Day Traders Diary

8/9/22

The major averages fell on Tuesday as investors navigated a batch of disappointing company reports ahead of a key inflation reading. The S&P 500 fell 17 points or 0.4%, while the Nasdaq Composite dropped 150 points or 1.2%. The Dow Jones Industrial Average fell 58 points, or 0.2%.

The declines came after memory chipmaker Micron warned that revenue may fall short of its prior guidance because of "macroeconomic factors and supply chain constraints." The stock fell more than 3%.

It's been a rough week for chipmakers. On Monday, weaker-than-expected revenue guidance from Nvidia weighed on the group, and those stocks extended their losses on Tuesday.

The S&P 500 has climbed for three straight weeks, but earnings season has featured demand warnings from executives of major companies. Investors are watching closely to determine how the Federal Reserve's fight against inflation is rippling through the economy.

Outside of chips, a pair of Nasdaq-listed stocks were also taking early hits. Novavax slumped nearly 30% after slashing full-year revenue guidance because of poor demand for its Covid vaccines. Upstart declined more than 11% after the consumer lending company reported second quarter results that missed both profit and revenue expectations.

Investors are awaiting the latest reading of the July consumer price index, due Wednesday. The report is expected to show a slight slowdown in inflation, thanks in part to a fall in oil prices, which could inform the market about the next steps for the Federal Reserve.

The report is expected to show that headline CPI was at a year-over-year pace of 8.7% in July, down from 9.1% in June, according to Dow Jones. Traders said for the market to view it positively, inflation would have to be in line with expectations or even lower.

Ahead of the report, the spread between the 2-year note yield and 10-year note yield continued to widen, with the 2-year yield rising further above the 10-year. The fact the 2-year is higher means the yield curve is inverted, and that is sometimes a signal of recession.

Andy Brenner of National Alliance said CPI could be a turning point for the market. "If we get a good CPI report, which is what a lot of people are hoping for, I think you can switch the yield curve around and you can shift the odds of the Fed to be less aggressive from more aggressive," said Brenner. "On the other hand, if it's a bad number, and it's still 9%, or it's still high month-over-month, the markets going to try to lock in 75 (basis points) for September."

The fed funds futures has been pricing in high odds of another three-quarter point, or 75 basis point hike, for September. Some economists, however, expect the hike to be a half point.