US equity futures point to a positive market open, but we have only a modest amount of economic data today and there are other worries bubbling up that could challenge what looks to be another rally attempt.

We continue to see technical resistance for the S&P 500 at 3,900 and we've seen upward movement in the put-call ratio, throwing another yellow flag on the market. The relative quiet will soon disappear as the onslaught of June quarter earnings is had with more than 250 companies reporting this week and more than 800 next week compared to last week's rather tame 62.


Several weeks ago we shared our concern over EPS expectations for the second half of 2022, and as we saw with IBM's (IBM) earnings last night, even good news is being picked apart with investors focusing on any shortfall. Even though IBM posted better than expected June quarter revenue and EPS, and reaffirmed its 2022 revenue guidance, it updated its free cash flow guidance for the year to $10 billion, the lower end of its previous $10-$10.5 billion guidance, and shared currency is now expected to be a six point headwind assuming mid-July exchange rates hold.

In response, IBM shares looked to open down some 6% this morning as we write these comments. Even though the CNN Business Fear & Greed Index has inched back to Fear vs. Extreme Fear a week ago, the market mood appears to be back in a "bad news is bad news, and good news isn't good enough" mindset.

Given the barrage of earnings to be had, we're more than likely going to see a turbulent market as we close out July. Of course, that will depend on what the Fed has to say exiting next week's monetary policy meeting but for now we will continue to hold our inverse ETF positions and remain on a cautious path with the portfolio.

Interest Rates

There are other reasons to think markets will be facing higher interest rates. The annualized inflation rate in the Eurozone hit a record high of 8.6% in June, up from 8.1% in May and 1.9% in June 2021. While the biggest factor driving inflation once again was energy prices, strong price increases were also seen for food, alcohol & tobacco, services, and non-energy industrial goods.

In an effort to tame record high inflation, reports suggest European Central Bank policymakers are considering raising interest rates by a bigger-than-expected 50 basis points at their meeting on Thursday. As the ECB gets ready for that meeting, Europe's energy infrastructure is starting to strain under the extreme heat that's blanketing the continent while Russia owned Gazprom said that due to unforeseeable circumstances it is not in a position to comply with gas contracts with Europe. This runs the risk of stoking energy prices even higher given that before Russia invaded Ukraine, Europe received ~40% of its gas imports from Russia.

There are also new potential inflation and supply chain pressures in the US as well given trucking disruptions in California that come as unions and West Coast port employers are negotiating a new labor contract. For context, California's ports handle about 40% of container goods that enter the US.

Made in the USA

In terms of potentially positive news, ahead of a crucial vote in the Senate, the Department of Defense is reportedly pressing lawmakers to back legislation to fund the domestic production of semiconductor chips, arguing it is essential for national security. Reuters reports Senate aides shared the bill would include $52 billion to rebuild the US semiconductor industry as well as tax incentives for companies to build plants in the United States.

The passage would be a positive for several portfolio companies, notably Applied Materials (AMAT) but also our chip positions and longer-term even Ford Motor (F) . We say that about Ford as we were reminded of the current auto chip shortage this morning when Toyota Motor (TM) announced its global production for August would be about 18% fewer than its earlier plan as the automaker struggles to shake off impacts of chips shortage and COVID outbreaks.

AAP Portfolio Quick Hits

Morgan Stanley (MS) upgraded shares of Cboe Global Markets (CBOE) to Overweight from Underweight and boosted its corresponding price target to $140.