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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Jul 14, 2023
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“You don’t reason with intellectuals. You shoot them.” – Napoleon Bonaparte
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For all the talk about how the discourse has become so much more violent in recent years, we have nothing on Napoleon. Shooting people you disagree with??? The only duels these days happen on Twitter.
After a brief scare last week from a stronger-than-expected ADP report, the bull market came back from July 4th vacation this week, and futures are poised for a flat to modestly higher open to close out what has been a very positive week. The only economic reports on the calendar this week are Import Prices at 8:30 (weaker than expected) and Michigan Sentiment at 10 AM. It’s been a busy morning for earnings, and so far, the reports have been positive as all seven of the companies reporting as we write this have reported better-than-expected earnings and five out of seven have topped sales forecasts. So far so good.
European markets are mixed so far this morning with the STOXX 600 essentially flat while France leads the way higher with a gain of 0.3% and Germany lag (-0.2%).
They say a dollar isn’t what it used to be, but it can still have a big impact on equity market performance. Take the recent performance of European stocks. The chart below shows the performance of Europe’s benchmark STOXX 600 index over the last year. After an extended period of sideways trading, the STOXX 600 sold off in late May and ever since has been making a series of lower highs and lower lows. A recent test of the 200-DMA held, but the index is currently bumping up against its downtrend and trying to reclaim its 50-DMA as we close out the week. From a technical perspective, it’s not the greatest picture for European stocks.
If you’re an investor in the US and looking at the performance of European stocks through the lens of the US dollar, you’re seeing an entirely different picture. Instead of lower highs and lower lows, it looks more like higher highs and higher lows as the STOXX just this morning broke above resistance from earlier this year and is now trading at 52-week highs. Technically speaking, the STOXX 600 in dollar-adjusted terms looks a whole lot better. What a difference the dollar makes!
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Jul 13, 2023
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“The discipline of writing something down is the first step toward making it happen.” – Lee Iacocca
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Equities remain in rally mode again this morning as Dow, S&P, and Nasdaq futures are all firmly positive. Treasury yields are also firmly lower across the curve. The 2-year yield which was over 5% a week ago is now down to 4.67% while the 10-year yield which was over 4% is now down to 3.83%. Much of this really has been the result of benign economic data specifically related to inflation, but for it to continue we’ll need to see companies pick up the baton as they start to report earnings.
This morning’s earnings reports have been generally positive. The two biggest companies to report – Pepsi (PEP) and Delta (DAL) both handily beat EPS and sales forecasts, and PEP even raised guidance to complete the Triple Play. Conagra (CAG) also managed to top EPS forecasts but missed on the top line, while Fastenal (FAST) reported slight misses on both the top and bottom line. As one might expect given the results, both PEP and DAL are up over 2% in the pre-market while the other two are down roughly 2%.
Besides the earnings results this morning, it’s a busy day for economic data with June PPI and jobless claims coming out at 8:30. Initial Claims came in lower than expected at 237K versus forecasts for 250K while continuing claims were slightly higher than expected (1.729 mln vs 1.720 mln). The big report of the morning though was PPI and that came in at 0.1% at both the headline and core levels, which was lower than the 0.2% forecast.
Regarding PPI, as we’ve highlighted in recent months, the spread between consumer and producer prices has widened to historically wide levels. Last month, the spread between the y/y readings of CPI versus PPI widened to 2.9 percentage points which is the highest since at least 2011 when the current incarnation of PPI begins. Following this morning’s release, the spread remained at that record level of 2.9 suggesting that corporate profit margins remain healthy.
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Jul 12, 2023
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“I don’t mind going back to daylight saving time. With inflation, the hour will be the only thing I’ve saved all year.” – Victor Borge
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We’re already in the middle of the week, but in many ways, it’s just beginning as June CPI is being released as we write this, a number of Fed speakers are on the calendar to speak, and then later in the week, we’ll get PPI, Jobless Claims, Michigan Confidence, and then the start of earnings season. Heading into the release of today’s CPI report, equity futures are higher following a mixed session in Asia, and a strong showing in Europe where most benchmark indices are up 0.5% or more. Interest rates are lower, and crude oil is up back above $75 per barrel.
In Asia, overnight data was positive as PPI in Japan unexpectedly declined 0.2%, and in China, the government pledged support for internet platform companies which could signal some thawing in the tensions between the communist government and the country’s most powerful executives.
There isn’t much in the way of specific catalysts to speak of explaining the rally in European stocks, although Spanish CPI increased 0.6% m/m which was right in line with expectations. What makes that report notable is that the y/y rate of inflation dropped to 1.9% from 3.2% making Spain the first EU member state to reach the 2% inflation bogey. Will the rest of the region follow suit?
The June CPI report was just released, and while economists were forecasting both the headline and core readings to rise 0.3%, the actual readings came in at 0.2% on both a headline and core basis. On a y/y basis, headline inflation dropped to 3.0%, the lowest level since March 2021 while core CPI dropped to 4.8, which is the lowest reading since October 2021. We’re definitely not at Mission Accomplished, but it’s still moving in the right direction. In response to the report, equity futures are higher with the Nasdaq leading the way gaining more than 1%.
Remember back when it seemed we couldn’t get a weaker-than-expected CPI reading? Well, that tide has turned in a big way. The charts below show the rolling 12-month total of the number of months that headline and core CPI came in higher than expected. At the headline level, there have only been two stronger-than-expected readings in the last year which is the fewest in a twelve-month span since November 2019. On a core basis, there have been just three stronger-than-expected monthly readings, and that’s the fewest since November 2020. In markets, just when you think a trend is entrenched, things have a way of turning on a dime, and that’s an important thing to remember for both investors and policymakers alike.
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