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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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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