Dec 12, 2022
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“The best is yet to come.” – Frank Sinatra
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Futures are in the green to start the week, but with less than 15 trading days left in 2022, any hopes for anything but a bad year in the stock market can be put to bed. The bulls have pretty much run out of time. This week is starting out on a quiet note with little in the way of economic or earnings-related news, but it’s a major week for global central banks, including the FOMC, and the tone of these meetings will also likely be dictated at least in part by Tuesday’s CPI report for the month of November.
We’ve never fully adhered to the idea that small caps lead the broader market. When an entire index like that Russell 2000 is only 22% larger than the largest single company in the S&P 500 (Apple – AAPL), it’s hard to say that it leads the entire economy. Whether they are a leading indicator or not, though, small-cap stocks are widely followed, and recent trading in the space hasn’t been particularly bullish.
Starting with the Russell 2000, the IWM ETF has been range bound now since early November, but in Friday’s decline it barely closed out the week above its 50-DMA after closing below the 200-DMA earlier in the week.
Trading in micro-cap stocks has been even weaker. Not only did the Micro-Cap ETF (IWC) never trade above its 200-DMA in the last several weeks, but on Friday, it opened and closed below its 50-DMA as well.
Looking at all US index ETFs in our Trend Analyzer, the indices that track the largest market cap companies are generally the farthest above their 50-DMAs, and then as you go down the market cap scale, the closer they get to their respective 50-days with the micro-cap ETF (IWC), the only one actually trading below that level.
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Dec 9, 2022
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“I’m lazy. But it’s the lazy people who invented the wheel and the bicycle because they didn’t like walking or carrying things. ” – Lech Walesa
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With an important PPI report about to be released plus Michigan Confidence at 10 AM, futures have still managed to post gains heading into the opening bell. Weaker inflation data out of China could be setting the tone for the positive start as CPI rose just 1.6% y/y which was down from 2.1% in October. All of this will become irrelevant, once the US data is released, though. Stay tuned.
Russia’s invasion of Ukraine caused massive disruption in the global economy, but nowhere was it more pronounced than in Europe. Commodity prices soared resulting in massive inflationary pressures in both food and energy. The negative impacts were also felt in the performance of European stocks. From the time of Russia’s invasion in February through late September, the SPDR Euro Stoxx 50 ETF (FEZ) was down over 25% and nearly double the decline in SPY over that same span. Making matters worse, summer was barely over. Heading into the winter heating season things were only going to get worse.
Well, that’s not exactly what happened. Over the last several weeks, stocks in both the US and Europe have rallied, but with the dollar also declining, European stocks have seen much stronger returns on a dollar-adjusted basis. In fact, through Thursday’s close, FEZ is now outperforming SPY since Russia invaded Ukraine in February. Ten months after Russia’s invasion of Ukraine, crude oil is down, and European stocks are outperforming the US. Now, all we need is natural gas to continue falling.
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Dec 8, 2022
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“Happiness is just how you feel when you don’t feel miserable.” – John Lennon
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Futures have been steadily improving as we head into the opening bell as the S&P 500 looks to end a streak of five straight declines. European equities have been basically flat trading in a range, while treasury yields and crude oil are higher. One notable asset class that hasn’t been moving at all is bitcoin. In the span of the last 24 hours, the world’s largest cryptocurrency has traded in a range of less than 1%. Looking ahead, the only economic reports on the calendar today are initial and continuing jobless claims. After that, all eyes will shift to Friday’s PPI…and then CPI and the Fed next week.
Happiness is not a feeling the bulls have after the first week of December. The Nasdaq just completed its worst first week to December since 1975. Think about that. Chances are you had no idea what the stock market even was the last time the Nasdaq started off December this bad. Weakness hasn’t just been isolated to the Nasdaq and growth stocks either. While some sectors have done worse than others, they’re all down over the last week as Powell’s speech last week at the Brookings Institution fades into the rearview mirror.
Leading the way lower, Energy has plunged over 6.5% as weaker oil and natural gas prices finally catch up to the sector. There’s no need to feel bad for Energy, though, as it’s still up over 58% YTD and is more than 57% percentage points ahead of the next closest sector (Utilities). Other sectors that have been under pressure since December started were Consumer Discretionary, Financials, Technology, and Communication Services. At the other end of the performance spectrum, Health Care and Utilities get the participation trophies as they’re both down less than 1% MTD.
As bad as December has been to start, one potential bright spot is that every sector except for Energy and Consumer Discretionary remains above its 50-day moving average, so if you want to take the optimistic approach, the last week can still be considered a digestion of the rally off the October lows.
One last side note. This year has been unique for a lot of reasons, but how often is it that you see Energy and Consumer Discretionary simultaneously leading the market to the downside?
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Dec 7, 2022
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“Theory is splendid but until put into practice, it is valueless.” – James Cash Penney
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December just keeps getting lousier and lousier as futures are negative, putting the S&P 500 on pace for five straight losses to kick off what has historically been one of the more positive months of the year. The culprit for this morning’s weakness is negative trade data out of China, and the action in oil over the last couple of days has been signaling that weakness. The just released reports on Nonfarm Productivity and Unit Labor Costs came in better than expected providing a boost to futures but at this point, not enough to push them into positive territory.
