Jun 21, 2023
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“Even if there was a hand, it was the hand of God.” – Diego Maradona
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It’s looking like another sluggish start to trading today as the market looks to digest the sharp gains from the last few weeks. There’s no economic data to speak of but higher-than-expected CPI data in the UK is weighing on global sentiment tied to inflation. While not an economic report, Powell’s testimony in front of the House Financial Services Committee at 10 AM will be a big market driver today.
After acting as a flare for a dark market in 2022, Energy has been an outlier again in 2023 but this time to the downside with the sector declining over 10%. The last week has seen more of the same with Energy falling more than 2.5% while no other sector is down even half of a percent. As shown in the snapshot below, Energy tops the list in terms of weakness as it is down more than any other sector YTD, down the most over the last five trading days, and is further below its 50-DMA than any other sector (-3.83%).
What’s interesting about the weakness in Energy stocks over the last week is that it has come as energy related commodities have rallied substantially. As shown below, the ETFs that track crude oil (USO) and natural gas (UNG) have rallied 6.1% and 9.8%, respectively.
While performance over the last week has been divergent, whether you look at six-month price charts of energy-related stocks or commodities, they all look like a mess with all of them much closer to six-month lows than six-month highs. Perhaps the only positive thing to say is that up until this point, they haven’t made lower lows. You could even say that the chart for UNG looks similar to the way some bombed-out growth stocks looked in late 2022, although given the way the ETF is structured, holding it for extended periods of time is likely to result in an enormous amount of decay.
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Jun 20, 2023
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“You’re going to need a bigger boat.” – Martin Brody, Jaws
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48 years ago today, the relaxing effect of swimming in the ocean permanently changed forever when the movie Jaws hit the screens in movie theaters nationwide. These days, as the market rallies to 52-week highs and just recently moved past the 20% bull market threshold, the bulls look like they may need a bigger boat to accommodate the growing ranks of investors looking for higher stock prices. The market has reached overbought levels in the short term, so it shouldn’t surprise anyone to see at least a pause in the rally as we close out Q2 and shake out some of these new bulls.
In the here and now, futures are modestly lower this morning following up what was a negative start to the week for most international markets yesterday and further weakness this morning. It’s going to be another quiet week again for economic data (after a busy one last week), although the earnings calendar is starting to modestly pick up. Today, the only two economic reports on the calendar are Building Permits and Housing Starts, and the only notable earnings report is from FedEx (FDX) after the close. The economic data was just released, and Building Permits exceeded forecasts while Housing Starts were much stronger than forecast with the headline reading coming in at 1.631 million versus forecasts for a reading of 1.430 million. While still an enormous beat relative to expectations, April’s reading was revised lower by 71K.
Markets were closed for trading yesterday, but the National Association of Homebuilders (NAHB) announced yesterday that its homebuilder sentiment for the month of June came in at a level of 55 versus expectations for a level of 51 and up from last month’s level of 50. The move back above 50 indicates that homebuilders have net positive sentiment for the first time since last July, ending a streak of ten straight months of 50 or sub-50 readings. You can’t blame homebuilders for being in such a good mood given where the housing data came in this morning.
In looking at the historical chart of homebuilder sentiment, the current move above 50 started from a trough of 31 in December which is a level that historically has been associated with recessions. Also notable is the speed at which the index has rebounded from its trough. While not as quick as the rebound off the COVID lows, the magnitude of the reversal has been among the swiftest on record.
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Jun 16, 2023
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“Once you know where the roller coaster is going, are you in for the ride?” – Robert Fulghum
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It’s looking like a flat open to cap off what has been a very strong week, and once again the Nasdaq is outperforming after Adobe (ADBE) reported better-than-expected earnings last night after the close. It’s a quiet day for data, but Fed Governor Waller had some relatively hawkish comments and the University of Michigan Sentiment report will be released at 10 AM. The key item to watch in that report is inflation expectations.
