Jul 6, 2023
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“An absolutely new idea is one of the rarest things known to man.” – Thomas More
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The first three days of Q3 have been an example of stocks not picking up right where they left off in the second quarter. while things started off quiet enough during the shortened session on Monday, yesterday’s session and this morning’s pre-market have traded heavily. This morning the tone has been especially weak as European stocks trade down over 1% on breadth that is skewed 10-1 to the downside. There hasn’t been much data to steer the market, but rising interest rates have been acting as a significant weight.
This morning, there’s much more economic data to contend with. ADP Private Payrolls were just released and came in much higher than expected at 497K versus forecasts for a reading of 220K. Jobless claims were more mixed. Initial Claims came in slightly higher than expected at 248K versus forecasts for 245K and up from a downwardly revised reading of 236K. Continuing Claims managed to come in weaker than expected (1.72 mln vs 1.737 mln). Overall, these reports suggest that any doubts over the health of the labor market can be put to rest, at least for now. Besides these two reports, we’ll get the monthly JOLTS report at 10 AM followed by Non-Farm Payrolls tomorrow. While there’s a lot of employment-related data to contend with don’t forget about the 10 AM release of ISM Services.
With the S&P 500 rallying into bull market territory and new 52-week highs, investors have become bullish. According to the weekly survey of individual investor sentiment from AAII, bullish sentiment jumped up to 46.4% from 41.9%. While bulls are still not in the majority and haven’t been in over two years, this week’s reading was the highest level of bullish sentiment since November 2021. Looking at the chart below, sentiment and the stock market have carved out identical patterns over the last two years indicating that investors’ views of the stock market have been based on how stocks have performed in the moment.
You may think that investor sentiment has always been positively correlated to the stock market’s performance, but that hasn’t necessarily been the case. The chart below shows the rolling two-year correlation between AAII bullish sentiment and the S&P 500 since 2000. While the correlation between the two has usually been positive, the levels have varied widely. In fact, levels like the current reading of +0.50 or more have been uncommon occurring less than 12% of the time since 2000.
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Jul 5, 2023
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“No one ever made a difference by being like everyone else.” – P.T. Barnum
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The starters are coming back on the field this morning after a short session on Monday, and the gains from the quarter’s first trading day are on pace to be more than erased at the opening bell. Weak PMI data for many major economies released overnight and this morning has generally been weaker than expected raising concerns about the health of the global economy. The US economic calendar is quiet today with Factory Orders at 10 AM and FOMC minutes at 2 PM.
After a strong start where the STOXX 600 rallied 6.5% in the first ten trading days of the year, investors around the world hopped on the bandwagon for European stocks. Since those first ten trading days, though, stocks across the Atlantic have essentially flat-lined. In the 121 trading days since those first ten trading days of 2023, the STOXX has only managed to rally 1%, and the technical backdrop for stocks in the region has started to look shaky.
The STOXX 600 traded at new highs for the year in May, but since then has formed a short-term downtrend of lower highs and lows, and in the process, has broken the uptrend that has been in place since last fall’s low. In late June, it made a rally attempt, but that bounce stalled out right at resistance coinciding with that former uptrend as well as the 50-day moving average. To paraphrase PT Barnum, no one ever makes much money by investing like everyone else.
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Jul 3, 2023
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“The essence of America — that which really unites us — is not ethnicity, or nationality, or religion. It is an idea — and what an idea it is: that you can come from humble circumstances and do great things. That it doesn’t matter where you come from, but where you are going.” – Condoleezza Rice
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Welcome to the second half! It’s going to be a quiet start to the second half as most people seem to have taken the long weekend for July 4th. There’s been little corporate news to speak of, but we will get the ISM Manufacturing for June and Construction Spending report for May at 10 AM. After that, traders will start packing up for the holiday as equity markets close for trading at 1 PM eastern. Happy July 4th!
For anyone who didn’t follow the College World Series (CWS) this year, it ended up being an experience of extremes in the best of three series. Game one looked pedestrian enough with LSU winning 4-3 over Florida. However, it took 11 innings to get there with each team scoring a single run in three different innings during the first nine and LSU taking the lead in the top of the 11th on a Cade Beloso home run deep over the right field wall. In game two, Florida came back with a vengeance demolishing LSU by 20 runs in a 24-4 final. It was the most runs ever scored in a CWS game and the largest margin of victory since Notre Dame beat Northern Colorado 23-2 all the way back in 1957. The next day, it was LSU doing the thumping in game three and taking the title by scoring 18 runs to Florida’s 4. LSU ultimately took the title, but on both sides, pitching wasn’t a strong suit.
The first half of 2023 and 2022 look a lot like this year’s CWS. Last year, it was the bears on top in what was collectively one of the worst years for financial assets as stocks and bonds were all crushed. This year, it’s been the opposite as stocks have surged and bonds of all types are in the black on a YTD basis. Like game two of the CWS, which had the most lopsided win since 1957, the Nasdaq had its best first half since 1983, the Nasdaq 100 had its best first half ever, and Apple (AAPL) crossed the $3 trillion market cap threshold. Is that enough financial dopamine for you? And if pitching wasn’t the strong suit of this year’s CWS, central to the volatility of the last two years in financial markets has been the Fed, which at times has seemed equally inconsistent.
It hasn’t just been a strong for US stocks either. As shown in the snapshot from our Trend Analyzer below, equity ETFs from around the world all finished the first half in positive territory YTD. Not only that, but the last week of June was also positive for every one of the regional ETFs we track, and they are all above their 50-day moving averages. Talk about a tide lifting all boats.
