Aug 21, 2023
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“Learn to deal with the valleys and the hills will take care of themselves.” – Count Basie
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After a rough night in Asia as issues in China continue to weigh on growth prospects for the region (more on this in page five of today’s Morning Lineup), European stocks pivoted right at the opening bell and are now firmly in positive territory to start the week. US futures are following the European lead and currently point to a 0.5% gain at the opening bell. While the S&P 500 was down on Friday ending what was its third negative week in a row, we would note that stocks pretty much opened at their lows of the day and drifted higher throughout the trading session.
For all the drama in markets on a day-to-day basis, the moves in the small-cap Russell 2000, often abbreviated as the ‘RUT’, have primarily been noise as the index has been stuck in a trading range for the last year. The ‘valleys’ of each sell-off have found support right around the pre-COVID highs in the 1,650/1,700 range multiple times since last summer, but each ‘hill’ has run out of steam right around 2,000. After the latest rally that began to take hold in late May petered out at the end of July, the Russell has pulled back just over 7% and finds itself smack dab in the middle of the 12-month range.
Looking at the Russell on a shorter-term basis, the pullback off the latest failed rally has been relatively swift, but one encouraging aspect so far has been that Friday’s 1.5% rebound off the intraday low occurred right around the 50-day moving average and at support from the uptrend off the early May low. Let’s see if that bounce can hold in the days ahead and mark a higher valley for small caps and ultimately break the small cap index out of its rut.
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Aug 18, 2023
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“Conquering the world on horseback is easy; it is dismounting and governing that is hard.” – Genghis Khan
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Futures are down. What else is new? This morning we have China to thank as troubled property developer Evergrande filed for Chapter 15 bankruptcy. In spite of the news, the yuan is actually rallying a little bit on reports that the PBoC has instructed banks in the country to support the currency. There’s no economic data on the calendar today, so there won’t be much to drive markets between now and the opening bell. It’s hard to imagine what kind of catalyst could turn things around heading into the weekend, but how we do end up trading between now and the closing bell will give a good read on where sentiment really stands.
If you’re looking for an example of the manic nature of the market, look no further than the last 26 trading days. The chart below shows the net daily breadth readings of the S&P 500 since July 13th. Closing out July, bulls took charge of the market as there were just two days of negative breadth in the last thirteen trading days of the month. After ‘conquering’ the market, bulls quickly found that maintaining control would be a lot harder, and in the first thirteen trading days of August, breadth has been turned completely upside down with just two days of positive breadth.
Besides being an unlucky number, thirteen is a somewhat arbitrary number when analyzing the market, but we did find it interesting that the two days of positive breadth in the market over the last thirteen trading days is the fewest amount of positive days in a thirteen day window since late September 2022, and the 11 positive days in the thirteen day window that preceded it was the strongest since March 2013. In this market, investors are either all in or all out.
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Aug 17, 2023
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“The only way to get ahead is to find errors in conventional wisdom.” – Larry Ellison
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Investors are trying to muster an up day as futures trade modestly higher an hour ahead of the opening bell. Jobless claims and the Philly Fed Manufacturing report were just released. The former was basically right in line with expectations while the Philly report unexpectedly increased. One potential negative of the Philly report was the fact that like its Empire counterpart, the Prices Paid component showed a notable increase.
With the flip of the calendar into August, the general tone of the market shifted on a dime. Look no further than the chart of Apple (AAPL). The stock closed at an all-time high on July 31st, but since then it’s been all downhill as the stock has corrected more than 10%, erasing more than $300 billion in market cap in the process. That’s greater than the market cap of all but 20 US publicly traded companies!
At the sector level as well, the tide has gone out. The image below is a snapshot of sector ETFs from our Trend Analyzer as of the end of July. At that point, all but one sector was overbought (1+ standard deviations above its 50-DMA), and two sectors – Communication Services and Energy – were at ‘extreme’ overbought levels.
The sector picture has changed significantly in just over two weeks, though. As of yesterday’s close, only one sector – Energy – remains at overbought levels, and three have moved into oversold territory (Utilities, Technology, and Real Estate). Also notable is the fact that every sector has traded lower over the last week with all but Health Care posting declines of more than 1%.
Just as there’s nothing like a rising market to improve investor sentiment, all it usually takes is a market pullback to get investors nervous. This week’s sentiment survey from the American Association of Individual Investors (AAII) looks as though we may be starting to see that play out. Over the last week, bullish sentiment dropped from 44.7% down to 35.9% which is down over 15 percentage points from the recent peak back in late July. Certainly not a panic, but bulls are starting to look over their shoulders.