139 years ago today, the first roller coaster in the United States opened in Coney Island, and for ‘just a nickel’, customers could get on board for the thrill of riding six miles an hour through twists and turns of metal and wood. Roller coasters have come a long way since their first introduction in terms of both speed and ups and downs, but If the stock market is a ride, these days the only direction it goes is up.
The S&P 500 closed back above 4400 yesterday and finished in positive territory for the eighth time in ten days. For the last ten trading days now, the S&P 500 has closed more than two standard deviations above its 50-day moving average (what we call short-term ‘extreme’ overbought levels), and yesterday almost closed three standard deviations above its 50-DMA (+2.97). That was its most overbought close since November 2004 which was right after George W Bush won re-election over John Kerry.
Streaks of at least ten trading days of extreme overbought (OB) readings for the S&P 500 haven’t been especially common over the years. Since 1952 when the five-trading day week started, there have now been 35 such streaks. The most recent was in April 2021, and the longest was 17 trading days in December 1995.
Looking at more recent history, the chart below shows the S&P 500 going back to 2000 with the red dots showing each prior ten-day streak of extreme overbought closes (each dot represents the 10th trading day in the streak). While none of these prior streaks occurred near a market low, they didn’t represent short-term or long-term peaks either. The closest any of these streaks occurred to a peak was in April 2021- more than seven months before the ultimate peak.
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Jun 15, 2023
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“A military is built to fight” – Xi Jinping
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China’s leader Xi Jinping turns 70 years old today, which in American politics would make him a spring chicken, and who better to celebrate his birthday with than US Secretary of State Anthony Blinken and Bill Gates who are both scheduled to visit with him in the next week. It’s just too bad that Xi couldn’t get some better economic data to celebrate over. Overnight, China reported that youth unemployment had hit a record high of 20.8%, but the PBoC’s gift to China’s leader came in the form of a rate cut in its key policy medium-term lending rate from 2.75% down to 2.65%.
In the US this morning, futures point to a lower open as European equities trade lower and the ECB just hiked rates. There was just a ton of economic data released, and the key items in the data were that initial jobless claims came in higher than expected (262K) and at their highest level since October 2021, Retail Sales and Empire Manufacturing both surprised to the upside with positive readings, but the Philly Fed remained negative coming in at -13.7 vs forecasts for a reading of -14.0. Basically, there was a little for everyone, but more signs of strength than weakness.
For the last few months, investors have been waiting for the rally to broaden away from the mega-caps to the smaller members. While we started to see some of that in the first week of June, the mega-caps have moved back into the lead in the last week. To illustrate, the chart below shows the YTD performance spread between the S&P 500 market cap and equal-weighted indices. Believe it or not, earlier in the year, the equal weight index was actually outperforming the market cap-weighted index, but by February they were pretty much back to even. In early March, though, we all know what happened, and ever since SVB Financial started to collapse, the market cap-weighted index has blown the equal-weighted index out of the water.
At the start of June, the YTD performance spread between the two indices had widened out to a peak of 10.62 percentage points. In the week that followed, the spread narrowed down to as low as 8.62 percentage points, but this week the mega caps have once again started to take the lead. After yesterday’s trading, the spread had once again widened out above 10 percentage points. At some point, the rally will broaden out, but up until this point, there have been more than a few false starts.
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Jun 14, 2023
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“They always say time changes things, but you actually have to change them yourself.” – Andy Warhol
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Futures are mixed this morning, but the Nasdaq is indicated to open higher, and the May read on PPI hasn’t hurt sentiment. Headline PPI fell 0.3% m/m versus expectations for a decline of 0.1%. Ex Food and Energy, they increased 0.2% which was right inline with expectations. On a y/y basis, headline PPI was up just 1.1% compared to forecasts for an increase of 1.5%, and ex Food and Energy, they rose 2.8% versus forecasts for an increase of 2.9%. PPI certainly isn’t as closely followed by markets as CPI, but these numbers suggest that the headwind of inflation pressures continues to wane.
