Aug 25, 2023
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“Some people without brains do an awful lot of talking, don’t you think?” – Frank Baum, The Wonderful Wizard of Oz
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There’s less than 90 minutes until Powell speaks in Jackson Hole, and before anyone leaps to the assumption that the above quote is directed at certain monetary authorities or any of the commentators who will dissect every syllable spoken or even imagined in Jackson Hole today and this weekend… there could be some truth to that, but we’d also note that today marks 84 years since The Wizard of Oz first hit the silver screen, and after the August we’ve had, we could only wish that it was as easy as clicking our heels to get back to the rally of July.
Although it was primarily one stock driving the move yesterday, in early trading it looked like the S&P 500 was going to build on Wednesday’s gain and string together a rally that would take it back above its 50-day moving average (DMA). It didn’t take long for the sellers to step in and ruin the party, though, leaving the S&P 500 with another outside reversal day.
There are a number of different ways to screen for an outside reversal day, but for our purposes we looked at days where the SPDR S&P 500 ETF (SPY) had an intraday range of more than 1%, its intraday high was higher than the prior day’s high, the intraday low was below the prior day’s low, and it closed in the bottom quintile of its intraday range (near the lows). Based on those criteria, yesterday was the fourth outside reversal in the last month.
While outside reversal days like Thursday aren’t particularly uncommon, you rarely see four within a one-month span (21 trading days). Since SPY started trading in 1993, there have only been four other periods with as many or more, with the most recent being late last April.
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Aug 24, 2023
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“Life is fragile. We’re not guaranteed a tomorrow so give it everything you’ve got.” – Tim Cook
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There’s a positive mood across the global equity universe as stocks in Asia had a positive day, Europe is trading higher, and US futures are indicating a gain of about 0.6% at the opening bell, half of which can be attributed to Nvidia’s (NVDA) 9% pre-market gain. Commodities are mixed but skewed to the downside, and both the dollar and US Treasury yields are slightly higher. It’s a busy morning for economic data with jobless claims, Chicago Fed National Activity Index, and Durable Goods at 8:30 and Kansas City Fed Manufacturing at 11:00.
The August pullback in equities has had the desired effect on sentiment as AAII’s weekly sentiment survey showed bullish sentiment declining for the third week in a row falling from 35.9% down to 32.3%. That’s the lowest level since May 31st, and represents a nearly 20 percentage point decline from its recent peak of 51.4% on 7/19.
It’s hard to think about a more fitting statement from Tim Cook regarding his predecessor who resigned on this day twelve years ago. After taking a leave of absence in January 2011 due to his battle with pancreatic cancer, Jobs formally stepped down as CEO on 8/24/11. The news was made public after the close, and shares fell sharply in the after-hours session before recovering. The following morning AAPL dropped by just about 3% as analysts came out and defended the stock, and by the end of the day it was down less than 1%. At first glance, the fact that the stock had such a muted reaction on news of the departure of one of the all-time greatest tech visionaries may seem counterintuitive, but Jobs had already given up most of his day-to-day responsibilities. While no one could fill the shoes of a leader like Jobs, Tim Cook had (and continues) proved that he was more than capable of leading the company. Just 41 days after formally leaving Apple, Steve Jobs passed away on 10/5/11.
The chart below shows the market cap of Apple since Steve Jobs returned to the company as CEO in 1997 through today. Its market cap under Jobs is shown in blue, while Cook’s tenure is shown in green. One of the most ironic aspects of the chart is that the vast majority of Apple’s market cap has accrued under Cook’s tenure. When Jobs stepped down, Apple’s market cap was just under $348 billion compared to $2.8 billion today. Put differently, more than 87% of the company’s current market cap came during the Cook years compared to less than 13% under Jobs. Even crazier is the fact that in the 13 trading days that followed its peak on 7/31 through the close a week ago on 8/17, Apple lost more in market cap ($369 billion) than the company had accrued from the time it was founded through Jobs’ ultimate departure.
