Nov 13, 2023
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“Victory is not simply defeating the enemy, but also preserving and protecting the values we hold dear.” – George B McClellan
Below is some introductory commentary of today’s Morning Lineup. Start a two-week trial to Bespoke Premium to get full access.
Unlike seemingly most Fridays this year where investors were hesitant into the weekend, last week bucked the trend as the S&P 500 rallied more than 1.5%. The downside of the positive close to the week is that there’s less fuel for a relief rally to start the week, and that’s exactly what we’re seeing this morning as futures trade modestly lower. It’s a quiet start to the week in terms of economic data, but there will be a ton of events to watch this week as the economic calendar is packed, including a very important CPI report on Tuesday. Earnings season will also unofficially wind down as Walmart reports later this week, and on the geo-political stage, President Biden will meet with Chinese President Xi in San Francisco on Wednesday.
While there isn’t much in the way of actual economic data today, one important report will be the NY Fed’s Survey of Consumer Expectations, specifically its reading on inflation expectations. In last Friday’s Michigan Sentiment report, inflation expectations showed a meaningful increase. While that could just be a one-off quirk of that survey, any confirmation of that trend in today’s report would spark concerns in the Treasury market. The results of that survey will be released at 11 AM.
With the S&P 500 and Nasdaq up over 1% last week, it looked like a good week for stocks, but that’s not a complete picture. Smaller stocks were crushed with the Russell 2000 down over 3% and micro-caps down closer to 4%. At the sector level, performance was also mixed. While the Technology sector rallied 4.5% and Communication Services gained over 1%, sectors like Energy, Utilities, and Real Estate all fell over 2%. In terms of where various sectors finished the week relative to their trading ranges, there was also a lot of disparity with Technology at ‘Extreme’ overbought levels, while Energy and Health Care finished the week at Oversold levels.
In a nutshell, last week was a week where what had been working all year continued to work, and what hadn’t been working didn’t. The scatter chart below compares sector performance on a YTD basis (horizontal axis) with performance over the last five days. As shown, there is a clear trend where sectors that were positive on a YTD basis finished the week higher and vice versa. Of the eleven sectors, the only two where last week’s performance wasn’t in the same direction as their YTD performance were Consumer Staples and Materials.
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Nov 10, 2023
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“We have so much to say, and we shall never say it.” ― Erich Maria Remarque, All Quiet on the Western Front
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Investors are doing their best to reverse yesterday’s weak tone and end the week on a positive note. Last Friday, we were finally able to buck the trend of declines heading into the weekend, and if the market could do it again today, that would be a positive sign. The only economic report on the calendar is Michigan Consumer Sentiment at 10 AM, and the inflation expectations components of that report will be the primary focus of the day- at least when it comes to scheduled data.
Unlike every other day this week where the S&P 500 traded higher on the day and the equal-weighted version traded lower, on Thursday, they both traded lower with declines of about 0.8%. In just the first four days of this week, the equal-weighted index underperformed the cap-weighted index by 1.5 percentage points, and over the last 200 trading days, the performance gap between the two indices now stands at over 15 percentage points. A gap that wide is practically unheard of, and since 1990, it has been wider on 55 trading days, and they all occurred in the periods spanning December 1998 through April 1999 and then briefly between March and April 2000.
The record performance gap between the market cap and equal weight versions of the S&P 500 topped out briefly above 20 percentage points for a day in March 2000, but there were multiple occurrences in the early 2000s and coming out of the Financial Crisis when the performance gap was over 20 percentage points in favor of the equal weight index. When you think about it, it makes sense as it would be easier for the smallest stocks in an index to see big moves (especially after a large market decline) than it would for the largest companies in the world.
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Nov 9, 2023
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“If you’re lonely when you’re alone, you’re in bad company.” – Jean-Paul Sartre
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Futures are basically flat this morning as the Nasdaq and S&P 500 each look to extend their winning streaks to ten and nine, respectively. The only data on the calendar today is jobless claims at 8:30, but there is a decent amount of Fedpseak to navigate including Chair Powell at 2 PM. With the market going up every day now for nearly two weeks, you can imagine that investor sentiment has improved. In this morning’s latest update to the AAII sentiment survey, bullish sentiment surged from 24.3% up to 42.6% which is the highest level since August. Bearish sentiment, conversely, has been nearly cut in half falling from just over 50% (50.3%) down to 27.2%.
As treasury yields have collapsed over the two weeks, short-term returns on long-term US Treasuries have surged. Take the iShares 20+ Year US Treasury ETF (TLT). Over the last two weeks, it has surged over 7% putting its two-week change in the 99th percentile relative to all other ten-day moves in the ETF’s history. It’s still down over 7% since the end of August, but that’s a story for another day.
Given the magnitude of the recent move and the big losses we have seen in TLT in recent months, it shouldn’t come as a surprise that the ETF’s day-to-day volatility has also become elevated. Over the last 50 trading days, TLT’s average daily move has been 1.10% (up or down) which ranks in the 94th percentile relative to all other periods. The only times where this measure was higher were during the Financial Crisis, when S&P downgraded the sovereign debt rating of the US from AAA, briefly during COVID, and most recently, late last year and into early this year.
