Feb 15, 2023
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“No company can afford not to move forward. It may be at the top of the heap today but at the bottom of the heap tomorrow, if it doesn’t.” – James Cash Penney
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Futures were already modestly weaker heading into the January Retail Sales report, but the much stronger-than-expected readings have added extra pressure to equity prices as Treasury yields continue to rise. The 10-year yield is on pace to close at its highest level of the year while the 2-year yield is knocking on its cycle highs from late October. Empire Manufacturing for the month of February was still negative but came in better than expected after showing a larger-than-expected improvement from January’s dismal readings. Still on the agenda today, we have Industrial Production, Capacity Utilization, Business Inventories, and Homebuilder sentiment. Lower rates had been helping the housing sector earlier this year, but increases in yields over the last week or so haven’t been helpful.
With Retail Sales on the front burner this morning, we wanted to provide a quick update on the performance of retail-related stocks so far this year. The two most popular ETFs tracking the retail sector are the VanEck Retail ETF (RTH) and the S&P Retail ETF (XRT). Depending on which one you look at, YTD performance varies greatly. RTH has rallied 5.45% since the start of the year, while XRT has nearly tripled that performance with a gain of 16.33%.
So, what explains the outperformance this year? Looking at the top ten holding of each ETF and their YTD performance, they may be retail-related ETFs, but they sure don’t have a lot in common. XRT is basically a broad-based equal-weighted ETF where no company has a weighting in excess of 2.5%. RTH, however, is a more top-heavy market cap-weighted tracker of the retail space. In RTH, Amazon.com (AMZN) accounts for over 20% of the holdings, Home Depot (HD) accounts for 8%, and Walmart (WMT) and Costco (COST) each have a weighting of about 6%.
As shown in the chart below, not one of the top ten holdings of XRT is also a top-ten holding of RTH, and all of the top ten holdings of XRT are up sharply YTD. In fact, the worst-performing top ten holding of XRT (Children’s Place) is still up over 25% YTD which is more than five percentage points better than the top performing top ten holding of RTH (AMZN).
The performance disparity between the two ETFs hasn’t just been confined to this year. Looking at the relative strength of the two ETFs over the last three years shows how they have traded off between periods when each one took the lead. From the early days of COVID through early 2021, XRT outperformed RTH by a wide margin, but during the bear market of 2022, it was RTH that outperformed as the largest cap retailers went down less than many of the smaller ones. This year, though, the tide has been turning in the first six weeks of the year. Despite tracking the same sector of the economy, the performance of both XRT and RTH over the last three years shows how even if you get the macro trend right, how you implement the trade will be just as, if not even more important than the premise behind the trade in the first place.
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Feb 14, 2023
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“Today is Valentine’s Day — or, as men like to call it, Extortion Day!” – Jay Leno
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Given the lack of major economic data last week, investors have had their sights set on the January jobs report ever since the January employment report earlier in the month. Well, the day is finally here. The consensus was for an acceleration from December’s rate, which was a decline of 0.1%. The 9% surge in gas prices during January alone would suggest an increase of 0.5%, which coincidentally is right where consensus forecasts had settled heading into the report. It’s also exactly where the report came in. Ex Food and Energy, the reading came in at 0.4% which was also right in line with forecasts. The only issue was the y/y readings which both also came in higher than expected.
While a 0.5% m/m increase is red meat for the headline writers to paint a narrative of inflation starting a new leg higher, the fact that it’s also right where consensus expectations are means that it was priced into the report. Also, with interest rates rising leading up to the report last week, one could argue that many investors were gearing up for an even stronger number. The market reaction so far has been indecisive. After originally erasing all of the pre-market gains, futures rebounded back above where they were heading into the report, and have now once again erased those gains. All in the span of nine minutes! Interest rates have been moving in the opposite direction. CPI loves me, CPI loves me not.
As far as the market is concerned, CPI reports have taken on an added significance in the last year as we have seen heightened volatility on CPI days. Over the last year, the S&P 500’s average daily move on CPI days has been a gain or loss of 1.94%, which is a level of volatility last seen back during the financial crisis. As shown in the chart below, there’s been a shift within the trend of volatility, though. From February to July of last year, the S&P 500 declined on CPI days for six straight months and was down for seven out of eight straight months from February to September. Since October, though, there have been four straight months where the S&P 500 rallied on CPI days. Not only that, but the degree of volatility is also showing what could be an early sign of abatement as there have been two months in a row where the one-day change on a CPI day was less than 1%.
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Feb 13, 2023
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“When it’s grim, be the Grim Reaper and go get it.” – Andy Reid
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If you were thinking that there was something familiar about the market last week, you weren’t going crazy. With Communications Services (-5.57%) and Consumer Discretionary (-2.11%) leading the way to the downside and Energy (+4.94%) leading to the upside, it was basically a replay of 2022. Although last week also reflected a fair amount of mean reversion from the YTD moves of 2023, there’s still a good amount of dispersion in the market as six sectors finished the week at overbought levels, three were oversold and just two were neutral. With the oversold camp comprised of Consumer Staples, Health Care, and Utilities, it hasn’t been an especially strong showing for defensive sectors which is something that the defenses of both the Chiefs and Eagles can empathize with. It was such a poor showing for both defenses last night, in fact, that the total of 73 points was the third-highest total of any game, and it was the first time that both teams scored 35 points or more.
