Aug 3, 2023
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“You can never cross the ocean unless you have the courage to lose sight of the shore.” – Christopher Columbus
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The change in the calendar has brought with it a change in the mood of investors as stocks have traded lower on each of August’s first two trading days and are currently indicated to open lower today as well. The weakness hasn’t just been confined to US stocks either as most global benchmarks are all down on the month. Stocks in Europe have been especially weak with declines in excess of 3% in the first three trading days after more broad-based weakness this morning.
Today’s weakness comes despite some weaker than expected inflation data where PPI for the Eurozone declined more than expected (-0.4% vs -0.3% expectation). That was more than offset, though, by general weakness in the Services PMI indices. While Germany experienced better than expected growth France, Italy, and Spain missed forecasts.
Today’s economic slate in the US is jammed packed with Non-Farm Productivity, Unit Labor Costs, and Jobless Claims at 8:30. Then, after the open we’ll get updated Services PMI data from S&P and ISM. Along with those reports, we’ll also get updates on Factory Orders and Durable Goods. Besides all the economic data, don’t forget that both Amazon.com (AMZN) and Apple (AAPL) will report after the close.
531 years ago today, Christopher Columbus set sail heading west from Spain in search of a western route to China. For the next 70 days, Columbus sailed the uncharted seas with no sight of dry land until he reached what is thought to be the Bahamas on October 12th, 1492. For most people, it’s hard enough, even with Waze, to get around their own city, but looking back at Columbus’ voyage, one can only imagine what was going through his mind travelling across the ocean with no cell phone, GPS, or even a map! It makes worrying about which way the market goes from here after a credit downgrade seem trivial, but like the quote from Columbus above, there’s no reward without risk.
Yesterday’s sell-off in US stocks moved both the S&P 500 and Nasdaq out of overbought territory for the first time since May. In the case of the Nasdaq, it was the first time since before Cinco de Mayo that the index didn’t close at overbought levels, and at 60 trading days, that streak was the longest since August 1997. Yesterday’s decline in the Nasdaq was also the worst day for the index since 2/21 and just the fourth one-day decline of 2% this year. For the sake of comparison, last year at this time the Nasdaq already had 33 one day declines of 2% on its way to 46 for the year.
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Aug 2, 2023
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“True courage is being afraid, and going ahead and doing your job anyhow, that’s what courage is.” – Norman Schwarzkopf
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Just as Wall Street brokerage firms have been tripping over themselves to upgrade their views of the US economy and forecast a soft landing as opposed to a recession for the US economy, Fitch came out of the blue last night and downgraded their rating of US debt from AAA to AA+. The rationale behind the downgrade had nothing that couldn’t have been said at any point in the last couple of years, so the timing is curious. Then again, if you’re going to issue a downgrade, maybe it’s better to do it during a period of relative calm rather than in the middle of a period of heightened volatility like S&P did back in 2011.
Market reaction to the downgrade has been muted. Equities did sell-off overnight but have rebounded off their overnight lows and are now pointing to a decline of 0.6% at the open. The only economic report of the day was ADP Employment which blew past expectations once again. Earnings results have also been positive, but stock price reactions to those results remains underwhelming as investors start taking profits following the massive gains from the first half of summer.
While the US debt downgrade should theoretically cause higher interest rates, as we saw back in 2011, that was not the reality. This morning, yields are pretty subdued with little in the way of changes across the curve, and any moves have been to the downside. From a longer-term perspective, though, if the charts of the 10-year and 30-year US Treasury yields were stocks, technicians would likely be bullish.
After tests of the 4% level this year back in early March and early July, the 10—year yield is once again bucking up against 4%. The more often the yield tests this resistance level, the weaker it tends to get, so when and if yields do convincingly break through 4%, they’re likely to immediately test the highs from late last year.
If recent moves in the 30-year are any indication, more upside in the 10-year yield is likely. Yields at this part of the yield curve have already broken through this year’s resistance levels and at just under 4.1% are at the highest level since November.