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Aug 16, 2023
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“When things go wrong, don’t go with them.” – Elvis Presley
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It’s been a tentative morning in markets following yesterday’s relatively large declines. Building Permits and Housing Starts were just released and while Permits were slightly weaker than expected, Starts were slightly better than expected although June’s reading was revised lower. The only other reports on the calendar for the day are Capacity Utilization and Industrial Production at 9:15 Eastern. Also don’t forget about the release of the Fed Minutes at 2PM.
2023 started off weak for the Industrials sector as it underperformed the broader market by a wide margin in the first five months of the year. As of the end of May, the sector was down fractionally YTD even as the S&P 500 was up over 9%. The chart below showing the relative strength of the sector versus the S&P 500 clearly illustrates this trend, but just as the sector underperformed in the first five months of the year, it has seen a rebound since then as concerns over a hard landing in the US economy shifted more to a soft or no-landing scenario. As the overall market has come under pressure in August, though, the Industrials sectors hasn’t been immune to the selling, and yesterday’s decline of 1.27% for the sector was the largest one-day decline since 5/31 when the sector’s relative strength bottomed for the year.
Unlike the S&P 500 which closed below its 50-day moving average yesterday, the Industrials sector managed to hold above that level for now and looking at a longer-term chart for the sector, it’s interesting to note that the support of the 50-DMA also happens to coincide with the sector’s highs from late 2021 and early 2022. Theoretically, these prior highs should act as support, but only time will tell.
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Aug 15, 2023
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“More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly.” – Woody Allen
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After rallying to kick off the week with a late day surge into the close, today looks like a turnaround Tuesday (of the negative kind) as futures point to a sharply lower open. Several factors have contributed to the downbeat tone including some very weak economic data out of China (Retail Sales, Industrial Production, and Unemployment). One notable aspect that was missing from the Chinese employment data was the youth unemployment rate. In June, the rate of joblessness for those aged 16 to 24 was 21.3%, but with the latest data release, the Chinese authorities said they would temporarily stop releasing the data so that it could be refined. Don’t worry though, one official assured reported that the situation was ‘generally stable’. Out of sight, out of mind. Right?
Here in the US, it’s a busy day for data. Retail Sales and Import Prices came in significantly better than expected while the Empire Manufacturing report was significantly weaker. Essentially, it’s more of the same as Manufacturing survey remain generally weak even as the consumer holds strong.
It may be August and a lot of people are out on vacation, but they’re missing out on various financial assets as they converge towards their own individual crossroads. Starting with the S&P 500, yesterday the benchmark for the US equity market appeared to have successfully tested and held its 50-day moving average (DMA). While bulls had hoped for a one and done test, it’s not going to be that easy as futures indicate another test of that level today. The S&P 500 isn’t the only major US equity index testing its 50-DMA either. The Russell 2000 also successfully tested its 200-DMA yesterday but will also see another test of that level today. Lastly, the Nasdaq was already below its 50-DMA yesterday, and if it weren’t for a late day rally towards the close, would have finished the day there as well. With this morning’s negative open, yesterday’s move is going to end up looking more like a failed rally attempt.
The Dollar Index has rallied over 3% over the last month, but the move came to a grinding halt yesterday at the 200-DMA. This morning, it is modestly lower again, although we would note that it experienced a similar pause in the rally a couple of weeks ago before it moved up through its 50-DMA.
Saving perhaps the most important for last, the 10-year US Treasury yield is probably at the biggest crossroads of the three assets classes discussed here. This morning, the yield is at 4.256% which is above the closing high from last fall and less than ten bps below the intraday high. If the yield breaks above both levels, it’s going to be hard in the short-term for equities to stay above their respective 50-DMAs.
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Aug 14, 2023
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“Kill them with success and bury them with a smile.” – Usain Bolt
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August tends to be a quiet time of year in terms of events but a heavy period for equities, and that’s exactly what we’re seeing this year and this morning. Following the first two weeks of the month where stocks have had trouble holding on to their daily gains, futures kicked off the morning higher but have given up all of those gains as we approach the opening bell. So far the losses have been modest, but just as it’s encouraging to see markets rebound on weakness, it’s disappointing to see selling into strength. As noted on page five of today’s Morning Lineup, however, the uptrends for major US and international equity ETFs remain intact.
Wherever the US equity market goes for the second half of August, a lot will likely depend on the direction of the Mega Cap stocks. Last week was a tough one for the group as everyone of them besides Alphabet (GOOGL) was down and in most cases down sharply, but some perspective is also in order as they’re all still up by 34% or more YTD and only two of them (AAPL and MSFT) are oversold.
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