May 17, 2023
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“Success is making ourselves useful in the world” – George Dayton, Founder of Target
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Politicians on both sides of the aisle are still talking tough regarding the debt ceiling, but there are signs of progress being made as President Biden has announced that he will cut short his trip to Asia. In response, futures were rallying ahead of the April release of Housing Starts and Building Permits. Starts were right in line with forecasts (1.401 million vs 1.400 million) and Building Permits were shy of forecasts (1.416 million vs 1.430 million). Regarding starts, though, the March reading was revised significantly lower from 1.420 million down to 1.371 million. Building Permits, however, experienced a modest upward revision. Futures are still in positive territory on the news, but off slightly from their pre-release level.
On the earnings front, retailers continue to take center stage, and after yesterday’s report from Home Depot (HD) where the company noted softer sales trends post the SVB collapse, Target (TGT) management had similar comments.
We still have another day left until Walmart (WMT) marks the unofficial end to earnings season, but this morning we wanted to take a quick look at how stocks have recently performed during the earnings ‘on’ and ‘off-seasons. The red lines in the chart below show the performance of the S&P 500 from the time of JP Morgan’s (JPM) report to WMT. While the first two earnings seasons of 2020 were not friendly for stocks, the next three were very positive periods for the market. Unlike the last three earnings seasons, performance during the current period has been remarkably sideways. On the surface, the lack of much upside during the current earnings season may be considered a negative signal. Then again, when you consider the fact that the market started to sell off after each of the last three earnings rallies, maybe the lack of an earnings rally means the odds of a post-earnings hangover are less likely.
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May 16, 2023
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“Try to decide how good your hand is at a given moment. Nothing else matters. Nothing.” – Doyle Brunson
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There’s a modest amount of risk-off mentality in the markets this morning, and it started last night with weaker-than-expected economic data in China followed by a weaker-than-expected report on economic sentiment in Germany from ZEW. This morning in the US, Home Depot (HD) is trading more than 2% lower after reporting a sales miss and lowering guidance. That weak report didn’t bode well for April Retail Sales at 8:30 where economists are forecasting a m/m increase of 0.4%. Looking ahead, we’ll get Industrial Production and Capacity Utilization at 9:15 followed by Business Inventories and Homebuilder sentiment at 10 AM.
The release of April Retail Sales was mixed. At the headline level, sales increased just 0.4% compared to forecasts for an increase of 0.8%. Stripping out autos, though, the report was right in line with forecasts (0.4%), and ex-autos and gas, sales actually increased at triple the rate of expectations (0.6% vs 0.2%). In addition, last month’s report was revised to a worse than initially reported number, so there was something for everyone in this report.
After slicing right through the psychologically critical threshold back in September, the yield on the 2-year US Treasury found support multiple times at the 4% level. After the last bounce in early February, the yield looked as though it was going to launch into a new higher range above 5%, and being short bonds looked like a winning hand.
Within a month, though, the failures of SVB Financial, Signature Bank, and later, First Republic caused a rush to safety, and yields quickly erased all of the February spike. Since then, the 4% level has been acting more like resistance (or a magnet) as the yield hasn’t been able to convincingly get back above the 4% level and is trading right around there this morning. With the 50-day moving average (DMA) continuing to roll over and the 200-DMA starting to follow suit, the 2-year yield runs the risk of breaking down below 4% turning what was the nuts into a bad beat.
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May 15, 2023
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“If any of my competitors were drowning, I’d stick a hose in their mouth.” – Ray Kroc
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After five straight days of losses and declines in nine of the last ten trading sessions, bears are making way for the positive day in the Dow, as futures are firmly in positive territory. Whether the bears stay out of the way for the entire session, though, is another question. Not helping matters for the bulls this morning is the just released Empire Manufacturing report which came in at -31.8 compared to forecasts for a reading of -1.8 and last month’s reading of 10.8. Going back 20 years, today’s report was the third weakest relative to expectations on record trailing the reports from April 2020 and August 2022. This weakness comes against the backdrop of Atlanta Fed President Bostic saying that inflation is not coming down very quickly and that rate cuts do not factor into his near-term plan.
If the maritime analogy were to be applied to markets, it has been a bit of a slack tide in the last week as there wasn’t much in the way of a major current in the market’s direction. While the S&P 500 was down fractionally, and most sectors were lower, there is a lot of disparity. Heading into the new week, seven sectors are neither overbought or oversold, three sectors are overbought, and just one sector (Energy) is oversold. In general, sectors that had been performing the worst YTD, did the worst last week and vice versa. Take the Energy and Communication Services sectors, for example. Energy has been the worst-performing sector YTD; it was the worst performer last week and it is further below its 50-day moving average (DMA) than any other sector. Conversely, Communication Services is the top-performing sector YTD, was the best-performing sector last week and it is further above its 50-DMA than any other sector.
Looking in more detail at the Energy sector, it has been stuck in a downtrend since last October, and after a steep sell-off to kick off the month, the sector looks to be trying to stabilize. Whether this attempt proves successful remains to be seen, but it is worth noting that this most recent low has taken place on lower levels of volume compared to the one in March.
