Jul 19, 2024
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“An emperor’s an entertainer, an empire a super-show.”– Nero
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
If you’re reading this, you are one of the lucky ones as computer systems around the world have been crippled. The culprit is a botched security update issued by CrowdStrike (CRWD) through Microsoft (MSFT) systems which has caused thousands (or even millions) of people to be greeted by the dreaded ‘blue screen of death’. Flights and mass transit systems worldwide have been ground to a halt leaving people temporarily stranded as CRWD looks to roll back the update.
After a lousy couple of days for US stocks, Asian and European stocks are closing out the week on a down note. Major Asian equity benchmarks were down between 0.2% for Japan to 2.0% for Hong Kong’s Hang Seng. The Japanese government lowered its 2024 growth forecast from 1.3% to 0.9% even as inflation has pushed rates higher. In Europe, the STOXX 600 declined 0.5% in early trading and is on pace to finish the week down more than 2%. The only major economic report of note in the region was UK Retail Sales, which came in much weaker than expected, falling by 1.2% versus forecasts for a decline of just 0.6%.
There are no economic reports to speak of in the US this morning, and futures are little changed after trading moderately lower overnight, so the main issue of discussion heading into the weekend will revolve around whether or not President Biden stays in the race, and if not, who will replace him.
In what has been a bifurcated year for the market, the five days ending Thursday have continued to be a two-tier system, except now in the other direction. Through yesterday’s close, the S&P 500 tracking ETF (SPY) was down 0.69% over the last week, but mid-caps were up over 1% while small and micro-cap stocks surged over 3%.
There used to be a segment on Sesame Street called, “One of These Things” where they would show four items with one not looking like the others. The one-year charts of the major indices based on market cap would be a perfect version of that game where micro-caps, small-caps, and mid-caps have all surged and broken out of sideways trading ranges in the last few days. Meanwhile, large-caps have pulled back after reaching record highs.
Even as US large-cap stocks have faltered over the last week, they’ve outperformed every other part of the world. As shown in the snapshot of regional ETFs below, European and Asian markets were down slightly more than the S&P 500 while emerging markets fared even worse with declines of over 2%. It may not have been the best week for US stocks in what was an overdue pullback, but other parts of the world fared even worse as US small caps were the only global bright spot.
Jul 18, 2024
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“The brave may not live forever – But the cautious do not live at all” – Richard Branson
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Yesterday was another one of those days when price moved in one direction while breadth went the other way. While the S&P 500 fell 1.3%, a net number of 15 stocks in the S&P 500 finished the day higher. The scatter chart below shows the daily moves of the S&P 500 (y-axis) this year versus the net daily breadth readings (x-axis). Whenever a dot falls in any of the shaded areas, prices and breadth moved in the opposite direction, and occurrences in the darkest shaded areas indicate days when the S&P 500 finished the day up or down 0.5% and breadth moved in the opposite direction. Yesterday (red dot) was one of five days this year when the S&P 500 was down 0.5% and breadth was positive. Not only that, but it was the first time since April 2000 that the S&P 500 was down 1%+ and breadth was positive.
Yesterday was the 34th day this year that the price and direction of the S&P 500 moved in opposite directions. If it ended today, this year’s total would already rank as the seventh-highest number of days where the two moved in the opposite direction. But the year isn’t over yet, and if the current pace keeps up over the next five and a half months, the total number of divergent days for the S&P 500 would total 62, easily setting a record dating back to at least 1990.
In terms of extreme divergence days, yesterday was the 9th time that the S&P 500 rallied (or declined) at least 0.5% and breadth moved in the opposite direction. That already ranks as the fourth most occurrences for a calendar year since 1990. If this pace continues for the rest of the year, there will be 17 occurrences. That would put this year in the position of the second most of all-time, trailing only 19 occurrences in 2000.
It’s never good to find yourself in a world of comparisons to 2000, but when it comes to daily divergences between price and breadth, 2024 has a lot of similarities.
Jul 17, 2024
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“Mercy to the guilty is cruelty to the innocent.” – Adam Smith
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
The fun couldn’t last forever, could it? Futures are sharply lower this morning with tech leading the way to the downside as the Nasdaq is indicated to open 1.5% lower. S&P 500 futures aren’t faring much better with an indicated decline of 1%, but the Russell 2000, while lower is down a more respectable 0.40%.
There are two catalysts for this morning’s weakness. First, Bloomberg reported that the Biden Administration is considering tighter trade restrictions on companies that provide chips with US-based technology to China. On the other side of the aisle, former President Trump told Bloomberg that Taiwan should pay the United States for providing defense of the country against China. If there’s one thing both Biden and Trump can agree on, it appears that China is the issue.
