Jul 26, 2023
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“There are no gains, without pains.” – Benjamin Franklin
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With the Dow up 12 days in a row and every other major US index trading at some sort of short-term extreme overbought level, the recent gains seem like they have pain free, but when you get rallies like these and the major averages are still well below their highs from late 2021 and early 2022, pain was involved at some point!
US stocks are set to kick off the day on a subdued note with mixed earnings overnight weighing on the markets. Futures on the Dow, which has traded higher for 12 days in a row, were firmly lower earlier, but have gotten a modest boost after Boeing (BA) reported a narrower-than-expected loss on stronger revenues and better-than-expected free cash flow. At this point, whether the streak ties the post-WWII record of 13 trading days rests in the hands of Jerome Powell and what kind of tone he takes in today’s post-meeting press conference. A 25-bps hike is a done deal, but how Powell guides markets going forward will dictate which way stocks finish the day.
Mega caps have driven most of the gains in the market this year, and it’s been discussed endlessly over the last seven months. What people seem to forget, though, is how much these stocks underperformed the market in 2022. The chart below shows the relative strength of the S&P 500 versus the equal-weighted index since the start of 2022. For all of 2022, the market cap-weighted index steadily underperformed the equal-weighted index with little reprieve. Early this year, though, with the shift of the calendar, relative strength shifted too.
Just as talk of mega-cap outperformance crowded out nearly every financial-related topic in recent weeks, the trend started to shift again. Since the start of June, the equal-weighted S&P 500 has been outperforming again, and since the start of 2022, the performance of the two indices is essentially the same. For all the noise, ink, and pixels used talking about how the market-cap-weighted S&P 500 has been outperforming lately, did you know that less than a percentage point separates the performance of the two indices since the start of 2022? Things often seem one way at first glance, but if you stop and look a little longer, the picture changes.
Just this quarter, which started a month after the relative strength between the two indices shifted, equal-weighted outperformance relative to the market cap-weighted index has been broad. The chart below compares the performance of the market cap versus equal-weighted S&P 500 sector ETFs since the start of Q3. For every sector besides Consumer Staples and Technology, the equal-weighted indices have been outperforming, and the sectors where the performance disparity has been the widest have been in Energy, Health Care, and Real Estate.
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Jul 25, 2023
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“It’s such a fine line between stupid, and uh… clever.” – David St. Hubbins, This is Spinal Tap
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In case you missed the segment last night on CNBC’s Last Call, here is a link (the only link available at the moment is on Twitter)
CNBC Last Call – 7/24/23
Based on where futures are trading now, the current Spinal Tap streak of eleven straight daily gains for the Dow is making a run for The Dirty Dozen. The gains are just marginal at this point, though, so it wouldn’t take much for things to turn south. Like futures here in the US, European equities are higher this morning but just barely so, and that comes following news that the latest survey of banking from the ECB showed that corporate loan demand has plunged to record lows. Not only that, but Germany’s Ifo index which tracks sentiment towards the economy dropped for its third straight month after six straight gains to start the year. Part of the reason European equities have managed to rally off intraday lows despite the weak economic data is China. Following reports of increased government stimulus in that country, Chinese stocks rallied more than 2%.
Here in the US this morning, the only reports of note are the Case Shiller housing numbers at 9 AM followed by the Richmond Fed and Consumer Confidence reports at 10 AM. Consumer Confidence is expected to jump from 109.7 up to 112.0 while the Richmond Fed report is expected to weaken from an already negative reading of -7 to -10.
As just about everyone knows by now, the Dow’s eleven-day winning streak is the longest since 2017 and just the sixth streak of as long or longer of duration since WWII. Just as eleven straight red spins on the roulette wheel would inevitably lead you to start betting on black thinking it was overdue, it’s natural to expect a pullback to even things out. One thing worth pointing out, though, is that following each of the five prior eleven-day winning streaks, the Dow was higher three and six months later all five times.
While the Dow may have posted positive returns for eleven straight days now, not even one of its components has been higher for as many days. The longest winning streak of the index’s 30 components has been in UnitedHealth (UNH) at seven days, followed by IBM and Goldman Sachs (GS) each with six. Behind those three stocks, another three components have been up for five straight days. On the downside, just three components have traded lower for two or more days, and the longest of those streaks has been American Express (AXP) at four days.