Look on the bright side, though, in the ten prior Super Bowls where the total was 60 or more, the S&P 500’s rest of year performance was a gain of 11.7% with positive returns nine out of ten times. The only exception was Super Bowl LII when the Eagles took out the Patriots 41-33 in what was the second-highest-scoring Super Bowl of all time.
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Feb 10, 2023
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“Losing a Super Bowl destroys all the good things that happened to get you there.” – Don Shula
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Just like one bad trade can ruin a trader’s year, one loss can ruin an entire season. Don’t take our word for it, just ask any of the players on the rosters or the fans of the 56 prior teams who have come up on the losing end. The 2007 Patriots are considered one of the best teams in NFL history, but given how that season ended, you’d have a hard time finding anyone on that roster who would call the season a success. Whatever you do, don’t ask Rodney Harrison.
On what has been the quietest week in terms of economic data all year, it’s been a disappointing one for equities. Futures are indicated to open moderately lower, putting the S&P 500 on pace to trade down on four of five days this week. Weakness today coincided with the European open as stocks on the continent have been trending lower all morning. The Nasdaq has been even weaker. Over the last five trading days, the Nasdaq has been down over 0.99% (not quite 1%) four times, and today, it’s on pace for another 1% decline.
Through Thursday, there have only been 27 trading days this year, and yet 16 have been moves of 1% or more. Since 1972, this is the tenth year where there have been 15 or more 1% daily moves, and last year there were actually 17 at this point. What’s unique about this year, though, is how strong stocks have been during this period of heightened volatility.
Volatility is usually a characteristic of a weak stock market rather than a strong one. Of the nine prior years where the Nasdaq had at least fifteen 1% daily moves in the first 27 trading days of the year, it was down YTD six times, and the largest YTD rally was 7.2% in 2000 (21 1% daily moves). This year, the Nasdaq is up over 12%! The other years were 1999 (19) and 2001 (16), and in those years it was up 5.3% and 3.7% YTD, respectively.
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Feb 9, 2023
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“I am a warrior, so that my son may be a merchant, so that his son may be a poet.” – John Quincy Adams
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After a weak showing yesterday, bulls are attempting to rebound this morning as S&P 500 futures are up over 0.50%, and the Nasdaq is priced to open up by 1%. It’s been an extremely quiet week for economic data, but we just got two reports this morning with initial and continuing jobless claims coming out at 8:30. Both reports came in slightly higher than expected with initial claims exceeding forecasts by 6K and continuing claims topping forecasts by 28K.
Not only are US futures rising this morning, but stocks in Europe have also been marching higher. In fact, Germany’s DAX is up over 1% and is actually trading at a 52-week high. Bear what?
Today’s 52-week high for the DAX broke a streak of 314 trading days that the index has gone without trading at a 52-week high. As shown in the chart below, the streak that just ended was hardly extreme as there have been nine other periods where the index went longer without a 52-week high, including an 883 trading day stretch that ended in September 2003.
The DAX may be trading at a 52-week high from the perspective of a German investor, but for US investors, there’s still some climbing out of the hole left to go. On a dollar-adjusted basis, the DAX remains just over 6% below its 52-week high. In order to reach a new high, the dollar-adjusted DAX can get there one of two ways. It can either rally from here, or it can merely trade sideways and as the 52-week window continues to drop higher prices from last February, the bar will get increasingly set lower.
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Feb 8, 2023
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“I have civilized my own subjects; I have conquered other nations; yet I have not been able to civilize or to conquer myself” – Peter the Great
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They say that you should never short a dull market, but that’s what seems to be the case this morning as futures are trading modestly lower despite a very quiet macro backdrop both here and abroad. Earnings season remains in full swing and a number of stocks are seeing big moves, but none of them are impacting much more than their respective shares let alone the broader market.
It’s hard to call the day-to-day performance of the equity market this year anything but impressive. Despite last Friday’s strong employment report and a continued hawkish (although no longer hawkish with a capital H) rhetoric from FOMC officials, the S&P 500 has managed to keep its rally intact. Just yesterday, it closed right near its YTD high from last Thursday. At the index level, every major US index ETF is currently at ‘overbought’ levels (greater than one standard deviation above its 50-day moving average) and all of them are in the green YTD with all but one (Dow Jones-DIA) up at least 8%.
Where things stand this year is a far cry from a year ago. At this point last year, all but one index ETF (DIA) was trading at oversold levels, they were all down YTD, and all but one (DIA) was down over 5% YTD.
Comparing the performance of these index ETFs this year versus last year provides an even clearer picture of the complete reversal. Indices that were down the most last year at this point like the Nasdaq 100 and the Russell 2000 are among this year’s biggest winners. Meanwhile, indices that experienced the least ‘damage’ at this point in 2022, like the Dow, have lagged so far this year. Another example? Of the 14 index ETFs we track in our Trend Analyzer, the seven ETFs that were down less than 7% YTD in 2022 are the only ones up less than 10% YTD in 2023.
Our Morning Lineup keeps readers on top of earnings data, economic news, global headlines, and market internals. We’re biased (of course!), but we think it’s the best and most helpful pre-market report in existence!
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