Normally, the impact of these types of headlines isn’t long-lasting, but in this case, we would note that semis have been underperforming the broader market for the last couple of weeks now, so that’s something to watch.
It’s a busy morning for economic data as well. At 8:30 we got the release of June Building Permits and Housing Starts, and then at 9:15, we’ll get Industrial Production and Capacity Utilization. Today’s housing-related data was important from an economic perspective as each of the last three reports on Building Permits and Housing Starts have all come in weaker than expected and in some cases by a wide margin. This morning’s release provided some relief as both headline readings came in moderately better than expected while last month’s readings were revised higher.
After a five-day rally of more than 11%, the Russell 2000 closed 4.42 standard deviations above its 50-day moving average yesterday. Yesterday’s close was the most overbought level for the small-cap benchmark index since…Ever. The prior record was 3.72 standard deviations on 6/27/23 and before that 3.40 standard deviations in January 1991.
Looking at the chart of the Russell 2000’s daily OB/OS reading, you’ll notice that three of the four most overbought daily readings have all occurred since November 2021. One potential explanation for this phenomenon could be that as the overall market has become much more concentrated at the top, the rest of the market has become smaller and more prone to extreme moves. It was only a couple of years ago when we marveled that the largest company in the S&P 500 was larger than the entire Russell 2000 small-cap index. Before yesterday, though, the Russell 2000 still had a market cap of less than $3 trillion which was less than the market caps of Microsoft (MSFT), Apple (AAPL), and Nvidia (NVDA). Therefore, a 3% shift in the market cap of just those three companies would translate into a 10%+ rally for the Russell 2000!
Not only was yesterday’s close for the Russell 2000, the highest in its history, but of the four major US indices (S&P 500, Nasdaq, DJIA, and Russell 2000), it was the most overbought closing level on record.
Starting with the Nasdaq, in its history dating back to 1971, the most overbought reading based on standard deviations above the 50-DMA was 3.59 in November 1991.
The S&P 500 dates back to 1928, and its most overbought reading on record was 4.06 standard deviations above the 50-DMA on 8/3/1984.
The Dow goes back even further than the S&P 500, and while the chart below only extends back to 1928, since 1900, its most overbought reading on record was 4.36 standard deviations above the 50-DMA also on 8/3/1984.
Jul 16, 2024
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“It’s funny. All you have to do is say something nobody understands and they’ll do practically anything you want them to.” – J.D. Salinger
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Futures were in the green ahead of the June Retail Sales report this morning as reactions to some of the more high-profile earnings reports were mixed. Shares of Bank of America (BAC) were modestly higher, but both Charles Schwab (SCHW) and Morgan Stanley (MS) were lower. Treasury yields and oil were both lower as gold rallied to what would be a record high on a closing level. In the crypto space, Ethereum is moving modestly lower even as the greenlight was made for ETFs tracking the world’s second-largest crypto to start trading next week.
Retail Sales hit the tape, and the top-lin numbers were better than expected. Overall, sales were unchanged versus an upwardly revised May reading of 0.3%. Ex Autos, sales jumped 0.4% compared to forecasts for a gain of just 0.1% while Ex Autos and Gas, total sales were up 0.9% which was 0.7 ppt better than the consensus forecast. Building Materials saw a large rebound, rising by 1.4% after May’s decline of 0.7%. Nonstore retail (online) saw the largest increase, though, as sales jumped 1.9% on top of May’s increase of 1.1%. As you would expect, yields moved higher on the news, but not by a lot as the 10-year yield is only 2 bps higher than its pre-release level. Still on the calendar for today, we have Business Inventories and Homebuilder Sentiment at 10 AM.
While yesterday’s breadth in the S&P 500 wasn’t strong (+59), it was the fourth straight day where the S&P 500’s net advance/decline line was positive. That’s only the tenth such streak this year, and when you consider that the S&P 500 is up over 18% this year, you would expect to see more similar streaks of positive breadth. The three days that preceded yesterday did show relatively strong breadth, especially compared to other days this year, and all three of them rank in the top eleven in terms of single-day breadth readings.
While breadth readings for the S&P 500 last Wednesday, Thursday, and Friday were strong none of them were strong enough to register as an ‘all or nothing’ day where the net daily breadth reading for the S&P 500 is either +400 or above or -400 or less. That still leaves March 27th (all) and April 12th (nothing) as the only all-or-nothing days this year.
With only two occurrences so far this year, if the current pace continues, 2024 will only have four all-or-nothing days for the entire year. The last time there were fewer was in the extremely placid year of 2017 when there were only three, and before that, you’d have to go back to 2002. While this type of subdued extremes in breadth was normal in the 1990s, most people trading today aren’t familiar with the lack of extremes in day-to-day breadth. While the consistency of low readings in the VIX despite some major geo-political events has been puzzling, the lack of extremes as we have seen in breadth helps to keep the VIX grounded.