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Aug 1, 2023
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“Live life expecting the worst, hoping for the best, and living for the future” – Jerry Garcia
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As if on cue, the calendar flipped to August and futures are pointing to a lower open this morning. Things started off well enough overnight in Asia where Japan, South Korea, and Australia all traded higher, but Europe picked up the baton and has headed south since the open. The catalyst for weakness there has been some lackluster manufacturing PMI data, but at this point the declines are relatively modest. While the headline PMI reading for the Eurozone was right in line with expectations, it remained deep in contractionary territory at 42.7.
In the US today, the focus remains on earnings, but fifteen minutes after the opening bell, we’ll get the S&P US Manufacturing PMI followed by Construction Spending, ISM Manufacturing, and JOLTS at 10 AM.
With a rally of over 28% from its bear market lows in late 2022, equities have really come a long way in a short period of time, but if you widen out your view from the extreme lows of last year and look on a calendar basis, the gains don’t look quite as impressive. In the case of the S&P 500, over the last 12 months, it’s still up over 11%, but on a two-year basis, performance looks much less attractive at just 4.4%. That hardly looks like a market that has become unanchored from reality.
The Nasdaq is a similar picture. It has rallied more than 40% from its bear market lows and is up nearly 16% over the last year. Over the last two years, though? Down 2.2%.
Lastly, the Russell 2000. It’s been a laggard off the lows and over the last year as well with gains of 21.4% and 6.3%, respectively. The two-year performance looks downright depressing with a decline of 10%. When you have big gains in a short period of time, yet longer-term returns are still flat to down, all you can say is “What a long strange trip it’s been.”
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Jul 31, 2023
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“It is dangerous to make everybody go forward by the same road.” -Ignatius of Loyola
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We’re now well past the halfway point of a year that most investors would prefer never to end. That’s a big shift in the way sentiment was to start out the year, but while things are far from perfect, the backdrop looks a lot less ominous now than it did at the start of the year. That’s both a good thing and a bad thing. It’s good because no one wants runaway inflation or a recession. The bad news is that it’s becoming a much more widely accepted view, and when everyone starts to travel the same road, traffic jams are ultimately the least of your problems.
Futures are modestly higher to kick off what will be another busy week for earnings and economic data. In terms of earnings, the two biggest reports will be Amazon.com (AMZN) and Apple (AAPL), which will both be reporting after the close on Thursday. On the economic side of things, the key reports to watch will be ISM Manufacturing (Tues) and Non-Manufacturing (Thu), as well as Non-Farm Payrolls on Friday. Besides those reports, JOLTS and Jobless Claims will obviously be key indicators to watch.
Along with the positive tone in US futures this morning, Asian stocks were broadly higher with gains of more than 0.5% while European stocks are also higher led by France and Italy.
The S&P 500 rallied over 1% last week, but four sectors posted losses led lower by interest rate-sensitive sectors like Utilities and Real Estate which were both down close to 2%. At the other end of the spectrum, more cyclically sensitive sectors like Communication Services, Energy, Materials, and Consumer Discretionary led the way higher. While Real Estate and Consumer Discretionary are no longer trading at overbought levels, they are still well above their 50-day moving averages, and the broader market remains overbought as has been the case since the Friday before Memorial Day.
Regarding seasonality and the last trading day of July and the first trading day of August, there have been some interesting (and not so bullish) trends regarding performance during years when the S&P 500 was up 10%+ YTD versus all other years. Regarding the last trading day of July, there hasn’t been much in the way of differences in performance. In the 24 prior years since 1953 when the S&P 500 was up 10%+ YTD, its median performance on the last trading day of July was a gain of 0.06% with positive returns just over half of the time. As shown, both in terms of median performance (top chart) and consistency of positive returns (lower chart), these numbers are just slightly less than the figures for all other years.
