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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Jul 18, 2023
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“Hidden talent counts for nothing” – Nero
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There’s not a whole lot going on in financial market trading this morning. Earnings news from the likes of Bank of America (BAC), Morgan Stanley (MS), and Schwab (SCHW) have been better than expected (as has been the case with every other report this morning), but that good news has been offset partially by a sales miss from PNC (the only sales miss this morning). Trading in Europe has also been subdued with modest gains after a mixed session in Asia.
The economic calendar is jammed packed this morning with Retail Sales (8:30), Industrial Production and Capacity Utilization (9:15), and Business Inventories and Homebuilder Sentiment at 10:00. After the close, the earnings calendar remains quiet, but there will be reports from Interactive Brokers (IBKR), JB Hunt (JBHT), and Omnicom (OMC).
As the market’s rally has started to broaden out, we’ve also seen a modest expansion in the daily percentage of stocks hitting new highs. The top chart below shows the net daily percentage of S&P 500 stocks hitting 52-week highs, and while the recent peaks in this reading aren’t necessarily strong on a long-term relative basis, they are higher than any other readings in the last year. We wouldn’t go so far as saying that it’s a broad rally, but it’s also much more than just seven stocks too.
One interesting sector is Financials. Given the trouble in the bank stocks during the first quarter, the sector has fallen way out of favor among most investors. Even this sector, though, has started to see an expansion in the percentage of stocks hitting 52-week highs and just recently saw the highest percentage in a single day in at least the last 12 months. Not only has the sector seen more of its components hitting new highs, but it has also routinely closed at its highest levels since March 9th (when SIVB started to implode) over the last two weeks.
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Jul 17, 2023
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“The first hundred thousand – that was hard to get, but afterwards, it was easy to make more.” – John Jacob Astor
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It’s looking like a lackluster start to the trading week, but what can you expect after a week like the last one. The main driver of the subdued sentiment is weaker-than-expected economic growth statistics out of China where Q2 GDP came in an entire percentage point below forecasts (+6.3 y/y vs 7.3% est.). It’s going to be a busy week for both economic and earnings-related data, but the week is starting off on a quiet note with Empire Manufacturing the only report of note. The headline reading was modestly better than expected (+1.0 vs -1.8 est). While we haven’t yet fully gone through the report, the Prices Paid component stood out as it plunged from 34.9 to 22 which was the lowest reading since August 2020 and is now back below its pre-COVID average reading of 26.
After 2022, where gains were hard to come by in just about every corner of the equity market, the last several weeks have been a different ballgame entirely, with last week serving as a perfect example. Participation trophies were all over the place as every US equity index that we track in our Trend Analyzer rallied at least 2% during the week. Small Caps (Russell 2000) and Mega Cap tech (Nasdaq 100), which have taken divergent paths over the last several months, managed to come together and top the leaderboard with gains of 3.5% or more.
At the sector level, gains were also widespread. Energy was the smallest winner as it rallied just 0.82%. Besides every other sector rallying over 1%, all but two, Consumer Staples (+1.12%) and Financials (+1.96%) gained at least 2%. Topping the list were Consumer Discretionary (+3.28%) and Communication Services (3.23%) which are now up over 35% on the year and trailing only the 42% rally in the Technology Sector. Outside of those three sectors, though, only one other sector is up by double-digit percentages, and three are in the red (Energy, Utilities, and Health Care).
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