Communication Services has been in a steady uptrend since its Q4 lows. While it has consistently been making higher lows, the ETF that tracks the sector (XLC) has stalled out at resistance multiple times this year. If it can break above $60, there’s no short-term resistance above.
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May 12, 2023
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“It’s tough to make predictions, especially about the future.” – Yogi Berra
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What you think of the stock market these days will depend a lot on which index you’re looking at. While futures are up across the board today, the Dow has been down every day this week and eight of the last nine trading days. The Nasdaq, on the other hand, has been up in four of the last five trading days and is near its highs of the year. There’s little in the way of news driving the positive tone this morning, although the delay of the meeting between political leaders in DC over the debt ceiling until next week has been taken as a positive sign that the two sides are making progress. Along with the positive tone in futures, treasury yields are higher, but the two-year yield is still only at 3.92%. Crude oil prices are up modestly, and Energy Secretary Granholm has reportedly said that purchases for the SPR could resume in June.
On the economic calendar this morning, Import and Export prices will be released at 8:30 while Michigan Sentiment will be the least report of the week at 10 AM.
The performance disparity between major US equity indices has been well documented, but over the last several days, the gap has widened even more. Through yesterday’s close, the S&P 500 was up 7.6% on the year while the Dow was up only 0.5%. At 7.1%, the performance gap between the two indices on a YTD basis through 5/11 has never been wider, and the only time in the post-WWII period that it ever even exceeded five percentage points was in 1985 and 2020.
Given the differences in the way each index is constructed (market cap weighting of 500 stocks for the S&P 500 compared to a price-weighted index of 30 stocks for the Dow), performance disparities this large may not be too surprising, but since 1945, the correlation of daily returns for the two indices has been +0.95 meaning they’re almost perfectly correlated.
At the other end of the spectrum, there have been more years (seven) where the Dow outperformed the S&P 500 by over five percentage points YTD through this point in the year, but the most extreme was in 1999 when at this point in the year, the S&P 500 was up 10.3% while the Dow was already up over 20%! Comparisons between now and the late 1990s/early 2000s have been common, but in the case of performance disparities, the two periods couldn’t have been further apart.
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May 11, 2023
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“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” – Bob Hope
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After a slug of economic data, equity futures remain biased towards the downside along with treasury yields. Initial jobless claims came in higher than expected, continuing claims were modestly below estimates, headline PPI was weaker than expected, and core PPI was in line with expectations. Headline producer prices are currently up 2.3% on a y/y basis which is right in line with where this reading was in 2018 and 2019. Investors can debate over whether or not the FOMC should be cutting rates later this year, but given the continued weaker trend of data and stress in the banking sector, any continuation of rate hikes in June would be completely out of touch.
It was nice for a few days when headlines surrounding the regional banks weren’t at center stage, but PacWest ended the intermission this morning when it announced that nearly 10% of deposits at the bank left last week when news surfaced that the bank was evaluating strategic alternatives. Shares are down over 20% this morning and dragging other regional banks down with it.
While the banks may have been out of the headlines for a few days, the selling hadn’t stopped. Yesterday, the SPDR Regional Banking ETF (KRE) had its second-lowest close of the year trailing only the level it closed at last Thursday (5/4). In pre-market trading this morning, KRE isn’t quite below that close from a week ago, but it is within 20 cents of that low close ($36.08).
Shares of KRE have come nearly full circle from their COVID lows in early 2020. What’s interesting to note is that after the decline in the COVID crash in 2020, most investors probably thought they would never see regional banks decline that swiftly and with that magnitude ever again, but looking at the chart below, just three years later, history pretty much repeated itself.
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May 10, 2023
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“The higher up you go, the more mistakes you are allowed. Right at the top, if you make enough of them, it’s considered to be your style.” – Fred Astaire
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As expected, Congressional leaders made little headway on the debt ceiling and then blamed each other for the stalemate. Given the low expectations, the market reaction was muted. Plus, investors have bigger fish to fry with the release of the April CPI which was expected to increase 0.4% on a m/m basis at both the headline and core levels. On a y/y basis, the headline level was expected to increase by 5.0%, while the core was forecast to increase by a more concerning 5.5%. The actual readings came in right in line with expectations although the headline y/y reading was slightly lower at 4.9%.
Equity futures were modestly lower heading into the report, following the lead of Asia and Europe, while treasuries were mixed, and crude oil was lower trading at $73 per barrel. Investors were clearly positioned for a hot reading, so the initial reaction from the market has been for equities and bonds to reverse their pre-market losses as the two-year yield drops back below 4%.
Semiconductors are an area of the market to watch here. After a lousy April where the Philadelphia Semiconductor Index (SOX) fell 7.3%, the index is down about another 1% so far in May, and the technical picture doesn’t look so great. The index broke below its 50-day moving average (DMA) in the middle of April and hasn’t been able to reclaim that level ever since. Not only that, but the SOX also broke its uptrend from the October lows. Last week, it tried to trade back above both its former uptrend and the 50-DMA but was rejected. Subsequently, last Friday it made another attempt at the 50-DMA but failed again. The S&P 500 has been having its own problems trading back above 4200, and unless the semis can regain their March traction, it could be a tough grind. On any downside in the SOX, the first level of support comes into play at around 2,850 (blue line) or about 3.5% below current levels.
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