Oct 30, 2023
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“When so many hours have been spent convincing myself I am right, is there not some reason to fear I may be wrong?” – Jane Austen
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While the record streak of positive Mondays ended last week, it’s looking like another positive start to the trading week this morning as investors breathe a sigh of relief that the world didn’t end over the weekend. The week is starting off slow in terms of news and data, but it’s going to be a busy week of data, earnings, and central bank decisions (FOMC, BoJ, and BoE).
Simply put, last week was a lousy one for US stocks. While the S&P 500 was down less than 1.5% for the month of October heading into the week, it now finds itself down just under 4%. What was notable about the declines, though, was in how uniform they were. In a market that has been so uneven for at least the last year (see the YTD performance numbers in the fourth column), all fourteen of the US index ETFs we track in our Trend Analyzer were down over 2% but less than 3%. Another common theme? All of them are at ‘Extreme’ oversold levels.
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Oct 27, 2023
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“If you could kick the person in the pants responsible for most of your trouble, you wouldn’t sit for a month.” – Theodore Roosevelt
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It’s getting to the point where if you want to see the market trading higher, set your alarm an hour or two earlier. Dow futures were firmly in the green very early this morning but reversed sharply a couple of hours ago as oil prices spiked following news that the US had launched airstrikes on certain targets in Syria. You know what that means; we’re heading into another weekend with a ton of uncertainty over what’s going to happen in the Middle East. There’s very little incentive to take much of a stand heading into an over 60-hour lull where the equity market will be closed for trading. Therefore, how the market manages to finish the day today will give a good idea of how sentiment looks after a rough couple of weeks of trading. Not including today, the S&P 500 has been down on five of the last six Fridays.
While Dow futures are now firmly in the red, S&P 500 futures are hanging onto positive territory (for now), and the Nasdaq is indicated to open firmly higher. Whether those gains hold will depend in part on how this morning’s economic data comes in relative to expectations. At 8:30, we got updates on Personal Income (weaker than expected) and Personal Spending (stronger than expected) as well as the PCE Deflator on both a headline (higher than expected) and core (inline) basis. At 10:00, the University of Michigan will give us updates on overall consumer sentiment and inflation expectations. Of the reports, Core PCE and the inflation expectations components of the Michigan survey are the two we’ll be paying closest attention to.
The last five trading days have been painful for US stocks, but the weakness has been global in nature. The snapshot below from our Trend Analyzer shows the performance of regional global equity ETFs and where they stand relative to their trading ranges. Outside of Europe, which is still oversold, every other ETF in the snapshot closed yesterday at ‘extreme’ oversold levels. Declines have been widespread around the globe with every ETF trading down at least 1.5% over the last week and all but two are at least 5% below their 50-day moving averages.
Looking a little closer at the returns in the last week, US equity ETFs have been hit especially hard with declines of more than 3% while most of the other ETFs are down closer to 2% or less. The underperformance of US equity-based ETFs is mostly a reflection of the weakness in mega caps this week. Mega caps have been big drivers of US outperformance this year, but now investors are getting a taste of the process working in reverse.
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Oct 26, 2023
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“I’ll be back” – Arnold Schwarzenegger, The Terminator
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39 years ago today, The Terminator, one of the most iconic Arnold Schwarzenegger movies of all time, hit the screens, and a small line that no one thought would amount to anything during production ended up turning into one of the most recognizable movie quotes of all time. After being denied entry into an LA police station to find Sarah Connor, The Terminator sized up the room and matter-of-factly said, “I’ll be back” and casually walked out. Seconds after leaving, a car comes crashing through the walls and then The Terminator gets out and proceeds to destroy everyone in his path. When faced with a roadblock, The Terminator didn’t mess around.