Jul 15, 2024
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“Make every detail perfect and limit the number of details to perfect.” – Jack Dorsey
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Bespoke co-founder Paul Hickey appeared on CNBC’s Squawk Box this morning to discuss potential market impacts from this weekend’s events. To view the segment, click on the image below.
Welcome to adulthood Twitter, now X. 18 years ago today, Jack Dorsey launched Twttr, which then became Twitter, and is now known as X. The social media platform has had a moody existence. As this weekend’s attempted assassination of former President Trump illustrated, though, when news breaks, the first place to find it is on X. With the good comes the bad, and there’s also no shortage of incorrect and misleading information on the platform, but that’s the case just about everywhere now. Who knows, maybe now that it’s an adult, the level of discourse on X will show some maturity. Oh, who are we kidding?
Futures are trading higher this morning as markets price in a higher likelihood of a Trump victory in November along with Republican control of the House and Senate. According to the website electionbettingodds.com, the GOP’s odds of winning the Presidential election have jumped from 60.6% early Saturday afternoon to 67.6% this morning. In the House, Republican odds have jumped from just over 50% to 55.5%. Finally, the Senate was already firmly likely to be controlled by the GOP, and those odds remain high at 76.7%. A lot can change between now and November, though. On February 3rd, 2008, the Patriots were 18-0 and looking to finish an undefeated season against the New York Giants in Super Bowl XLII, and we all know what happened. There’s a reason you still have to play the game.
If the GOP takes full control of DC following this November’s election, it will be just the fourth occurrence in the modern era. The three prior periods were the 108th (2003 – 2004), 109th (2005 – 2006), and 115th (2017 – 2018) sessions of Congress, and below we have included charts showing the performance of the S&P 500 and the 10-year yield during each two years. It’s a small sample size, but the S&P 500 and ten-year yield were up each time. The S&P 500’s median gain was 17% while the 10-year experienced a median increase of about 20 basis points (bps).
Jul 12, 2024
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“Vice president – it has such a nice ring to it!” – Geraldine Ferraro
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Welcome to earning season! With the major banks and brokers reporting earnings this morning, Q2 earnings season has begun. Of the four major banks reporting today, they all exceeded EPS and revenue forecasts, and except for Wells Fargo (WFC), they’re also trading higher on the day. WFC’s decline is tied to weaker net interest income and an increase in non-performing loans. The response in the market has been mixed as futures are little changed with the S&P 500 indicated modestly higher while the Nasdaq is modestly lower heading into the June PPI report and then the Michigan Confidence report at 10 AM.
June’s PPI came in higher than expected and May’s results were also revised higher, which has put some downward pressure on equity futures and pushed yields higher, so that should (in theory at least) reverse some of the moves we saw in yesterday’s volatile session
You’ve been living through history over the last few days, and we’re not even talking about political history. We’ve been highlighting the near-record levels of outperformance of mega-caps relative to the rest of the market this year, and earlier in the week we noted that the rubber band can only stretch so much before it snaps back. Yesterday gave a perfect example.
In last night’s Closer and on X yesterday, we noted some of the major one-day extremes we saw in the relative outperformance of small caps versus large caps.
Another major shift was the performance of semiconductors relative to homebuilders. Over the last five years, homebuilders and semiconductors have traded practically step for step with each other. During that time, the correlation between the Philadelphia Semiconductor Index (SOX) and the S&P 500 Homebuilder Sub Industry has been +0.93. Admittedly, the last three months have seen a deviation from that positive correlation, but the two indices have seen similar returns and followed very similar paths.
Yesterday saw the two sectors deviate in a big way. While the SOX fell 3.5%, the homebuilders industry surged 6.7% for the best day since November 2022. As shown in the chart below, the 10+ percentage point outperformance of homebuilders versus semis was the widest since the depth of Covid in March 2020, and there have only been 24 days since 1994 when the one-day performance gap between the two was wider than yesterday.
What makes yesterday so unique is the market environment it occurred. Prior days where homebuilders outperformed semis by such a wide margin took place in extremely volatile environments. While the VIX closed yesterday below 13, on the 24 other days when the performance spread was ten percentage points or wider (in favor of homebuilders), the closing level of VIX ranged from 19.6 up to 70, and the median closing level was 26.5! Similarly, under the reverse scenario when semis outperformed homebuilders by 10 percentage points or more, the VIX closed in a range of 21.5 up to 61.6 with a median reading of 29.4. we’re not exactly sure what to make of the lack of volatility given the moves underneath the surface, but it’s somewhat unprecedented.
