Market Plays An Uno Reverse Card

We spoke about it last week, but the situation in the U.K. continues to escalate.

After only nine months of quantitative tightening, the Bank of England is again stepping in to support the market. The central bank said it would suspend its plan to sell gilts (U.K. government bonds) next week and temporarily buy long-dated gilts to calm the markets.

These actions are in response to soaring U.K. bond yields and its currency sitting at 38-year lows. While both of these trends were in place, they accelerated at a record pace last week when the U.K. government unveiled a record tax cut to stimulate its economy. This put the Treasury and the central bank’s actions and priorities directly at odds. ⚔️

As if the situation wasn’t sticky enough, you’ve now got the central bank simultaneously tightening and loosening monetary conditions. On the one hand, it’s trying to stabilize its bond market and currency in the short term by buying gilts. Longer-term, though, it must continue to raise rates to fight inflation, which the country’s tax cuts will further stoke. 🔥

Although it’s been denied, rumors were flying that the Chancellor was preparing to ask banks not to short the Pound lol. That should surely help calm the markets… 🤦

Clearly, any confidence the market had that the U.K. government and central bank could easily sort this mess out is gone. Concerns remain that if markets don’t stabilize soon, there’s a material risk to the country’s overall financial stability.

With the country facing a host of other problems as well, traders and investors can expect volatility in its assets and financial system to continue as we head into Q4. 🙃

Dow Theory is a commonly-referenced technical analysis concept, and it’s popping up on people’s radars again these days. 👀

There are six basic tenants to the theory, including:

1. The market discounts everything;
2. There are three primary kinds of market trends;
3. Primary trends have three phases;
4. Indices must confirm each other;
5. Volume must confirm the trend; and
6. Trends persist until a clear reversal occurs

While they’re all somewhat connected, the main tenant we’re focused on today is #4: Indices must confirm each other. 🤝

The idea here is that the companies in the Dow Jones Industrial Average make the goods, while those in the Dow Jones Transportation Average ship the goods. So if both indexes are trending lower together, like they are today, that probably means we’re in a crappy environment for the stock market or economy in general. 🐻

The economy’s composition has certainly changed since this theory was invented a century ago. As a result, analysts like to put a modern spin on “Dow Theory” by adding the Semiconductor Index in there, too, since almost everything we do involves technology and chips today.

Well, as you can see, the results are the same. These indexes have been making lower and lower highs for most of the last year, indicating a clear downtrend. If the stocks representing these companies continue to fall, then we likely haven’t seen the bottom in earnings expectations yet.

At least that’s what analysts are saying. 🤷

Whether or not they’re right remains to be seen, but what’s clear is market bulls want to see this “down and to the right” pattern end sooner rather than later. ⌛

Better-than-expected earnings pushed recreational vehicle (RV) maker Thor Industries higher.

The company’s fiscal fourth-quarter earnings per share came in at $5.15, well ahead of estimates of $3.81. Additionally, its sales of $3.82 billion came in above estimates of $3.69 billion. 💪

The company said North America towable sales increased 3.8%, while North America motorized RV sales rose 24.5%. However, European RV sales suffered a drop of 16.8%, given the economic challenges and weaker currency the region is facing.

Given the high level of uncertainty, the company said it will provide its full-year 2023 guidance in conjunction with its first-quarter results. 📅

Investors appear pleased with the results, with the stock holding above its year-to-date lows and rising 4.06% today. 👍