Feb 13, 2024
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“It is myopic to base sweeping change on the narrow experience of a few years.” – Antonin Scalia
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 are getting off to a sluggish start this morning. US equity futures are lower as investors take a step back and assess whether sentiment towards equities has gotten a bit too giddy. Bank of America’s Fund Manager survey showed an increase in allocations to US equities, specifically in tech where exposure to the sector reached its highest level since August of 2020. That’s a far cry from November 2022 (right near the bear market lows) when sentiment towards the sector plunged to its lowest level since the Financial Crisis. The current reading in the percentage of funds overweight tech is at the highest level in more than three years, although that level also corresponds to the same range it hovered at for most of the period from 2010 to 2020 (see chart here).
The only two items on the economic calendar today were the NFIB’s Index of Small Business Optimism, which came in weaker than expected and fell below 90 for the first time since last May, and January CPI. Economists were expecting headline CPI to rise 0.2% m/m and 2.9% y/y, while the core reading was expected to rise 0.3% m/m and 3.7% y/y. On all measures, the January CPI came in ahead of expectations, so the widely expected drop below 3% in the headline y/y reading will have to wait at least another month. As you would expect, equity futures have added to their pre-market losses (S&P 500 down 1%), and bond yields are spiking as the 10-year yield tops 4.27% hitting its highest level since early December.
Yesterday looked like another one of those days where semiconductors were going to rip higher and close at new highs again. Early on, the SOX traded 1.7% higher to another record high, and Nvidia (NVDA) even pulled ahead of Amazon (AMZN) as its market cap briefly eclipsed $1.82 trillion. In just 29 trading days this year, NVDA has seen its market cap increase by $600 billion. $600 billion! That’s more than the market cap of all but eight companies in the S&P 500, including Tesla (TSLA)! Maybe traders sobered up from the Super Bowl parties and took a second to think about just how much $600 billion is, but at around lunchtime, the enthusiasm dried up. By the close, NVDA was flat, and the SOX erased all its early gains and finished down on the day.
Semis are an extremely volatile sector, so a reversal like Monday’s can pop up at any time, but they’ve been somewhat uncommon over the last three years. The red dots in the chart below show each time that the SOX hit a 52-week high intraday but then reversed lower finishing down on the day and more than 1% from the high. Outside of one occurrence in July 2021, every other since has come in bunches and shortly before a moderate to severe sell-off in the sector. With futures down sharply this morning, could yesterday’s reversal be another prelude to a sell-off?
While these types of reversals have recently been followed by a shaky performance from the SOX, from a less myopic vantage point, they have occurred at all different points in the cycle. Leading up to the peak in early 2022, there were several occurrences in the two-plus year period beginning in October 2019, and before that, there were several other extended runs where these types of reversals were sprinkled throughout, and the SOX didn’t miss a beat. There were other times, though, in the early 2000s when similar reversals occurred right before a moderate to severe sell-off. All of this is a long-winded way to say, that just as, or more often than, these reversals signaled a significant pullback, they also turn out to be meaningless.
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Feb 12, 2024
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“America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.” – Abraham Lincoln
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 days after Thanksgiving, July 4th, and Christmas are expected to be quiet, but “Super Bowl Monday” is starting to look like one of those days. US equity futures are little changed this morning, and outside of a merger announcement between Diamondback Energy (FANG) and Endeavor, there’s little in the way of corporate news flow. Economic data? It’s empty. International markets? It’s been quiet there too as several countries in Asia observe the lunar new year. European markets are open for trading, though, and the tone is generally positive.
Heading into the new week, after starting the year on a down note, the S&P 500 has risen for five straight weeks with gains of more than 1% each week. At the sector level, just six of eleven sectors are overbought while Utilities is oversold. The biggest gainers last week were Technology, with a gain of over 2.5%, followed by Consumer Discretionary, Health Care, and Industrials, which were all up over 1%. The S&P 500 is up 5.4% on the year. While Communication Services and Technology have been the largest outperformers, Health Care has also moved into the outperformer column while eight sectors are underperforming, including four sectors that are down on the year.
