Oct 4, 2022
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“So the last shall be first, and the first last: for many be called, but few chosen.” – Matthew 20:16
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The market is finally getting some positive follow-through for a change. After yesterday’s 2.5% rally, the S&P 500 is poised to gap up over 1.5% while the Nasdaq is looking at an even larger gain of 2.0%, and this comes despite no let-up in geo-political concerns as North Korea fired a ballistic missile near Japan. Traders have instead chosen to focus on central bank policy and a lower-than-expected rate increase from the Reserve Bank of Australia (25 bps vs 50 bps expected). The hope is that Australia’s easing off the gas pedal is a sign of things to come from other central banks around the world.
In addition to the spike in equity futures, treasury yields are lower again with the 10-year yield down below 3.6% and the 2-year now just a couple of basis points above 4%. Crude oil is up another 1% and getting closer to $85 per barrel. The earnings calendar remains quiet for the next few days, and the only economic reports on the calendar are Factory Orders and JOLTS (both reports for August).
Usually, when you get a rally following a steep market decline, the dogs of the downturn lead the subsequent rally. It’s called the dash for trash. The logic behind the trend makes perfect sense. The stocks that drop the most during a market decline are the ones that investors expect to be the most negatively impacted by the market catalyst, whether it be rising rates, economic weakness, geo-political concerns like a war in Europe, or weather events like a hurricane hitting a major population center. Once investors perceive that weight to lift, these stocks start to levitate.
Take the war in Europe. Surging energy prices from the near or complete shut-off of energy supplies to Europe from Russia have taken a higher share of the disposable income of consumers in that region and forced some European industrials to halt production since it’s become too expensive to keep the lights on. If the Ukraine war were to end, though, energy prices for the region would likely come back in, and these consumers and companies that have been hurt the most would have the most to gain.
In yesterday’s rally, though, the dash for trash was not evident. The chart below shows the performance of Russell 1000 stocks yesterday broken out by deciles based on their YTD performance through last Friday’s close. While the worst-performing stocks YTD (deciles 7 through 10) slightly outperformed yesterday, so too did the best-performing stocks YTD (decile 1), and the other five deciles barely underperformed. In other words, traders were not just buying the ‘losers’.
So, what happened? We’ve been highlighting the extreme daily breadth readings in the S&P 500 for weeks now, and this ‘all or nothing tone’ of the markets -more ‘nothing’ than ‘all’ lately – is reflective of a market driven by macro forces. Instead of specific sector/company fundamentals acting as the primary driver of performance, factors like central bank actions or the latest comments from a Fed official have taken precedence Captain Macro is still steering the ship.
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Oct 3, 2022
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“If I’ve made myself clear, I’ve misspoken.” – Alan Greenspan
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It’s a new quarter, and investors hope the clean slate leads to a more positive backdrop for equities. That being said, with S&P 500 futures indicated 1% higher at the open, it would only erase two-thirds of Friday’s decline, not to mention the losses from the rest of the week. Along with higher equity futures, oil prices are up around 5% on the news out this weekend of a potential million barrel per day production cut by OPEC+. Treasury yields are significantly lower this morning as the 10-year yield dipped below 3.70%. On the economic calendar, the big report to watch this morning will be the ISM Manufacturing at 10 AM. Economists are forecasting the headline number to drop modestly from 52.8 down to 52.4.
Heading into the new quarter, the YTD losses for individual sectors and where they are trading relative to their 50-day moving averages are staggering. Year to date, four sectors are down over 25% and another three are down over 20%. Two more are down over 10%, and the 7% decline in Utilities seems like a win at this point. The only sector in the green YTD remains Energy, and with oil prices higher this morning on reports of an OPEC+ production cut, the sector is poised to add to those gains this morning.
While the YTD declines have been steep, the recent weakness has really put many sectors into deeply oversold territory. The fact that all but two sectors (Health Care and Energy) are at ‘Extreme’ oversold levels (greater than two standard deviations below 50-DMA) is illustrative enough, but it’s not often that you get seven sectors trading more than 10 percentage points below their 50-day moving averages.
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Sep 30, 2022
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“We must recognize that no amount of formal planning can anticipate changes” – Andrew Grove
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Futures were a lot higher earlier in the morning but in what has increasingly become the norm this year, those gains were fleeting. Ahead of some important inflation data, equity futures were essentially flat, and the 10-year yield was trading down to 3.7% after topping 4% earlier this week. Nike (NKE) has been a drag on equity prices as the stock is down 10% in reaction to earnings. That would rank as the stock’s largest downside gap in reaction to earnings since at least 2001. The other major report since the close yesterday was Micron (MU) and while the company lowered guidance, it’s still trading up in the pre-market.
In terms of economic data, Eurozone CPI came in at 10% y/y for the month of September which was nearly a full percentage point higher than August’s reading of 9.1%. There’s been no let-up in inflation on the other side of the Atlantic. Over here, it’s a busy day for economic data to close out the quarter with Personal Income (inline), Personal Spending (stronger than expected), and PCE Core (higher than expected) all being released at 8:30. Chicago PMI will be released at 9:45, and then at 10, we’ll close out the quarter’s data with Michigan Sentiment.
