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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Jun 12, 2023
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“That wall has to come down. That’s what I’d like to say to them.” – Ronald Reagan
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Continuing the trend from last week and the last several months for that matter, equity futures are indicated higher this morning with the Nasdaq leading the way. The S&P 500’s bull market was confirmed last Thursday when it closed 20%+ from its October 12th low, but it will quickly face a big test this week with important inflation data and a Fed meeting culminating on Wednesday.
There hasn’t been a whole lot of economic data overnight in Asia or Europe, but Japan did report a larger-than-expected decline in PPI, and Machinery Tool Orders were down over 22% y/y in May after falling 14.4% in April. With data suggesting slower economic activity than expected, treasury yields are lower with the biggest moves at the short end of the curve, and crude oil is back under $70 per barrel to $68.43.
Barring an epic collapse in stock prices today, the S&P 500 will have gone eight months without hitting a new low after falling 20% or more from a 52-week high. We discussed how this period compares to prior periods and how the market performed going forward in this weekend’s Bespoke Report, but the chart below compares the S&P 500’s performance in the eight months coming off October’s lows to the eight months that followed each of the prior lows.
With a gain of 20.2%, the S&P 500 just barely moved into official bull market territory last week and avoided being just the third period (along with 1947 and 1957) of the fourteen in which the S&P 500 did not reach the 20% threshold for a bull market in the first eight months of a rally off the lows. You’ll see in the chart that the S&P 500 was also up less than 20% eight months after the September 2001 low, but in that period, it had already rallied 20% and was in a new bear market once the eight-month anniversary of the September low occurred. While the S&P 500 managed to make it into bull market territory last week, its gain in the first eight months of the rally is just over ten percentage points weaker than the average for all fourteen prior periods which helps to explain why, if you don’t have exposure to Technology and Communication Services, it may not exactly feel like a bull market.
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Jun 9, 2023
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“It wasn’t the money, it was just that we had them on the run and gave in. They knew it, and that’s why they wanted to come to terms.” – Al Davis
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This weekend marks the 155th running of the Belmont Stakes, which is referred to as the “Test of the Champion” given it is the longest and most grueling of the Triple Crown legs. In many ways, the current bull market, which was confirmed yesterday with the S&P 500 closing 20% (barely) above its October 12th low, has been the Belmont Stakes of rallies off a bear market low. To find a period where it took longer for the S&P 500 to rally 20%+ off a bear market low, you have to go back to the late 1950s. The road may have been long, but it’s better than making new lows!
This morning looks like a continuation of the trend all week where there has been little news in terms of earnings and the economy, and futures are modestly lower. Enjoy the calm while it lasts, though, because next week will be another busy week for economic data and even a Fed rate decision to boot.
Megacap stocks may have taken a back seat to large caps in the last several trading days, but somebody forgot to tell Tesla (TSLA). Heading into today, the stock is riding a 10-day winning streak, and with shares up 5% in the pre-market, the streak looks likely to reach Spinal Tap levels today. TSLA has been a wild stock over the years, but in its history as a public company, the stock has only had two other double-digit winning streaks. The first was ten trading days ending in April 2020 while the second came less than a year later when the stock rallied for eleven straight trading days. A gain today would move the current streak into a tie for the longest on record.
The log chart below of TSLA since its IPO shows where each of the prior 10-day winning streaks occurred. The April 2020 streak marked the beginning of what was a massive post-COVID rally where the stock rallied an additional 191% over the next six months. Following the January 2021 streak, however, the stock went on to fall 21% over the next six months.
While TSLA is currently in the midst of one of its longest-ever winning streaks, the magnitude of the move during the last ten days has been less monumental. While 28.4% over ten trading days is nothing to push your plate away over, as recently as this past February, the stock rallied more than 48% over ten trading days, and since November 2021, there have been three other ten-day periods where the stock rallied as much or more than it has over the last ten trading days.