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Feb 9, 2024
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“How old would you be if you didn’t know how old you are?” – Satchel Paige
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
After a brief second where it traded above 5,000 yesterday before dipping back down below that level into the close, the S&P 500 is poised to open firmly above that psychological level today. Whether or not it holds into the weekend remains to be seen, but four out of five Fridays this year have been positive.
Driving the tone in futures markets this morning there have been many big reactions to earnings where stocks like Pinterest (PINS), Expedia (EXPE), and Affirm (AFRM) are sharply lower, while shares of Cloudflare (NET) have been the big pre-market winner with a gain of over 25%. Outside of the equity market, treasury yields are little changed, crude oil is modestly lower, and bitcoin is surging back above $47K.
The economic calendar i slight today as the only release is the revisions to CPI seasonally adjusted data.
While there have been some concerning trends related to market breadth lately, one indicator that remains strong is the percentage of stocks hitting 52-week highs. For three months and running, there hasn’t been a single day where more stocks in the S&P 500 hit 52-week lows than 52-week highs, which is a very impressive run. Now, if we could finally start to see some broadening of the market, maybe we could start to see an expansion in the percentage of stocks hitting new highs as well. Wouldn’t that be nice?
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Feb 8, 2024
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“I don’t play small. You have to go out and play with what you have. I admit I used to want to be tall. But I made it in high school, college, and now the pros. So it doesn’t matter.” – Spud Webb
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
After getting within pennies of 5,000 yesterday, will today be the day? Futures are mixed this morning, but the changes are small on either side of the unchanged line. The only economic data on the calendar was jobless claims, and both initial and continuing claims came in slightly lower than expected. Like equities, treasury yields are little changed, but the bias is to the upside. Outside of the US, international markets are biased to the upside, and Japan rallied over 2% following some dovish commentary from the BoJ deputy governor suggesting that he doesn’t see a path of continuous rate hikes.
Before the NFL Season stretched out until mid-February, the NBA All-Star game used to take place in late January to early February (it’s now been pushed out to the second half of the month with this year’s scheduled for 2/18). One of the most exciting aspects of All-Star weekend for a lot of kids was the slam dunk contest where the tallest and most athletic players would show off their skills on an undefended rim (you could argue that defense doesn’t exist for the whole weekend, but that’s another story). Depending on when you grew up, you probably remember MJ going airborne from the foul line flying through the air to the rim, and finishing it off one-handed. For younger fans, maybe it was Zach Lavine in 2016 going through his legs while in the air.
But back on this day 38 years ago in 1986, the unlikeliest of contestants, one Spud Webb, who clocked in at 5 feet, 7 inches (generously) stunned the crowd to win. Going against players over a foot taller, including his teammate Dominique Wilkins, Webb wowed the crowd with a 360-degree midair jam to bring the trophy home.
If only small caps could get some inspiration from Spud Webb. Over the last five weeks, the Russell 2000 has underperformed the S&P 100 (largest stocks in the S&P 500) by over ten percentage points, a margin of underperformance that has only been exceeded in a few periods. That said, it was less than two months ago that the Russell 2000 had outperformed the S&P 100 by more than ten percentage points in the prior five weeks. Given the gyrations in performance between the two indices in the post-COVID period, there’s been a lot of indecision on the part of investors, although the bias has been to mega-caps.
From a longer-term perspective, the Russell 2000 has been in a consistent period of underperformance relative to the S&P 100 for ten years now, and the ratio of the prices of the two indices is down to its lowest level in 20 years. As long as this period of underperformance has been, though, from the mid-1980s through 1999, small caps pretty consistently underperformed mega caps for a period of nearly 16 years.
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Feb 7, 2024
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“If your work is so smart that only smart people get it, it’s not that smart.” – Chris Rock
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
US equity futures were flat to modestly lower up until about an hour ago, but have seen a nice bounce, and all three major US indices are indicated to open higher on the day. Once again, there’s not much economic data to steer futures, and the pace of earnings since yesterday’s close has been mixed. On the upside, Ford (F) has been one of the bigger winners as it trades 5% higher after better-than-expected earnings and announcing a special dividend of 18 cents per share. To the downside, shares of Snap (SNAP) have lost nearly a third of their value this morning following a weaker-than-expected report, putting the stock on pace to fall in reaction to earnings for seven straight quarters.
