Stocks surged this afternoon as investors “bought the dip” in response to an apparently strong retail sales report. Bank earnings, reported before trading opened, left investors scratching their heads, but that didn’t stop bulls from taking control.
The Dow, S&P, and Nasdaq Composite all climbed significantly higher.
Wells Fargo (NYSE: WFC) shares jumped higher this morning despite a massive 48% decline in profits, driven by bad loans. Citigroup (NYSE: C) also reported earnings and surprised investors with a major “beat.” The bank said it benefited greatly from rising rates last quarter.
“In a challenging macro and geopolitical environment, our team delivered solid results, and we are in a strong position to weather uncertain times, given our liquidity, credit quality, and reserve levels,” explained Citigroup CEO Jane Fraser.
And though Citigroup’s quarterly results were nice to see, the consensus outlook among bank CEOs remained mostly negative. JPMorgan Chase CEO Jamie Dimon said yesterday that risks to the US economy look “nearer than they were before” and “never-before-seen quantitative tightening” should have a negative impact.
“I’m simply saying, there’s a range of potential outcomes from a soft landing to a hard landing, driven by how much interest rates go up, the effectiveness of quantitative tightening, and defective, volatile markets,” Dimon said.
Many Wall Street analysts felt the same way.
“I don’t have a lot of bullishness on our ability to grow earnings in this environment,” said G Squared Private Wealth CIO Victoria Greene yesterday afternoon.
“I don’t think it was bad or tragic, you know, but I think, unfortunately, this earnings season, any miss on earnings or margins is going to be punished and any actual beats may actually be picked apart.”
Outside of earnings, bulls had the June retail sales report to look forward to. Released this morning, the report showed that headline retail sales climbed 1.0% month-over-month (MoM), beating the +0.9% MoM estimate. Last month was the best month for retail since March.
With a big Fed rate hike coming up, you’d think that a strong retail sales report would be bearish as it would give the Fed more room to hike.
In fact, voting Fed official Christopher Waller said just yesterday that he’d be watching retail sales closely in comments that sparked an intraday bullish reversal.
“I support another 75-basis point increase. However, my base case for July depends on incoming data,” Waller said.
“We have important data releases on retail sales and housing coming in before the July meeting. If that data comes in materially stronger than expected, it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down.”
Then why didn’t the retail sales “beat” drive stocks lower?
It’s because, in real terms, retail sales actually fell last month.
The retail sales report is entirely notional, which means that retail sales grew 1.0% last month unadjusted for inflation. Remember that June’s headline CPI rose 1.1%.
So, when adjusted for inflation (1.0% retail sales growth – 1.1% CPI growth), you get a real retail sales growth rate of -0.1%.
And for bulls, that’s a good number, as it won’t push the Fed any closer to a 100 bps hike at its next meeting.
But stocks may be looking at a retracement next week given what the S&P 500 Volatility Index (NYSE: VIX) is doing.
The VIX plummeted today, falling to support (yellow line) while continuing its downtrend since peaking back in mid-June.
Now though, bullish divergence has formed on the stochastic indicator relative to the VIX’s movement on the chart. We have a VIX lower low (relative to the low five trading sessions ago) but a higher low on the stochastic indicator.
This suggests that a VIX surge may soon arrive. The fact that the VIX closed at support also suggests we may soon see a double bottom prior to a VIX rally. And, as the VIX rises, stocks fall.
Kraft Heinz (NYSE: KHC) could be poised to tumble if a broader market selloff occurs. KHC ended up closing lower today despite a strong day from the major indexes. The stock also closed below its minor bullish trend (yellow trendline) and the 10-day moving average.
The stochastic indicator is showing bearish divergence as well relative to KHC’s price action.
For those reasons, it might make sense to take KHC short with a trade trigger of $37.45, below today’s low, as another big batch of corporate earnings approach next week.
