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“It is better to be roughly right than precisely wrong.” – John Maynard Keynes

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Futures are mixed with a negative bias as the Nasdaq is leading the losses on reports that the Federal government will expand export curbs on certain semiconductors to China.  Apart from China, most global equity markets have been rallying overnight in follow-through from yesterday’s US rally.  Chinese stocks were more subdued and that comes after reports that industrial profits well 18.8% on a YTD basis as the government cited ‘insufficient demand’.  Even after the PBoC intervened in markets overnight, the yuan was under pressure and fell to a seven-month low versus the dollar.

In the US, mortgage applications increased 3% last week, and just in time for the opening bell, Fed Chair Powell will speak at an ECB panel in Portugal at 9:30 AM.

We’ve discussed the rally in the Nasdaq a lot in recent days, and through the fourth to last trading day of the first half, it is up 29.5% which ranks as the third-best first-half performance through this point in the first half trailing only the 39.6% rally in 1983 and the 44.3% surge in 1975.  If there’s one thing we’re confident of, it is that this year won’t overtake those two years between now and the end of the week.  As wild as this year’s first half seems, it’s even crazier when you consider the fact that last year’s performance through this point in the year was the second worst in the Nasdaq’s history.

Given the strong gains so far, we were curious to see how the Nasdaq performed in the last three trading days of the first half after rallying 10% YTD.  In the 24 prior years when the Nasdaq was up by double-digit percentages YTD heading into the last three trading days of the first half, its median rest of month performance was a gain of 0.89% with positive returns 79.2% of the time.  That’s a pretty impressive three-day average, but compared to all years in the Nasdaq’s history, it’s actually right in line with the norm.

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“College isn’t the place to go for ideas.” – Helen Keller

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While stocks have traded heavily over the last several trading days, the weakness hasn’t been enough (yet) to move the Nasdaq out of overbought territory (one or more standard deviations above its 50-day moving average).  As shown in the chart below, Monday was the 34th consecutive trading day that the Nasdaq closed at overbought levels.

That sounds like a long stretch, but for the Nasdaq it is not especially uncommon to trade at overbought levels for an extended period.  Since the start of 2013, for example, there have been six other periods where it traded at overbought levels for at least six weeks, and the longest was over ten weeks back in early 2021. For the Nasdaq’s entire history, there have been even longer streaks.  In 1997, for example, there were 69 straight days of overbought readings, and back in September 1980, the Nasdaq traded at overbought levels for 95 straight trading days- that’s almost five months!

Naturally, when you see such an extended streak of overbought readings, it’s natural to expect a pullback.  After all, stocks can’t go up forever.  But if all it took to anticipate a pullback was an extended streak of overbought readings, we’d all be rich.  In the chart below, we show a chart of the Nasdaq since the start of 2013 and have included red dots to show each time it traded at overbought levels for 30 straight trading days.  In a number of these periods, the market kept rallying with little in the way of a pullback, and the only period where a significant pullback was almost immediate was after the January 2021 streak.  But even then, the streak lasted more than another month before the Nasdaq was no longer overbought again.

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“The debt is like a crazy aunt we keep down in the basement. All the neighbors know she’s there, but nobody wants to talk about her.” – Ross Perot

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3 points. After a wild but ultimately oddly quiet weekend on the geo-political front, US futures are just modestly negative to the tune of three points this morning, and crude oil is only marginally higher.  Not necessarily what you would have expected to see on the Monday after a weekend where we saw what looks like an attempted coup in a country that holds one of the world’s largest nuclear stockpiles and happens to be the third-largest producer of crude oil.

Bulls are looking to regroup this morning after a negative week, and as we head into the last week of what can only be considered a strong first half for equities. The only economic report on the calendar this morning is the Dallas Fed Manufacturing report, which is expected to be firmly in negative territory (-22.5) but not quite as weak as last month’s reading of -29.1. We’ll be watching the Prices Paid and Prices Received components for confirmation of the pattern we’ve seen in other regional fed reports where pricing pressures have been easing substantially.

While last week was negative for stocks, remember how strong the period was that preceded it was.  As noted in Friday’s Bespoke Report, the market still hasn’t broached the prior highs from last August, so the bulls still deserve the benefit of the doubt.

The picture for international stocks doesn’t look nearly as positive.  Less than two weeks ago, the MSCI All Country World Ex US ETF (CWI) broke out above resistance to new 52-week highs.  Like US stocks, though, the ETF faced pressure all last week and on Friday broke back below its former resistance as well as its 50-day moving average (DMA).  So, from the perspective of a US equity investor, it could have been worse.

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“If you think your boss is stupid, remember: you wouldn’t have a job if he was any smarter.” – John Gotti

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A negative week for equities looks like it’s set to continue this morning as both the S&P 500 and Nasdaq are on pace to break winning streaks of five and eight weeks, respectively.  While losses have been accelerating as we approach the opening bell, we would note that heading into today, each index is down less than 1%, and given this year’s pattern for strength on Fridays, don’t write off the streaks just yet.

