Oct 6, 2022
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“I hope to let every citizen know what steps he can take without delay to protect his family in case of attack.” – John F. Kennedy
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The focus for the rest of the week will be on jobs and Fedspeak with jobless claims today (higher than expected) and the September jobs report coming out tomorrow. In addition to the hard data, there are at least seven Fed speakers scheduled to speak between now and the end of the trading week. Last night, Atlanta Fed President Raphael Bostic was relatively hawkish when he noted that the fight against inflation was still in its ‘early days’ and sees the Fed Funds rate rising to around 4.5% by the end of the year and then from there the Fed should assess where the economy is heading. The path of a hike to 4% or 4.5% and then a pause (rather than a pivot) from there seems to be the Fed’s ‘plan’ at this point.
Investor sentiment this week improved after the market’s rally but with bullish sentiment still below 24% sentiment remains extremely depressed. There’s still a lot going wrong these days. The prices we’re paying for everything remain higher than we could have ever imagined, relations with China and Russia haven’t been this strained in a generation, a major hurricane just decimated parts of one of the country’s largest states, and by some measures, Americans have never been more miserable. It stinks out there.
But if you think you have it bad now, we’ve been here before, and it’s been even worse. Consider yourself lucky that Joe Biden isn’t on TV or TikTok today with a hammer and nails giving you a step-by-step guide on how to build a bomb shelter in the event of a nuclear attack. That may sound farfetched, but that’s where we were just 51 years ago today when President Kennedy made the comments above in a speech on the threats of an attack. And this was a full year before the Cuban Missile Crisis. The current geo-political backdrop is far from stable these days, but at least we’re not all learning to build bomb shelters in our basements or know at least where the closest Fallout Shelter is. Some of you out there may even remember firsthand or through stories from your parents of drills where they would get under their desks in order to protect themselves from nuclear fallout. A lot of good that would have done.
What a difference a few days can make in the markets. Equities around the world are gingerly easing themselves out of the bunker from weeks of declines that brought them into oversold territory. Just over a week ago, on September 27th, every regional equity ETF with the exception of the Latin America ETF (ILF) that we track in our Trend Analyzer tool was in extreme oversold territory, and all but two had been down at least 5% over the prior five trading days. Six were even down over 7%.
Fast forward to the present and every one of these same ETFs has now notched gains over the last week and each one of them has moved out of ‘extreme’ oversold territory. They’re still oversold and only ILF is not down by double-digit percentages YTD, but you have to start somewhere. As we noted in Wednesday’s quote of the day, “When nobody wants something, that creates an opportunity.” Nobody wanted anything to do with stocks – or for that matter, any other asset – as the third quarter ended last week. Investors have hardly fallen back in love with equities again, but they left a pillow on the couch and the back door unlocked.
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Oct 5, 2022
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“When nobody wants something, that creates an opportunity.” – Carl Icahn
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Equity futures are giving back much of yesterday afternoon’s gains and treasury yields are higher as markets reverse some, but certainly not all, of the moves from the last two trading days. ADP Private Payrolls increased 208K in September which was slightly above the consensus forecast of 200K. Oil is down marginally today ahead of an expected production cut announcement today, but crude rallied over 8% to start the week in anticipation of today’s decision. Overnight and this morning, we’ve seen the release of Services PMIs for a number of countries, and the general trend was of sequential declines suggesting that economic momentum continues to wane.
The S&P 500 rallied 5.7% in the first two trading days of the week, and while large, moves of this magnitude haven’t been unprecedented, and looking back over the last 50 years, there have been more than 30 other two-day rallies of 5%+. This week’s move was the largest since April 2020 and we saw a number of similar moves in the weeks coming off the COVID lows. Between those occurrences and the Financial Crisis, there was one occurrence in late 2018 and another in August 2015.
The red dots in the chart below indicate every prior day where the two-day trailing return of the S&P 500 was 5% or more. In recent years, a number of these occurrences came right or near market lows, but over the longer term, they have sprung up in all sorts of market environments like near market tops, early in a downturn, near market lows, or in the early stages of new bull markets. In other words, their level of significance is debatable.
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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.
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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