Dow underperformed against key indices, more earnings ahead

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There was more housing data to digest after weekly mortgage applications rose 28% and NAHB’s housing market index which suffered twelve consecutive worsening readings managed to improve last Wednesday, and we saw building permits month-on-month (m/m) for December drop 1.6% and housing starts for the same period suffer 1.4% contraction, and existing home sales also down but besting estimates with a -1.5% reading instead of -5.4% forecasts (its eleventh consecutive drop).

Earnings for one of the FAANG, (non-component) Netflix, showed subscriber growth easily besting estimates even as earnings missed and predicting higher revenue growth sending its shares surging, and (Dow 30 component) consumer goods giant Procter & Gamble’s y/y decline in revenues and profit even as the former slightly topped estimates while the latter was in line with estimates.

On the fiscal front, the US debt ceiling was reached late last week with no deal in sight and a proposal to tweak from dollar amount to percentage of GDP, but where the Treasury’s measures will push default out until June. In all, key indices finished the week mixed with the tech-heavy Nasdaq 100 up but both S&P 500 and Dow 30 in the red even after Friday’s gains, and so too the Russell 2000.

Over in the bond market, Treasury yields fell back slightly for most of the curve save the furthest end and lower in real terms, break-even inflation rates slightly higher, and market probabilities (CME’s FedWatch) of future Federal Reserve (Fed) rate hikes pretty much fully priced in for 25bp (basis point) when they meet next week and no longer pricing in a chance of a larger 50bp hike.

There was plenty of central bank speak to digest, Brainard that despite “the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis”, Williams on the clarity “that monetary policy still has work to do to bring inflation down to our 2% goal on a sustained basis” that’ll likely entail “below-trend growth and some softening of labour market conditions”, and Waller in favour of 25bp cautioning that the market’s “very optimistic view that inflation is going to melt away” different from that of the central bank where it’ll “be a slower, harder slog to get inflation down and therefore we have to keep rates higher for longer”.

As for the week ahead, there’s more economic data to process on multiple fronts, with manufacturing indices from the Richmond Fed tomorrow and Kansas Fed on Thursday, this is after Philadelphia and Empire’s readings released last week remained in negative territory and more so for the latter. Similar story for housing with pending home sales on Friday and preceded by new home sales on Thursday.

Advance GDP (Gross Domestic Product) for the fourth quarter is expected to be strong with a 2.8% print (Atlanta Fed’s GDPNow estimate at 3.5%) and its price index higher, durables released at the same time for the month of December after 2.1% contraction the month before, and the weekly unemployment claims where its continuing figure rose albeit beneath estimates.

None are expected to be as important as Friday’s PCE (Personal Consumption Expenditures) price indices, where expectations are we’ll see another increase in its core m/m reading, around 0.2-0.3%. And then there are earnings, with far more on offer out of the US and including a couple of the FAANG+MT (component Microsoft tomorrow), consumer staples giants (Johnson & Johnson, also a component of this index and also tomorrow), and Big Oil (Dow 30 component Chevron on Friday).

Dow Technical analysis, overview, strategies, and levels

Price-indicator proximity meant last week quickly put a dent in whatever positive technical boxes existed in both daily and weekly time frames, and then-conformist buy-fade strategies were stopped on out on the move past its previous weekly 1st Support level (removing the 'positive bias' from its overview and back to buy-reversals for conformists in both time frames, though can shift easily given where prices and key moving averages stand). Thursday's 1st Support initially barely held offering some for conformist buy-reversals before Friday's low triggered its S/L (stop loss).

IG client* and CoT** sentiment for the Dow

As for sentiment, CoT speculators raised their majority short bias to 59% (longs -48 lots, shorts +687) from 57%, and are on the same side for the remaining three key indices: S&P (65%), Nasdaq (57%), and Russell (70%).

While it’s also majority sell for retail traders, there’s been a big drop from heavy short 71% at the start of last week to start off slight sell 52%.

Dow chart with retail and institutional sentiment

*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the previous trading day.
**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.