Yesterday was another good session, although it ran out of steam into the closing bell. The focus moves to corporate earnings that, all the experts say, will be a minefield of pain.  Eight of eleven sectors moved higher, with those haven sectors lower. While the Heat Map wasn’t very impressive, it was greener than red.

Compelling Charts

Quick…what has been performing better since Christmas, Consumer Discretionary (XLY) or Consumer Staples (XLP)?  The latter has been promoted as ‘can’t be missed’ with pricing power and reputation as institutional stock haven, but the former is crushing it. On an equal-weight basis, Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD) is galloping away from Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS).

The CBOE Market Volatility Index (VIX), aka the Fear Index, crashed and collapsed under 20.0 to close at the low of the session, 18.8. This might be a sign investors are too compliant or not afraid anymore.

Not Ebullient…Yet

Individual investor bullishness edged higher, but the decline in bearishness to 39.9% from 52.3% seen four weeks ago is more noticeable.

The same survey shows investors still holding high equity positions even as they have been frightened to death. Ironically, market bears say this lack of fear makes the Fed angry.

You wouldn’t like me when I’m angry!

We heard from several Federal Reserve officials this week, who mostly stuck to the script of ‘higher for longer’ rate hikes. They derailed a rally attempt earlier in the week, but yesterday couldn’t dissuade investors – especially retail investors looking for quick grand slams.

I think it’s wrong for the Federal Reserve to craft monetary policy partly due to the performance of higher than-normal risk stocks. On that note, we head into the session wondering how Jay Powell might be feeling about the Bed Bath & Beyond (BBBY) 290% rally this week.

It’s not the only near-bankrupt company that saw its shares climb off the launching pad. After the close, Virgin Galactic (SPCE) lifted off as well. I’m told Powell will become very angry if this keeps up, you wouldn’t like him once he gets angry (we saw this at Jackson Hole, WY, and a couple of Federal Open Market Committee (FOMC) pressers).

Then there are those pandemic favorites that were going to change the world: 

• Peloton (PTON) +40%
• Wayfair (W) +28%
• Chewy Inc (CHWY) +18%
• Teladoc Health (TDOC) +10%
• Netflix (NFLX) +12%

Honestly, some companies have compelling stories, but they have struggled with an atmosphere where money (liquidity) is being sucked out of the market. So, for now, they are hot again.

Small-Cap Strut

The Russell 2000 has surged through the 50 and 200-day moving average and faces one more hurdle to another major leg higher.

Banks Step Up to the Plate

A bunch of big banks are reporting financial results before the open today. I’m not sure where the optimism is coming from, but these companies have seen their shares go parabolic over the past month.  So, that adds even more intrigue to this morning’s news.

Portfolio Approach

There are no changes to our Hotline Model Portfolio.

Today’s Sessions

BAC

• EPS $0.85; consensus $0.77
• Revenue $24.65 billion; consensus $24.14 billion
• Net Interest Income $14.8 billion; consensus $14.86 billion
• FICC Trading Revenue $1.38 billion; consensus $1.37 billion
• Loan to deposit ratio 0.52
• Combined credit / debit card spending +5% to $11 billion, credit up 6% and debit +5%

JPM

• EPS $3.57; consensus $3.12
• Revenues $35.56 billion; consensus $34.93 billion
• Net Interest Income $20.31 billion; consensus $19.16 billion
• FICC Trading Revenue $3.74 billion; consensus $3.88 billion
• Average loan +2% y/y and Average deposits +3% y/y

WFC

• EPS $0.67; consensus $0.62 consensus
• Revenue $19.7 billion; consensus $19.7 billion
• Net Interest Income $13.43 billion; consensus $12.99 billion
• Provision for Credit Losses $957 million; consensus $860.2 million
• Reports $3.3 billion of operating loses

C

• EPS $1.10; consensus $1.21
• Revenues $18.01 billion; consensus $17.9 billion
• Net Interest Income $13.27 billion; consensus $12.7 billion
• FICC & Trading Revenue $3.16 billion; consensus $2.81 billion
• Sees FY23 revenue of $78 billion to $79 billion

Bank earnings could live up to big moves leading into their release so it’s 'sell on the news.'

The reaction to bank earnings is dragging the entire market lower.  On top of this, Jamie Dimon is laying out current issues and headwinds:

• Geopolitical tensions including the war in Ukraine
• Vulnerable state of energy and food supplies
• Persistent inflation that is eroding purchasing power
• Higher interest rates higher
• Unprecedented quantitative tightening.

So many areas of the market have gotten off to a blistering star, we could see more selling ahead of the three-day weekend.

This was a good week toward reeling the Fed in from making a huge mistake of going too far to contain inflation.

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