Where things get interesting (and less positive for bulls) is on the first trading day of August. In years where the S&P 500 was not up over 10% YTD, the S&P 500’s median performance was a gain of 0.07% with positive returns 54% of the time. It’s in the years where the S&P 500 was up over 10% YTD, though, that the first day of August has been prone to profit-taking. In those years, the S&P 500’s median first day of August performance was a decline of 0.31% with gains less than 30% of the time.
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Jul 28, 2023
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What? Over? Did you say ‘over?’ Nothing is over until we decide it is! Was it over when the Germans bombed Pearl Harbor? Hell no!” – John Blutarsky
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In case you missed it yesterday, below is a link to yesterday’s segment on CNBC.
Consumers Aren’t Going to Keep Paying High Prices
While Bluto may argue otherwise, the Dow’s streak of daily gains ended at 13 days tying it with the 13-trading day period ending in January 1987 for the longest winning streak in the last 125 years. This morning, the bulls are determined not to make yesterday’s decline the start of a new losing streak, and so far, they’ve been successful as futures on all three major averages trade in the green.
Overnight and this morning, major equity indices are seeing mixed returns. In Asia, the Hang Seng and Shanghai Composite both traded up over 1% to cap off weekly gains of more than 3% while India traded marginally lower and traded down less than 1% for the week. In Europe, German GDP was the big report of the morning. While economists were expecting growth of 0.1% following Q1’s contraction of 0.3%, the actual reading showed zero growth (0.0%). The German economy may no longer be in a recession, but it isn’t growing either.
Earnings data for the week is now behind us, but there’s still a decent chunk of economic data to contend with including ECI (weaker than expected), Personal Income (weaker than expected), Personal Spending (stronger than expected), PCE Deflator (mostly inline with forecasts although Y/Y Core was less than expected at 4.1% versus 4.2% forecast), and Michigan Sentiment.
After hitting new bull market highs early in the session yesterday, stocks sold off and finished near the lows of the day. Technicians call days like yesterday ‘reversal days’, and they are considered negative market signals. As with several technical indicators, though, they sound good in theory, but they don’t always work out in practice. Since the inception of the S&P 500 tracking ETF (SPY) back in 1993, there have now been 83 days where SPY traded to a 52-week high intraday and then reversed lower throughout the trading session to the point where its intraday low was lower than the prior day’s low and the close was below the open.
The chart below of SPY shows every one of those prior reversal days over time. While there were a few times when the market did have a reversal day near a peak, most of them occurred nowhere near market peaks.
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Jul 27, 2023
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“Don’t take life too seriously. You’ll never get out alive!” – Elbert Hubbard
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After one of the most subdued reactions to a Fed decision in memory, today is not only one of, if not, the busiest days of earnings season, but there’s also a ton of economic data hitting the tape as we send this out. Given the volume of reports, you would think that there would be something to worry about in the data, but jobless claims were lower than expected, GDP was better than expected, Durable Goods were better than expected, and the inflation data (GDP Price Index and Core PCE) were all weaker than expected. Not a bad showing!
One thing they have already started to worry a little more about this week is the fact that most of them are bullish. After individual investor sentiment, as measured by AAII topped 50% for the first time in over two years last week, it headed south again this week falling down to 44.9%. That’s despite the Dow rising every single day since the last survey was taken!
We’ve talked a decent amount in the last few weeks about the extraordinarily narrow trading range that Bitcoin has traded in recently. This week, it has started to drift out of that range to the downside, and while it hasn’t been a dramatic move, the 50-day moving average is back into play. After testing that level in each of the last three trading days, Bitcoin has successfully tested that level, and today it has managed to stay above that level for now. There’s still a decent amount of time left in the day, so we’ll see if it holds, but for now, Bitcoin’s uptrend remains intact. If the 50-DMA fails to hold, though, the pace of selling could accelerate.
Bitcoin’s ‘little brother’, Ethereum, has been extremely quiet lately. Outside of a brief downdraft and recovery in June, its price has essentially done nothing. Extreme volatility is a way of life for speculators in crypto, but lately, the sector has had as much excitement as a movie on the Hallmark channel.
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