I wish the same could be said for the bull market that peaked in late July. Don’t get me wrong, the rally through the summer was impressive, and issues like record debt issuance from the US Treasury and war in the Middle East are more than just potholes. But the current pullback of close to 9% in the S&P 500 has been going on for close to three months now, and throughout it all, the best resistance that the bulls have been able to muster is two countertrend rallies of 3%. The small-cap Russell 2000 has been even more pathetic. It’s down 17.5% since the summer high, and through it all, the largest rally has been barely more than 4%. Terminator? The bull market’s reaction to this pullback reminds us more of George Costanza at the birthday party when he pushed all the kids out of the way trying to get out of the apartment when the fire alarm went off.
The market remains in ‘Costanza mode” this morning as futures sell-off in follow-through from yesterday’s shellacking. The primary culprit has been rising rates (what else is new), but earnings results have also been lackluster as many more companies are lowering guidance than raising guidance. As if that wasn’t enough to contend with, the economic calendar this morning is jam-packed with GDP, Core PCE, Durable Goods, Initial Claims, Pending Home Sales, and the KC Fed Manufacturing report among the more notable reports. On the geopolitical front, an Israeli ground invasion of Gaza seems imminent.
Of the data that was just released, GDP topped expectations (4.9% vs 4.5%), Durable Goods Orders were much better than expected (4.7 vs 1.9%), Core PCE was slightly lower than expected (2.4% vs 2.5%), and jobless claims were mixed. While initial claims were pretty much right in line with forecasts, continuing claims surged to 1.790 million which was the highest reading since May. In reaction to the data, treasury yields declined while equity futures got less worse.
Yesterday’s 2.5% decline for the Nasdaq 100 was the index’s worst day of the year. That’s notable because it’s extremely uncommon for the index’s worst day in a calendar year to fall this late. The scatter chart below shows the day (x-axis) and magnitude (y-axis) of the Nasdaq 100’s worst day in each calendar year. Yesterday’s 2.5% decline ranks as the third latest day in a year that the index had its worst day, trailing only 1997 and 1991. 2018 was also close, but the worst day in that year was a day earlier.
There are still two months left in the year, so we could conceivably have an even worse day for the Nasdaq 100 between now and year-end. However, if yesterday ends up being the Nasdaq 100’s worst day, it will also rank as the third mildest worst day of a year for the index trailing only the 2.3% declines in 2005 and 2013.
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Oct 25, 2023
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“Computers are useless. They can only give you answers.” – Pablo Picasso
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It’s looking like a mixed open for the equity market this morning as Dow futures are higher, while S&P 500 and Nasdaq futures are in the red. The pace of earnings is really picking up, and it’s only going to get busier in the coming days. One thing we would note is that in a tape that has been weak for the last several weeks, the ability of the market to get back on track yesterday after the late morning sell-off was encouraging.
In fixed income, we’re seeing a bear steepening of the Treasury yield curve as 10-year yields are up 2 bps to 4.86% while the 2-year yield is slightly lower at 5.09%. Crude oil and gold are basically flat at $83.70 per barrel and $1,987 per ounce, respectively.
On the economic calendar, the only major report is New Home Sales at 10 AM. Economists are expecting a modest increase to 681K from last month’s reading of 675K. Mortgage applications were already released, and they showed a decline of 1% compared to last week’s drop of 6.9%
Despite strength in shares of Microsoft (MSFT), which are up over 3.5% in pre-market trading, Nasdaq futures are lower as shares of Alphabet (GOOGL), where results in its cloud unit were weaker than expected, are trading down over 5%. That puts the stock on pace for its weakest downside gap in reaction to earnings since a year ago today when it opened down nearly 8%. In its history as a public company, there have been ten prior days where GOOGL gapped down more than 5% in reaction to earnings. On those days, the stock’s median performance from the open to close has been a decline of 2.0% with gains just three out of ten times.
While GOOGL’s reaction to yesterday’s earnings report has been weak, we’d note that over the last year, the stock has traded down in reaction to earnings three times with declines ranging from 0.2% up to 9.6%, and yet since the start of October 2022, the stock has still managed to rally 45%. One day doesn’t necessarily make a trend.
