutes it was discussed in the December meeting, that was 1. He said he expected it to be discussed in the January meeting, that’s 2. That leaves the potential for the Fed to start the run-off at the March meeting, maybe May. The March meeting seems ideal since it would be the quarterly meeting with the FOMC projections.

What does seem clear is that the run-off will begin very soon and the pace will be much faster than the 2017/2018 edition. It seems entirely clear that unless something changes dramatically, the Fed is looking for its first rate hike in March, with the potential for the run-off starting too.

Tomorrow we will get the CPI report, and estimates are for an increase of 7% y/y. But the ISM prices paid index was down sharply in December, and I expect the CPI to be down in December and come in below the 6.8% November reading, and miss expectations. How the market responds to a miss on inflation could be a double-edged sword. Some could look and say, oh, great, the Fed doesn’t have to be as aggressive, that would be the knee jerk reaction. But more importantly, it would also mean that demand is weakening and prices are falling as a result. The latter was the market following the ISM report on January 4. Better have your thinking cap on at 8:30 AM ET.

A miss on CPI would immediately send real yields higher, dropping inflation expectations. That is what matters the most for the equity market, especially, the NASDAQ. Because I noted following the ISM numbers, that inflation expectations are too high, and need to fall, and that real yields need to rise. I talked about in this YouTube video below.

10-Yr

So far, the 10-yr has held the 1.77% level, and if my CPI guess is correct, then the 10-year will likely fall back to the 1.63% level. If I’m wrong, then it goes to 2%. I have a high degree of confidence I will be right though.

Broadcom (AVGO)

Broadcom has fallen sharply, and for now, it is finding support at $605. It would be a shame to have come all this way and not filled the gap. But I still think it heads to $582.

Nvidia (NVDA)

Nvidia rallied back to the trend line and has stopped at this point. The chart looks very bearish, and a clean break of support at $267 leads to that gap fill at $231.

Exxon (XOM)

Exxon has risen sharply and found resistance at $71.25, with the RSI climbing over 77. The stock is getting overbought, and there is a ton of resistance between today’s close and $75. This is a good region for the stock market to stall out.

Tesla (TSLA)

Finally, Tesla has a lot of different moving parts, and it appears to have that big trough and peak, which is typical of a diamond pattern. I’m not totally convinced that is what the pattern is, but that is what it looks like, and given the chances for one in the S&P 500 being fairly strong, there is a good chance there is one in Tesla. It means the stock could break lower and head back towards the $900 gap fill to start.

-Mike