It’s a quiet day on the economic calendar this morning as the only reports will be S&P Global Manufacturing and Services sector PMIs, but similar reports were reported this morning for the Eurozone, and both the Manufacturing and Services sector PMIs came in weaker than expected and down from last month’s readings.  For individual countries like Germany, UK, and France, PMIs were also mostly lower across the board and weaker than expected.  The only exception was France where the Manufacturing PMI came in slightly ahead of expectations but still well below 50.

Given the weak tone of the data coupled with the fact that major central banks like the ECB, BoE, and even the Fed (based on Powell’s testimony) have taken a more hawkish stance, it shouldn’t come as a surprise that equities in the region are lower this morning and down at least 2% on the week. Thankfully, on this side of the Atlantic, the market saved the weakness for a short week.

In a year where there has been much divergence between different areas of the equity market, one trend over the last few days has been consistent across all of the major indices.  As shown in the charts below, whether we’re talking about micro-caps, mid-caps, or mega-caps, they all took a breather this week after recent sharp rallies.  Some of these rests are well deserved as indices like the S&P 500, Nasdaq 100, and S&P 100 all managed to rally to 52-week highs, but for smaller cap indices, the breaks may not have been as well deserved.

Looking at where all six of these indices are trading relative to their trading ranges, all six have pulled back from ‘extreme’ short-term overbought levels and now remain merely at overbought levels.  One trend that hasn’t changed even in the last week, though, is the outperformance of mega-caps relative to smaller caps.  While it may look like it at first glance, the table is not sorted by the market cap that each index tracks, but instead by performance over the last five trading days. The more thing change…

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“The militarists in Berlin, and Rome and Tokyo started this war, but the massed angered forces of common humanity will finish it.” – Franklin D Roosevelt

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It’s feeling a little big Goundhog Day-ish this week as equity futures are down setting the stage for a fourth straight day of declines and treasury yields are higher. The main culprit again this morning (besides profit-taking) is higher rates.  As expected this morning, the Bank of England raised interest rates, but what wasn’t expected was the size of the hike which was 50 bps versus expectations for an increase of 25 bps.  Elsewhere in Europe, Switzerland hiked rates by 25 bps and Norway hiked rates by 50 bps.  The title for the biggest hike, however, goes to Turkey which boosted rates by 650 bps to 15.0%, and believe it or not, the size of that hike was actually much less than expected. And you thought another 25-bps hike from the Fed was a big deal!

There’s a lot of economic data on the calendar this morning with the Chicago Fed National Activity Index (weaker than expected) and Jobless Claims (initial weaker, continuing better than expected) at 8:30, Existing Home Sales and Leading Indicators at 10 AM, and the KC Fed Manufacturing report at 11.  Besides those reports, buckle up for a ton of Fed speak with Powell, Waller, Bowman, Mester, and Barkin all scheduled to speak throughout the trading day.

On the earnings front, five companies have reported earnings this morning and all five reported better-than-expected earnings and four managed to top revenue forecasts as well.

79 years ago today, FDR signed the last of the New Deal reforms into law creating what has become known as the G.I. Bill which provided support for returning servicemen in the form of living assistance, low-interest loans for homes or small businesses as well as funds for education.  With that piece of legislation, the G.I. Bill unleashed a massive expansion in the college education industrial complex where the percentage of Americans with four or more years of college education quickly expanded from under 5% in 1940 to 17% by 1980.  In three of the four decades after FDR signed the legislation into law, the percentage of Americans with at least four years of college grew by over 34%.  If it was a stock, imagine what kind of multiple it would have traded at.

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“Even if there was a hand, it was the hand of God.” – Diego Maradona

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It’s looking like another sluggish start to trading today as the market looks to digest the sharp gains from the last few weeks.  There’s no economic data to speak of but higher-than-expected CPI data in the UK is weighing on global sentiment tied to inflation.  While not an economic report, Powell’s testimony in front of the House Financial Services Committee at 10 AM will be a big market driver today.

After acting as a flare for a dark market in 2022, Energy has been an outlier again in 2023 but this time to the downside with the sector declining over 10%.  The last week has seen more of the same with Energy falling more than 2.5% while no other sector is down even half of a percent. As shown in the snapshot below, Energy tops the list in terms of weakness as it is down more than any other sector YTD, down the most over the last five trading days, and is further below its 50-DMA than any other sector (-3.83%).

What’s interesting about the weakness in Energy stocks over the last week is that it has come as energy related commodities have rallied substantially.  As shown below, the ETFs that track crude oil (USO) and natural gas (UNG) have rallied 6.1% and 9.8%, respectively.

While performance over the last week has been divergent, whether you look at six-month price charts of energy-related stocks or commodities, they all look like a mess with all of them much closer to six-month lows than six-month highs.  Perhaps the only positive thing to say is that up until this point, they haven’t made lower lows.  You could even say that the chart for UNG looks similar to the way some bombed-out growth stocks looked in late 2022, although given the way the ETF is structured, holding it for extended periods of time is likely to result in an enormous amount of decay.

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