While volatility in the Treasury market is historically high, volatility in the equity market remains low. Over the last 50 trading days, the S&P 500 tracking ETF (SPY) has been just 0.65% which ranks right in the middle of its historical range.
With TLT averaging a daily move of over 1.1% it has been about 45 bps more volatile than SPY over the last 50 trading days. Since the inception of TLT in late 2002, there were just 17 trading days spanning late 2010 and into early 2011 and just another 5 trading days in July 2015 where the spread was wider. In other words, you don’t see this very often.
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Nov 8, 2023
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“Libraries should be open to all—except the censor.” – John F Kennedy
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Futures are little changed this morning but biased to the positive side, as the direction of the market is listless with little in the way of economic data or major earnings reports to speak of. Perhaps the most notable move has been in crude oil, where WTI is down over 1% after falling through its 200-day moving average yesterday.
Yesterday’s gain for the Nasdaq was the index’s eighth straight positive day in a row and the longest streak of consecutive gains since November 2021. In the process of this 8.3% rally, the Nasdaq has also managed to reclaim both its 50 and 200-day moving averages (DMA)- levels it was below before the streak started. While the Nasdaq has managed to trade back above both of its key moving averages, it finished the day right at the downtrend that has been in place since the summer highs, so that is a potential roadblock as the rally looks to keep going.
Eight-day winning streaks are nothing out of the ordinary for the Nasdaq. Since the index’s inception back in 1971, there have been 86 prior winning streaks of at least eight days with the longest, back in 1979, stretching to 19 days. In the current streak, we’re not even halfway there. What is much more uncommon for the Nasdaq is to start an eight-day winning streak below both its 50 and 200-DMAs and by the eighth day of the streak to trade back above both of those levels. Since 1971, there have only been ten prior periods where that occurred (red lines in the chart).
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Nov 7, 2023
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“Man is the only creature who refuses to be what he is.” – Albert Camus
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And on the seventh day, the market rested. After six straight days of the rally looks like it’s taking a day off as equities, crude oil, gold, bitcoin, and even treasury yields are lower. Some of the concerns this morning can be tied to comments made by Minneapolis Fed President Kashkari who said he cannot rule out further rate hikes. On the economic calendar, it’s another light session this morning as will be the case most of the week even as the quantity of earnings reports remains very busy.
Over in Europe, the major indices are all down between 0.1% and 0.5%. PPI for the region was down an incredible 12.4%, and what was even more incredible was that it was a smaller decline than expected! In Germany, construction data was weaker than expected and showed the weakest level of activity since April 2020.
While momentum in the market pulled back yesterday, last week’s rally was accompanied by exceptionally strong breadth. As an example, the S&P 500’s 5-day advance/decline (A/D) line surged to +1,476 as of Friday which ranked as the 7th highest reading dating all the way back to 1990. The chart below shows historical readings in the 5-day A/D line, and the reason it only goes back to 2008 is that before that there were no readings that ever exceeded +1,400. That’s due in at least part to the fact that around that time is when the popularity of ETFs really started to explode creating what has become the current all-or-nothing nature of the market.
The chart below shows the performance of the S&P 500 going back to 2008 on a log scale, and the red dots show every other time that the 5-day A/D line reached +1,400 or higher. As shown, these types of readings occurred at all different phases of the market cycle. While the late 2021 occurrence right near the market top sticks out like a big pimple, other occurrences don’t look nearly as ominous.
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Nov 6, 2023
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“I am a slow walker, but I never walk back.” – Abraham Lincoln
Below is some introductory commentary of today’s Morning Lineup. Start a two-week trial to Bespoke Premium to get full access.
The market is catching its breath this morning after the big moves of last week. Equity futures, treasury yields, and crude oil are all modestly higher while the dollar follows through on its declines from last week. There’s very little in the way of economic data this morning, and the pace of earnings has been relatively slow so far, but the pace will pick up later this afternoon and into tomorrow as earnings season remains in full swing- at least in terms of the number of reports.
Last week’s 5.82% gain for the S&P 500 was the best week of the year and the best week for the major US benchmark since the week ending November 11th from last year. With geo-political tensions remaining hot, earnings looking not so hot, and interest rates surging, the prospects for equities looked dim. You couldn’t fault an investor for thinking that it may be a good time to lighten up and sit things out for a bit until things cool off and some of the uncertainty recedes. As the market tends to prove time and time again, though, just when things look their worst, the market has a way of going the other way. In addition, timing the market remains one of, if not, the most difficult aspects of investing. Without fail in the markets, the best weeks tend to come when they’re least expected.
The chart below shows the growth of $100 invested in the S&P 500 at the start of 2010 (dividends not included) on both a buy-and-hold strategy as well as if an investor missed out on the best week of each calendar year. The gap is enormous. While the original $100 is now worth $390.85, had you missed out on the best week of each year, you would have less than half of that amount at $193.55. In other words, well over half of the gains since 2010 can be attributed to those 14 weeks. Admittedly, you could make the counterargument that most of the losses during this period have also occurred in a small number of weeks, but trying to successfully anticipate when these good weeks or down weeks will occur is IMPOSSIBLE. As “KC and the Sunshine Band” advised in 1979, “Please Don’t Go”.
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