A year ago today, the S&P 500 was just entering bear market territory following what was a sharp sell-off due to the Fed signaling to investors that not only were rate hikes coming, but they were coming in big bites. After a Michigan Confidence report showed consumer inflation expectations were rising more than expected, the FOMC went on to hike rates by an unprecedented 75 basis points for four consecutive meetings.
The snapshot from our Trend Analyzer below shows where the major US equity index ETFs stood relative to their trading ranges as of the close on 6/13/22. Leading the way to the downside, the Nasdaq 100 was down over 30% YTD, but nine indices were down over 20%. The week leading up to June 13th had been especially painful as every index ETF in the screen was down over 7% in the prior week, and most were at least 10% below their 50-day moving averages (DMA) and trading at ‘extreme’ oversold levels.
What a difference a year makes. As we head into the June FOMC rate decision this year, the Fed has signaled that after ten straight meetings where they hiked rates, today will be the first time in over a year that the committee leaves rates unchanged. Instead of inflation expectations surging, this week’s NY Fed Survey of Consumer Expectations showed that one-year inflation expectations are at the lowest level since May 2021, and three-year expectations are actually slightly below their ten-year historical average.
From a market perspective, whereas the S&P 500 was just entering bear market territory at this time last year, it is now just entering bull market territory as the S&P 500 finally closed 20% above its October 12th closing low last Thursday. Contrast the way the snapshot of index ETFs from our Trend Analyzer one year ago looked with the way it looks as of today. Now, the Nasdaq 100 is leading the way to the upside with a gain of over 30%. All but three of the index ETFs are up over 2% in the last week, and most of them are trading at least 5% above their 50-DMAs, and every single one of them are trading at ‘extreme’ overbought levels.
Historically, the market’s reaction to short-term ‘extreme’ oversold levels is very different in magnitude to how it responds to short-term ‘extreme’ overbought levels but given the sharp rally of the last couple of weeks, it shouldn’t be a surprise, if the rally we’ve seen experiences at least a pause for the next several days.
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Jun 13, 2023
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“There are so many worlds, and I have not yet conquered even one” – Alexander the Great
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Futures are little changed, and that’s understandable given the focus on the release of May CPI. Outside of the US, the PBoC lowered its 7-day reverse repurchase rate by 10 basis points, and there are reports of other policy decisions under discussion. Oil prices are higher, but with WTI at $68 a barrel, it’s hard to say that prices are rallying. Ahead of the May CPI, small business sentiment from the NFIB came in slightly higher than expected at a level of 89.4 versus expectations for a reading of 88.5. In individual stock news, shares of Zions Bancorp (ZION) are down 2% after the company noted at an investment conference that they expect loan growth to moderate.
The May CPI report just hit the tape, and both the headline and core readings were right in line with forecasts on a m/m basis. On a y/y basis, headline CPI was one-tenth lower than expected (4.0% vs 4.1%) while the core reading came in a tenth higher at 5.3% versus the 5.2% forecast. There’s been little change in markets in reaction to the report, and there’s nothing here to suggest that the Fed can’t pause tomorrow, although the hotter-than-expected y/y reading in the core reading is probably more negative than the fact that the lower-than-expected headline reading is positive.
With the release of the May CPI, the pace of increase in y/y inflation has now declined for eleven straight months. In the history of the report dating back to the early 1900s, this is just the third time that the y/y reading has decelerated versus the prior month’s reading for ten or more months. This month’s decline topped the ten-month streak that ended in July 2012, and the only streak that was longer lasted 12 months and ended in June 2021 just after WWI and the Spanish flu epidemic. During that 12-month streak, the y/y rate of inflation dropped from a peak inflation rate of 23.7% to deflation of 15.8%. Talk about a reversal. In the current streak, the rate of inflation has only declined just over 5 percentage points from a peak of 9.1% to May’s reading of 4.0%
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