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Jul 24, 2023
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“We can’t buy one minute of time with cash; if we could, rich people would live longer.” – O. Henry
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Despite a weak session in Europe to kick off the week, US equity futures are modestly higher this morning ahead of what will be a busy week for the markets with a ton of earnings reports and the Fed decision on Wednesday. The economic calendar is also busy and kicks off this morning with preliminary PMI data for the US Manufacturing and Services sectors. Tuesday we’ll get Richmond Fed, Case-Shiller housing updates, and Consumer Confidence, and then Wednesday’s expected rate hike will follow New Home Sales at 10 AM. The pace of data will only pick up in the second half of the week with jobless claims, GDP, Durable Goods, KC Fed, and Pending Home Sales, and then we’ll close out the week on Friday with Personal Income, Personal Spending, PCE, ECI and Michigan Confidence. So much for a slow Summer Friday!
This morning’s weakness in Europe has primarily been sparked by a weak batch of PMI data for the region where the Manufacturing sector slid further into contraction territory while the Services sector clings to growth.
You don’t have to look any further than the Dow’s 10-day winning streak to know that last week was a bit of a reversion to the mean trade for US stocks. At the sector level, the five best-performing sectors last week are also the five worst-performing sectors on a YTD basis. Meanwhile, the two worst-performing sectors – Communication Services and Consumer Discretionary – are two of the three best-performing sectors on a YTD basis. Technology, the best-performing sector YTD, managed to trade higher last week but just barely at 0.08%.
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Jul 21, 2023
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“When people talk, listen completely. Most people never listen.” – Ernest Hemmingway
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It’s a slow news morning in financial markets, and that’s reflected in the futures where both the S&P 500 and Dow are just modestly positive. Nasdaq futures are more firmly in positive territory, but that’s just because that index got slammed yesterday declining more than 2%. In overnight international economic data, the most notable report was probably Japan’s weaker-than-expected CPI print. In Europe, UK Retail Sales were stronger than expected. Earnings season started to pick up the pace this week, but it’s all been a dress rehearsal for next week when Alphabet (GOOGL), Amazon.com (AMZN), Meta (META), and Microsoft (MSFT) – four companies representing 15% of the S&P 500’s market cap- will all report. And don’t forget about the Fed meeting either!
With Dow futures essentially unchanged heading into the opening bell, it will be a coin flip as to whether that index can extend its current streak of nine straight daily gains to double-digits. Whether or not the streak goes on, it will be the longest winning streak for the DJIA since 2017. If the streak ends today, it will be the longest streak since September 2017, and if it continues, it will be the longest streak since August 2017. You may recall that 2017 was a good year for US stocks as the Dow rallied over 25% with little in the way of downside volatility. That is reflected in the fact that there were three different streaks during the year where the DJIA was up for at least nine straight days with the longest being 12 trading days in February 2017. The only other year with three or more streaks of nine straight daily gains was 1955 when there were four.
In total, since 1953, which is the first full year where the NYSE had a five trading day week, there have now been 27 different streaks where the DJIA posted daily gains for at least nine trading days. In the 26 prior streaks, the Dow’s average and median performance in the month after the ninth positive day in a row was a gain of 0.8% with gains just barely more than half of the time. Performance over the following three, six, and twelve months, however, was much more consistent to the upside. Six and twelve months later, for example, the Dow’s median performance was gains of 5.3% and 8.8%, respectively, with positive returns over 80% of the time. Extended winning streaks like the Dow is in the middle of right now, don’t usually occur during bear markets.
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Jul 20, 2023
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“If trouble comes when you least expect it then maybe the thing to do is to always expect it.” – Cormac McCarthy
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The S&P 500 and Nasdaq have benefited from the performance of mega caps this year, but this morning, a 4% decline in Tesla (TSLA) in reaction to earnings is weighing on futures for both of those indices. At this point, though, the declines are minor. The real test will come in the next couple of weeks when the trillion-dollar club of companies starts to report.
Overnight, Asian stocks were mixed with Japan and China lower while India and Australia rallied as payrolls down under came in better than expected. Stocks are faring better in Europe this morning as major benchmarks are higher across the board as an ECB policymaker suggested that just one more 25 basis point increase in rates could be all that’s needed for the current cycle.