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Jun 30, 2023
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“Perfection is a theory.” – Mikhail Baryshnikov
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It’s been a quiet overnight session in terms of US-centric news, but European stocks have rallied to close out the first half as inflation data for the Eurozone was lower than expected. Headline CPI dropped from 6.1% down to 5.5% on a y/y basis, while core ticked up to 5.4% from 5.3%. Both reports, however, were lower than expected.
The only data on the calendar today is Personal Income, Personal Spending, and PCE inflation data at 8:30. Then at 10 AM, we’ll get the final reading of consumer sentiment from the University of Michigan. Personal Income came in at 0.4% versus forecasts for a gain of 0.3%. Personal Spending was weaker than expected rising just 0.1% versus forecasts for an increase of 0.2%. Headline PCE was right in line with forecasts at 3.8% while Core PCE rose 4.6% which was slightly below the 4.7% forecast.
With the Nasdaq having the third-best first half in its history, it has been as close to a perfect year as one could imagine for the index. The only two years that were better were 1975 (45.5%) and 1983 (37.1%), and with the Nasdaq up 29.9% heading into today, those two years are out of reach. Similarly, the next closest year behind this year is 1991, and back then the Nasdaq was up 27.3% in the first half. Therefore, unless the Nasdaq falls over 2.5% today, its ranking in the third spot seems safe. If this were the NFL, we’d be sitting Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), Tesla (TSLA), Nvidia (NVDA), and Meta (META) today. Although AAPL may just get the start so it could cross the $3 trillion threshold.
It has also been a steady year for the Nasdaq as well. So far this year, the maximum peak-to-trough decline for the index has been 8.7%. That doesn’t sound too benign, but it’s well below the 12.5% first-half average dating back to 1972. It’s also the smallest first-half decline since 2017 when it fell just 2.9% in the first half. Looking back throughout the history of the Nasdaq, while years with sub-10% drawdowns in the first half haven’t been very common in the years since 2000 (just 8 in 24 years), prior to that they were much more common with 17 in 28 years.
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Jun 29, 2023
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“You speak an infinite deal of nothing.” – William Shakespeare
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While Micron reported a wider-than-expected loss and gave mixed guidance after the close last night, commentary from the company suggesting that the semiconductor market bottomed has provided a boost to futures, especially in the tech space, and that has overshadowed any hawkish commentary from Fed Chair Powell.
There’s a decent amount of economic data this morning. GDP was revised much higher coming in at 2.0% versus 1.4% expected. Personal Consumption was stronger than expected (4.2% vs 3.8%), and the GDP Price Index was lower than expected at 4.1% vs 4.2% expected. All these numbers are backward-looking from Q1, though. Timelier was jobless claims, and on both an initial and continuing basis, they came in lower than expected. Initial Claims were especially strong, dropping to 239K versus forecasts for a level of 265K, and that has pushed the yield on the 10-year from 3.74% up to 3.8%.
In Asia overnight, equities were generally flat with a negative bias, although economic data was mostly better than expected. Ironically, Europe is trading with a more positive tone even as economic data in the region hasn’t been particularly market-friendly.
Within the commodities space, one of the only bright spots in an otherwise dark sector had been precious metals, but even this area has started to weaken.
In early May, gold looked like it was on the verge of a breakout, but more hawkish commentary by the Fed and pricing out of rate cuts this year has reversed that positive momentum, and over the last two weeks we’ve seen a downside break of the uptrend off the October lows.
It’s a similar story for platinum which was also trading at 52-week highs in the spring but has since broken down in an even more dramatic way than gold. Right now, it’s on the verge of making a lower low.
Silver traditionally has a connotation of playing the bridesmaid role, but while the commodity has pulled back from its spring highs and traded at a series of short-term lower highs and lows, it is the only one of the three commodities here where the uptrend off the October lows remains intact.
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Jun 28, 2023
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“It is better to be roughly right than precisely wrong.” – John Maynard Keynes
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Futures are mixed with a negative bias as the Nasdaq is leading the losses on reports that the Federal government will expand export curbs on certain semiconductors to China. Apart from China, most global equity markets have been rallying overnight in follow-through from yesterday’s US rally. Chinese stocks were more subdued and that comes after reports that industrial profits well 18.8% on a YTD basis as the government cited ‘insufficient demand’. Even after the PBoC intervened in markets overnight, the yuan was under pressure and fell to a seven-month low versus the dollar.
In the US, mortgage applications increased 3% last week, and just in time for the opening bell, Fed Chair Powell will speak at an ECB panel in Portugal at 9:30 AM.
We’ve discussed the rally in the Nasdaq a lot in recent days, and through the fourth to last trading day of the first half, it is up 29.5% which ranks as the third-best first-half performance through this point in the first half trailing only the 39.6% rally in 1983 and the 44.3% surge in 1975. If there’s one thing we’re confident of, it is that this year won’t overtake those two years between now and the end of the week. As wild as this year’s first half seems, it’s even crazier when you consider the fact that last year’s performance through this point in the year was the second worst in the Nasdaq’s history.
Given the strong gains so far, we were curious to see how the Nasdaq performed in the last three trading days of the first half after rallying 10% YTD. In the 24 prior years when the Nasdaq was up by double-digit percentages YTD heading into the last three trading days of the first half, its median rest of month performance was a gain of 0.89% with positive returns 79.2% of the time. That’s a pretty impressive three-day average, but compared to all years in the Nasdaq’s history, it’s actually right in line with the norm.
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