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Jun 8, 2023
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“It wasn’t the money, it was just that we had them on the run and gave in. They knew it, and that’s why they wanted to come to terms.” – Al Davis
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In a week that has been quiet on the market, economy, and policy fronts, one of the biggest stories has been the merger between the PGA and LIV Golf, and it came 57 years and just two days after what was the most important merger in US sports history when the NFL merged with the AFL forming what has gone on to become the most formidable league in all of professional sports. This week’s merger in golf hasn’t been without controversy, but with time, will we look back on this merger as anything nearly as significant?
As we said, it has been a quiet week, and this morning is no exception. The only economic reports of note today are Jobless Claims and Wholesale Inventories, and they’ll also be the last reports of the week. Jobless claims were mixed as initial claims came in at an 18-month high of 261K while continuing claims were lower than expected (1.757 mln vs 1.802 mln) falling to their lowest level since February. Equity futures are slightly higher but basically unchanged. Likewise, crude oil is up fractionally, and treasury yields are higher across the curve.
Market rotation has been a common theme this year, and throughout the first week of June, we’ve seen it again where the winners YTD have underperformed as the laggards lead. Look at the chart below which compares the YTD performance of major equity index ETFs (x-axis) to their performance in the first week of June. With its 31.2% YTD gain, no index ETF has performed better than the Nasdaq 100 (QQQ), but in the first week of June, it is the only index ETF up less than 1%. Conversely, the Russell Microcap ETF (IWC) was the second worst-performing index ETF YTD, but it’s the best performed during the first week of June (+8.25%).
At the sector level, the inverse relationship hasn’t been quite as notable, but it has still been a factor. Technology (XLK) and Communication Services (XLC) are the two best-performing sector ETFs YTD with gains of over 30% each, but in the first week of June, they’ve been two of the three worst performers. Meanwhile, Energy (XLE), the worst-performing ETF this year (-6.11%), has rallied more than 7%, leading all other sectors. There have also been some exceptions, though. Consumer Discretionary (XLY) is the third best-performing sector YTD and it remained near the top in the first week of June as the fifth best-performing sector. Meanwhile, Utilities (XLU), Health Care (XLV), and Consumer Staples (XLP) were among the weakest sectors YTD, and they continued to lag in the first week of June.
Whatever side of the trade you are on, the question of whether this rotation is a trend shift or not is important, but the fact that it has coincided with the start of a new month would suggest that it has been more a function of rebalancing than a real trend shift.
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Jun 7, 2023
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“The Edge… There is no honest way to explain it because the only people who really know where it is are the ones who have gone over.” – Hunter Thompson
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It’s another quiet morning in the markets today as futures are little changed with a positive bias. Crude oil and yields are also higher, although overnight economic data out of China and Europe generally came up short of expectations, and mortgage applications in the US declined 1.4% versus the prior week. Bitcoin is also modestly lower on the morning, but given the SEC’s actions towards the industry this week, one might have thought the sector would be under even more pressure.
With every advancement, the negative side effects tend to get a disproportionate amount of attention even when the societal benefits of the breakthrough dwarf the costs. The bank runs this spring were a perfect example. How many times did we hear that a consumer’s ability to transfer large sums of capital with nothing more than a couple of taps on their smartphone was a threat to the banking system?
The list of benefits these same commentators fail to mention is long and includes the ability to effortlessly move funds around the world with just a couple of taps and how it has radically improved economic efficiency. Besides the benefits, if banks simply offered even something resembling a competitive deposit rate and didn’t load up on long-duration assets when interest rates were near zero, they never would have run into these problems in the first place. And anyway, is a business model built on a foundation of making it difficult for customers to take their business elsewhere really one we all want to get behind? If that’s the case, why wasn’t anyone defending America Online back in the early 2000s when the company made it nearly impossible for customers to cancel their accounts?
The only reason for bringing this up now is that back on this day in 1962 Switzerland opened its first drive-through bank. After seeing that, we wondered if, even with the added convenience, there were similar cries from the Luddite community railing against the fact that customers could now just drive up to the bank and withdraw funds…all while the car was still running. Talk about a bank run!
Regarding banks, we noticed yesterday that the S&P Regional Banking ETF (KRE) closed above its 50-day moving average for the third day in a row which hasn’t happened since late February/early March, before the onset of the regional banking crisis. Who knows if the worst is over, but if it is, it would have been one hell of a quick ‘crisis’.
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