Obviously, this is a major oversimplification of the impact Steve Jobs had on Apple as well as the entire US economy, bit it also illustrates the importance of compounding, and Steve Jobs left Tim Cook with more than a substantial base to build off.
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Aug 23, 2023
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“Things always seem to end before they start.” – Lou Reed
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A few hours ago, it appeared as though we’d be seeing a respectable rally to start the trading day, but much of the gains have faded and there’s still nearly an hour left before the opening bell. The pullback this morning has come in tandem with a sell-off in European stocks which are well of their highs of the day, and one catalyst has been a batch of mixed PMI readings for August. While activity in the manufacturing sector did not shrink by as much as expected, Eurozone services sector activity unexpectedly contracted. In Asia, most major indices were positive during the session, but China was a notable laggard as the CSI 300 fell 1.64% taking its MTD decline to just under 8%.
Weakness in China has really acted as a drag on the performance of Emerging Markets as an asset class as the country accounts for 30% of the entire index, but closer to home, Mexico, which has a much smaller representation in the index, has been moving in the exact opposite direction. The chart below shows the performance of the iShares China (MCHI) and Mexico (EWW) ETFs over the last ten years. While the two ETFs performed similarly with each other from August 2013 through August 2015, they really started to diverge from late 2015 through the onset of COVID, and as concerns over supply chains intensified during the pandemic, Mexico’s renaissance began. Despite periods in the last ten years where the performance of the two ETFs couldn’t have been more divergent, through yesterday’s close their performances was very similar; the MSCI China ETF (MCHI) was down 2.49% over the last ten years, while Mexico (EWW) was down 4.33%. On the chart, Mexico looks like the reflection of China much as the way a mountain range reflects on a lake.
The chart below shows the relative strength of EWW relative to MCHI over the last decade, and this chart further illustrates the roller coaster of Mexico relative to China. From late 2013 right through the onset of COVID, China steadily outperformed Mexico, but with the onset of COVID, the trend reversed abruptly, and in the span of three years has erased seven years of underperformance.
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Aug 22, 2023
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“It’s a funny thing, the more I practice, the luckier I get.” – Nolan Ryan
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On this day 34 years ago, Nolan Ryan came out to the mound in the top of the fifth inning against the A’s, and up to the plate stepped Ricky Henderson. Everyone knows that Ricky was known for his ability to draw walks, but he wouldn’t this time. After working a full count, he struck out swinging giving Ryan his 5,000th strikeout and putting him alone in the 5,000-club of strikeouts. It’s been more than a generation since Ryan notched his 5,000 K, but to this day no other pitcher has reached that level in their career. Randy Johnson (4,875) and Roger Clemens (4.672) got close, but the closest active players aren’t even in the same ballpark. Forever is a long-time, but with 5,714 strikeouts in his career and the way pitchers are coddled now, Ryan’s record may just be unbreakable.
Holders of long-term US Treasuries probably feel just like any of the batters coming up to the plate with the “Ryan Express” on the mound. Earlier this month, we highlighted the fact that the iShares 20+ US Treasury ETF (TLT) traded to its most oversold level in its history when on 8/3 it closed 3.8 standard deviations below its 50-day moving average.
Looking at the price of TLT relative to its trading range over the last year, you can see that it has been in oversold territory all month. While the degree to which it is oversold is nowhere near as much as it was earlier this month, it remains deeply oversold.
As bad as the last month has been, this year hasn’t been nearly as bad for TLT as last year. So far this year, TLT has closed at oversold levels for 48 trading days, which would put it on pace for 75 this year or once about every three to four trading days. That’s high, but it’s still less than half of last year’s total of 158 oversold days, and relative to the 20 prior years of trading for TLT, there have been six other years where TLT notched more than 75 daily closes in oversold territory. So, it’s been bad, but maybe more Don Sutton bad (3,574 career strikeouts) than Nolan Ryan bad.
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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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