It’s been a lousy back half of the quarter, so just about everyone is happy to see it come to an end, but there are still 6.5 hours of trading to get through.
The Philadelphia Semiconductor Index (SOX) traded lower yesterday as it has on more than half of all trading days this year. As a result, the index is down just under 42% from its record closing high in late December. The current drawdown in the SOX is now deeper than the 35% drawdown from the COVID crash and ranks as the fourth largest decline from a record closing high in the index’s history. The only three that were deeper were two 50%+ declines in the mid to late 1990s, and then the 80%+ drawdown from the dot-com peak. The two drawdowns in the 1990s were short-lived lasting two years or less before new highs were once again reached, but the high from the dot-com peak in 2000 wasn’t eclipsed for another 18 years. One can only hope that in the late 2030s we aren’t finally celebrating the first new high in the Semiconductor index since 2021!
Even though the SOX is down nearly 42% from its all-time high, it may sound hard to believe but throughout its history, it has been further below its all-time high than it is now 57% of the time! With semis consistently trading down so far from record highs over the years, you would think the sector has been a bad investment. Since its inception in 1994, though, the SOX has returned more than 12% annualized on a total return basis. Not bad for an index down over 40% this year.
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Sep 29, 2022
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“When you see only problems, you’re not seeing clearly.” – Phil Knight
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The rally was fun while it lasted. Futures are sharply lower this morning and poised to give up over half of Wednesday’s gains at the opening bell. An interview with Cleveland Fed President Loretta Mester where she reiterated her hawkish stance hasn’t helped sentiment nor has the fact that initial jobless claims dropped below 200K and continuing claims were also lower than expected. As if that wasn’t bad enough, the GDP Price Index and Core PCE were both revised higher. If there’s any silver lining to those upwardly revised inflation readings, it’s that it will make it more likely that these readings for Q3 show some deceleration.
These days, either all stocks rise, or they all fall. There is little in-between. It’s like flipping a switch. In yesterday’s rally, the S&P 500’s net A/D reading was +477 which was the strongest single-day breadth reading since late July and before that April 2020. Yesterday’s strong breadth reading was the 7th this month and the 31st ‘all or nothing’ day (single day breadth reading either above +400 or below -400) for the S&P 500 this year, bringing the full-year pace to 42. That would be just one shy of the 2020 total of 43 and the sixth highest single-year total since 1990. Besides 2020, the only years with a higher number of all or nothing days were during and coming out of the Financial Crisis from 2008 through 2011.
In a normal functioning market, fundamentals play a large role in the direction of individual stock prices. There are certain times, like now though, where the seas get rough, and Captain Macro takes the helm relegating fundamentals to steerage. If you’ve ever been seasick on a boat, though, the last place you want to be is down below.
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Sep 28, 2022
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“History, Stephen said, is a nightmare from which I am trying to awake.” – James Joyce
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Equity futures have been whipping around all over the place this morning. After some relatively steep declines overnight, this morning’s announcement from the Bank of England to buy long-dated government securities has put some temporary support in the market causing interest rates to pull back from their overnight highs and equity futures to rally. How long this reprieve lasts remains to be seen, but market participants will take any break they can get these days. On one positive note, we would note that from a historical perspective at least, over the last ten years, the upcoming three-month period for equities has been better than any rolling three-month period of the year.
Buying equities during the throes of a bear market can be a humbling experience, and never has that been more true than in 2022. The chart below shows the percentage of time that the S&P 500 tracking ETF (SPY) has traded higher on the day versus the period day’s close in each year of its existence. Since its inception in 1993, there have only been seven prior years where SPY traded higher on the day less than half of the time, but this year’s current pace of 43.8% is easily the lowest reading since SPY’s inception. The forces of gravity on stock prices haven’t been this strong or consistent in at least 30 years.
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Sep 27, 2022
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“Treasury securities are considered a safe and secure investment” – treasurydirect.gov
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Futures are attempting to rebound this morning after yet another decline in the equity market yesterday. It’s a busy day for economic data as Durable Goods Orders were just released and came in roughly in line with expectations, but there are still several more indicators on the calendar with FHFA House Prices and Case Shiller at 9 AM Eastern and then Consumer Confidence, Richmond Fed, and New Home Sales all at 10 AM.
Treasuries took another pasting yesterday as yields once again surged to new multi-decade highs. Every day there’s another way to show the carnage, so here’s the one for today. The iShares Long Term Treasury ETF (TLT) fell nearly 2% yesterday taking its YTD decline to more than 30%. 30%. In Treasuries! Weren’t they supposed to be safe and boring? For most of our entire investment careers, when markets hit turmoil, market commentary would include something along the lines of “investors rotated into the safety and security of Treasuries. Even Treasurydirect.com, which is run by the Treasury Department says as much on its website.
2022’s word of the year could very well be turmoil, yet US Treasuries are having a down year for the ages. Even on a y/y basis, since its inception in 2003, TLT’s performance over the last 12 months has been the worst on record. It’s even down more than the Nasdaq!
The weakness in Treasuries is not to say that the performance of US equities has been positive this year. With the exception of the Dow ETF (DIA), every other ETF that tracks a major US index is down more than 20%, and every single one of them closed yesterday at ‘extreme’ oversold levels (more than two standard deviations below 50-DMA).
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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