It hasn’t been a healthy start to the month of December for the market, but the Health Care sector has held up better than a lot of others with its decline of less than 1.3%. The sector has had a strong run from its October lows, and technicians are salivating over the impending ‘golden cross’ for the sector. A golden cross occurs when a security’s short-term moving average crosses above a longer-term one as both are rising, and it’s considered a positive technical pattern. In the case of the Health Care sector, we’re looking at the 50 and 200-day moving averages and barring any major moves, that crossover will occur tomorrow.
With a lot of technical patterns, the theoretical doesn’t always translate to reality. The table below lists the thirteen prior golden crosses for the Health Care sector since the start of 1990, and for each one, we list the sector’s performance following that occurrence. As shown at the bottom of the table, while median returns over the following week and month were better than the average for all periods since 1990, median returns three and six months later were actually below the long-term average for all periods. One year later, the Health Care sector was positive 12 out of 13 times for a median gain of 9.2%, and while the consistency of positive returns was better than average, the median return of 9.2% was basically right in line with the historical average. Historically speaking, golden crosses for the Health Care sector haven’t been bad, but they haven’t necessarily been followed by better-than-average returns either.
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Dec 6, 2022
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“Sometimes, you can learn more from criticism than you can from flattery.” – Doug McMillon
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It’s been a quiet morning for both earnings and economic news, and futures are doing little in response after yesterday’s drubbing. JP Morgan Chase (JPM) CEO Jamie Dimon was on CNBC earlier and said he expects to see a recession in 2023. That echoes comments from UAL CEO Scott Kirby who also expects to see a mild Fed-induced recession while noting that business travel has plateaued. Other CEOs appearing on CNBC this morning didn’t go as far as to use the r-word, but Union Pacific (UNP) CEO Lance Fritz sees the economy and consumer slowing driven by weakness in housing, and Walmart CEO Doug McMillon said he sees the low-end consumer being pressured as the percentage of consumers making more than $100K per year visiting stores increases.
Yesterday, we were talking about the mixed signals coming from the equity market. Today, it’s the Energy sector’s turn. Energy-related commodities were all the rage earlier this year when Russia invaded Ukraine, setting off the potential for major supply disruptions in both the global natural gas and oil markets. At one point earlier this year, WTI was up over 64% YTD and natural gas was up 160%. That helped to push the Energy sector to a gain of over 70% on the year while just about every other area of the market was down YTD, and in many cases, down big.
Since the initial hysteria in Energy markets earlier this year, energy-related commodities have come crashing back down to earth. Over the last six months, WTI is down 35%, and natural gas is down 40%. With declines of that magnitude, you would expect to see Energy stocks under heavy pressure, but during that same span, the Energy sector is down less than 1.5% and still up 58% YTD. To be sure, even after the recent big declines in energy commodities, they’re still positive YTD, although both natural gas (51%) and crude oil (3%) have trailed the gains in Energy equities.
One explanation given for the outperformance of Energy stocks versus the commodities has been the Biden Administration’s release of oil from the Strategic Petroleum Reserve (SPR) which has acted as an artificial weight on prices. That’s certainly a valid argument, but natural gas has not had to contend with increased supply from an SPR and yet it too is down just as much as crude oil in the last six months. Just when you think you have the market figured out, it throws you a curveball.
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Dec 5, 2022
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“Once, during Prohibition, I was forced to live for days on nothing but food and water.” – W. C. Fields
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It’s been a weak start to the trading week this morning as major averages in Europe and futures in the US are lower. While China rallied overnight, economic data in the EU didn’t do anything to encourage investors as PMI data for the services sector was generally weaker than expected, remaining in contractionary territory. Retail Sales in the region also declined slightly more than expected, falling 1.8% versus forecasts for a decline of 1.7%. Here in the US, the S&P 500 is on pace to open about 0.5% lower, treasury yields are modestly higher and crude oil is higher after OPEC+ announced plans to keep production levels intact. The only area of the market showing any strength this morning is crypto where bitcoin and Ethereum are both up nearly 1%. Overall, there’s no real catalyst for the weaker tone besides the fact that Morgan Stanley’s Mike Wilson said the rally has little upside left in the tank.
The equity market finds itself at an interesting juncture right now with almost as many conflicts as a high school lunchroom. Despite declines on five of the last six trading days, thanks to a 3%+ rally last Wednesday, the S&P 500 managed to finish the week up just over 1%. Similarly, while the S&P 500 also closed above its 200-day moving average (DMA) for the first time since the spring, the downtrend from the all-time high at the start of the year remains firmly in place. For every positive, it seems, there’s a negative.
In the European equity market, it’s a similar setup. The STOXX 600 was three weeks ahead of the S&P 500 in getting above its 200-DMA, and it also managed to break its downtrend on that same day. While those are positive technical developments, the current 16%+ rally is at least temporarily running out of gas right at the same levels that rallies in May and August both stalled out. If all of this confusion is enough to make you want to drink, look on the bright side; at least you can now do that legally now as Prohibition ended 89 years ago today.
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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