The focus now shifts to this morning’s economic data in the US with jobless claims (initial lower than expected, continuing higher) and the Philly Fed (weaker than expected) at 8:30 and then Existing Home Sales and Leading Indicators at 10 AM. While the earnings calendar has been busy this morning, the lineup after the close is relatively quiet with reports of note including Capital One (COF), CSX (CSX), and Intuitive Surgical (ISRG). Then tomorrow we close out the week with American Express (AXP), AutoNation (AN), and SLB.
With the market rising faster than the temperature this summer, we can’t say we were surprised this morning to see that individual investor sentiment as measured by the American Association of Individual Investors (AAII) has turned bullish. In this week’s survey, the percentage of bullish respondents increased from 41% to 51.4% which is the highest level since April 2021.
That plus-50% reading in bullish sentiment also ended a streak of more than two years (116 weeks) where bulls were never in the majority in the weekly AAII poll. In the history of the survey (since 1987), there have been just three other periods where bullish sentiment went more than 100 weeks without a 50%+ reading, and the just-ended streak ranks as the third longest of all time. What’s notable about this chart is that the three longest streaks without 50%+ readings in bullish sentiment have now all occurred in the last ten years, and during that ten-year stretch, there have only been 17 weeks (out of 520) of 50%+ bullish readings.
With so few weeks where bulls were in the majority, you would think that it was an unsettled time for equities, but during this period, the S&P 500 has put up annualized returns of over 10% (not including dividends). Like the Cormac McCarthy quote above, markets climb a wall of worry, and sometimes, the more issues that investors are worried about, the better the forward returns. Conversely, just when you think things can’t go wrong for the stock market, you get years like 2022. Complacency kills.
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Jul 19, 2023
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“Quick decipherment is very important to avoid the systematic errors which invariably arise from prolonged reflection.” – Jean Francois Champollion
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224 years ago today a group of scholars who accompanied Napolean on his invasion of Egypt discovered a large slab of rock with hieroglyphic writings and other inscriptions in ancient Greek. They had no idea what the inscriptions meant, but they figured it had some significance, so they loaded it into their wagon and took it back to Europe with them. For years after, they tried to figure out what the writings meant, but it wasn’t for another 23 years before French philologist Jean Francois Champollion was finally able to decipher the “riddle of the Sphinx” and unlock the meaning of ancient Egyptian writings.
The Rosetta Stone may have taken decades to translate so that Europe’s ‘enlightened’ could fully understand its meaning, but investors have been trying for centuries to fully understand and translate the messages of financial markets, and for all the time, talent, and treasure, that has been spent trying to separate the noise from what’s really important, most investors are nowhere closer to understanding Mr. Market’s riddle now than when they first started…and anyone who is, isn’t telling!
One riddle a lot of investors can’t figure out this summer is what’s behind the levitating market. The S&P 500 has closed at overbought levels (1+ standard deviations above its 50-day moving average) every day since Memorial Day and the Nasdaq has been overbought since Cinco de Mayo. For ‘enlightened’ investors who had it all figured out that the ‘bear market rally’ from the October lows was going to reverse itself in the wake of, among other things, the bank failures in March and the debt ceiling deal in June, it’s back to the drawing board.
Futures are modestly higher this morning, and the weaker-than-expected Building Permits and Housing Starts report didn’t do much to derail the positive tone. Both Building Permits and Housing Starts came in weaker than expected, missing estimates by 46K and 60K, respectively. Not only that but May’s big 231K beat was revised lower by 72K.
The pace of earnings has been moderate and results relative to expectations have been mixed. Three notable EPS misses this morning have come from Financials like First Horizon (FHN), Goldman Sachs (GS), and Northern Trust (NTRS).
Besides trading at short-term overbought levels since early May, the Nasdaq 100 is also trading at a pretty extreme reading relative to its longer-term 200-day moving average. As of yesterday’s close, the index traded more than 26% above that level which is the most stretched reading in this indicator since September 2020 coming out of COVID, and before that late 2009 coming out of the Financial Crisis. While they were more common prior to 2000, these kinds of extremes don’t happen too often. Try to decipher the meaning of that one.
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