In international markets, it was a mixed session in Asia overnight as Japan saw a stronger-than-expected report on Leading Indicators. Europe has taken a modestly negative tone in early trading as most major indices in the region trade down fractionally. In Germany, Industrial Production fell more than expected while a payrolls report in France was slightly better than expected.
After Tuesday’s rally in mainland China, the KraneShares CSI China Internet ETF (KWEB) had its best day since last July as it rallied 6.7%. Investors were excited about the prospects for a major round of stimulus from the Chinese government to prop up its stock market and economy, but it’s important to realize that there have been more than a few false alarms over the last few years. Already this morning, KWEB reversed some of yesterday’s gains with a decline of over 2% in the pre-market.
The chart below shows the performance of KWEB since its inception in 2013, and the red dots indicate each time the ETF rallied more than 5% in a single day. It’s easy to see that there have been a lot more occurrences since the ETF’s peak in February 2021 than before it. Of the 58 occurrences in the ETF’s history, 42 (72%) have been in the last three years.
After big rallies in a bear market like Tuesday, it’s tempting to think that it’s the start of something bigger, but in KWEB’s case, it has not. We saw a similar dynamic at play in the US during the dot-com bust and then during the financial crisis where the response to every big move was “Is this it?” Eventually, one of the rallies does take hold, but there are a lot of false alarms along the way. In KWEB’s case, Tuesday’s rally only took the ETF back to where it was less than two weeks ago.
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Feb 6, 2024
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“Government is like a baby: an alimentary canal with a big appetite at one end and no sense of responsibility at the other.” – Ronald Reagan
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Across the S&P 500, Nasdaq, and Dow this morning, futures are pointing to modest losses with all three indices trading down 0.12% as of this writing. True to form, though, the Russell 2000 is down more than triple that at 0.37%. Outside of the US, European stocks are modestly higher, and Chinese stocks surged on hopes for more government support. The economic calendar in the US is light today as it will be for most of the week.
Today would have marked the 113th birthday of former president Ronald Reagan, and besides being the leader of the free world for eight years, Reagan’s acting career was highlighted by his role in Knute Rockne – All American, where he played George Gipp. Knute Rockne was the coach of football at Notre Dame and was famous for his ”Win One for the Gipper Speech” which he gave at halftime in a game against Army at Yankee Stadium in 1928. The team was having a terrible season and living up to their Fighting Irish nickname they were not. Inspired by the pep talk, Notre Dame came out and scored two second-half touchdowns to stun Army by a score of 12-6. If there’s any part of the market that could use a Rockne boost right about now, it’s small caps.
Well maybe not just small caps. Just when you thought it was safe to get back in the 60/40 pool, long-term US treasuries have found themselves getting bombarded in 2024. Year to date, the iShares 20+ Year US Treasury ETF (TLT) is already down over 4%. Long-term treasuries sold off throughout just about all of January, and while they rallied in the last days of January and to kick off February to get back to even, the two trading days since last Friday’s employment report have been painful. TLT has experienced back-to-back declines of over 2%, taking it back below both its 50 and 200-day moving averages and perilously close to breaking the loose uptrend that emerged from the October lows.
Consecutive declines of over 2% hurt no matter what the asset class, but the sting of two declines of that magnitude for treasuries hits hard. Since TLT started trading in late 2002, there have only been two other periods where the ETF experienced back-to-back 2% declines, and they occurred at the two most volatile periods of trading in the last two decades – late in the Financial Crisis (January 2009) and within days of the Covid lows. As everyone remembers, those two prior periods both ended up being massive buying opportunities for the equity market, but they also occurred after very large declines in stocks. Right now, the S&P 500 is within half of one percent of an all-time high. Extreme volatility in the treasury market with the VIX under 14? You don’t see that often, but then again, there’s a lot that has happened in the last four years that wouldn’t get filed in the normal folder.
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