ECONOMIC CALENDAR AND EARNINGS OF SEVERAL MEGA SIZED TECHNOLGIES

Volatility is rising.  The NASDAQ fell 7.5% for the week, the largest weekly decline since March 2020.  The NASDAQ is also on tract for the worst month since October 2008 according to CNBC.  Bloomberg writes 35% of Friday’s decline in the NASDAQ was the result of NFLX’s 22% plunge as earnings did not meet expectations.

The volatility Friday was intense, perhaps the result of more than $3 trillion of option expirations.  Goldman estimates about $3.3 trillion in equity derivatives were set to expire. This amount includes roughly $1.3 trillion across single stocks primarily focused on the mega sized technologies and about $1 trillion of S & P 500 linked contracts and $240 billion tied to the world’s largest ETF (SPY).

As widely discussed option call volume has surged, propelled by massive interest from the retail buyer.  Short term, such buying interest is bullish.  Is the inverse occurring, which is the inability to roll over the derivatives which is inherently bearish?  I don’t know.

A change in monetary policy is the accepted reason for the volatility.  Speaking of which, will there be any surprises at this week’s FOMC meeting?  The December meeting shocked all.  The Committee changed its 2022 outlook from having no changes in the fed funds rate to three increases.  The Minutes from this meeting were even more of a surprise…the discussion of shrinking the Fed’s balance sheet.

No immediate change is expected however there will be scrutiny of forward-looking statements.

Oil has surged this year which has permitted the energy sector to greatly outperform all other sectors by a wide margin…up about 17% YTD.  JP Morgan wrote Friday that if oil gaps to $150/barrel, the result of geopolitical tensions perhaps between Ukraine and Russia, inflation at the worldwide level would more than double to 7.2% rather than the projected 3.0% rate. Global growth will slow to around 0.9% for the first half of the year versus the current forecast of 4.1%.

The Bank states if the above does occur, “declines in the highly valued shares will accelerate that will significantly impact the averages.”  Regarding bond yields, a 3% 10-year is possible.

What are the odds of this occurring?  Every Administration has faced a foreign policy crisis during the first year, perhaps the result of our adversaries testing the boundaries.

What will happen this week?

Earnings season accelerates.  Has the “stay at home trade” reversed itself?  MSFT, TSLA and AAPL post results this week.  It is widely accepted that if the largest companies disappoint, volatility in the indices will greatly increase.  About two weeks ago approximately 40% of the NASDAQ was down over 50% from their apex, the averages only be supported by a few companies.

In addition to the Fed meeting, the economic calendar is busy comprised of several regional and national manufacturing indices, a sentiment survey, wholesale and retail inventories, the Employment Cost Index and estimates of fourth quarter GDP.  All can influence outlook.

Last night the foreign markets were down.  London was down 1.22%, Paris down 1.79%  and Frankfurt down 1.90%.  China was up 0.04%, Japan up 0.24% and Hang Seng down 1.24%.

Dow futures are lower by 0.25% and NASDAQ off by 0.50% amid the Fed meeting, Ukraine and earnings.  The 10-year is up 4/32 to yield 1.70%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.