Turning back to the market, it seems somewhat hard to believe, but through yesterday’s close, the S&P 500 was down less than 1% in October. With just a week left to go in the month, in the chart below we show the performance of the S&P 500 in the last week of October for every year since 1952 when the current version of the five-trading day week began.
The last week of the month has tended to be positive with a median gain for the S&P 500 of 0.64% and gains 63% of the time. For perspective, the average one-week performance of the S&P 500 since 1952 has been a gain of just 0.17% with gains 56% of the time.
Looking at performance another way, the chart below compares month-to-date performance for the S&P 500 through 10/24 (x-axis) to its performance in the last week of the month (y-axis), and the shaded region shows periods when the S&P 500 was down between zero and 2.5% heading into the last week of the month. During these periods, performance was like the last week of October for all years with a median gain of 0.87% and gains 59% of the time. Overall, there is a slight (and we stress slight) inverse correlation between MTD performance heading into the final week of the month and its performance during the last week, but nowhere near enough to even consider making an investment decision about it.
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Oct 24, 2023
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“Coming up with an idea is the least important part of creating something great.” – Larry Page
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Equity futures are trading higher for what seems like a change this morning after the S&P 500 has posted five straight days of losses. Positive earnings news seems to be driving the gains. We’re starting to see a heavier flow of larger companies report, and this morning’s batch has been generally better than expected. The real test will come after the close, though, as we’ll hear from Alphabet (GOOGL) and Microsoft (MSFT) after the close. Treasury yields and crude oil are generally behaving this morning, and the only data on the economic calendar is preliminary PMI readings for the Manufacturing and Services sectors, as well as the Richmond Fed Manufacturing Index.
After trading in a relatively tight range over the last six months and seeing its daily volatility converge to levels more in line with a long-term US Treasury, bitcoin prices have been rallying over the last few days, capping it off with a gain of nearly 10% today. Prices briefly surged past $35,000 overnight, and while they have pulled back from those highs, the world’s largest cryptocurrency is on pace for its highest close since May 2022. Optimism over approval for a spot ETF has been cited for the gain, but rising geo-political instability and concerns over sovereign debt loads can’t be ruled out either.
While prices got there briefly overnight, bitcoin is currently on pace to come up just short of a double-digit single-day percentage gain. Heading into today, the current streak without a one-day gain of at least 10% was 224 calendar days (bitcoin trades every day) which ranked as the longest streak since the 229-day streak that ended in November 2018. Before that, the only other streak that was longer was the 272 days ending in March 2017.
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Oct 23, 2023
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“Success is no accident. It is hard work, perseverance, learning, studying, sacrifice and most of all, love of what you are doing or learning to do.” – Pele
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After flirting with the 5% threshold for a number of days now, the 10-year yield finally traded above that level this morning but has retreated back below as we approach the opening bell. Equity futures aren’t thrilled with the move and are firmly lower in response. Besides higher interest rates, unrest in the Middle East, and some hesitancy heading into what will be a very busy week of earnings are contributing to the negative tone.
By now, we’re all familiar with the fact that the S&P 500 has had positive returns on each of the last 15 Mondays, which as shown in the chart below, is easily the longest streak since at least 1952 when the five-day trading week in its current format started. The prior record of eleven up Mondays ended in June 2005. Unfortunately for bulls, it’s looking as though that streak is set to end as S&P 500 futures are firmly lower. With today being the 25th anniversary of the release of Britney Spear’s “…Baby One More Time”, can we get the streak to 16?
As far as Mondays are concerned, the streak has been significant in terms of this year’s gains for the market. While the S&P 500 ended last week with a YTD gain of 10.02%, without Mondays, it would actually be down fractionally on the year. The “Magnificent Seven” have gotten all the credit for carrying the market this year, but “Magnificent Mondays” have been just as important.
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