Bespoke’s Morning Lineup – 3/1/23 – Fresh Start
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“If you find yourself suddenly wearing a hot cup of coffee on the way to work, the day can only get better from there.” – Anonymous
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Futures were looking to start the new month off on a positive note, but that tone has shifted and the current setup is for a modest decline at the open. Following yesterday’s stronger-than-expected inflation data in France and Spain, this morning it was Germany’s turn to report hot inflation data, and that predictably, has been followed by hawkish commentary from ECB officials. In China, stronger-than-expected Manufacturing PMI data led to a 4% rally in Hong Kong’s Hang Seng, but stronger growth in China will be greeted as inflationary by the market, hence the move higher in US treasury yields. Economic data on the calendar today includes Manufacturing PMI reports from S&P and ISM as well as Construction Spending. Minneapolis Fed President Kashkari will also be speaking this morning, so you can expect the headlines from that even to be hawkish.
2023 is already 16% complete, so we can start to get a read on how trends are shaping up. Below we summarize the performance of S&P 500 sectors through the end of February. On a YTD basis, there’s been quite a bit of disparity in sector performance as four sectors are up over five percent, and two are down over 5%. Between the extremes, more than 20 percentage points separate the best-performing sector (Consumer Discretionary) which is up 12.7% from the worst-performing sector (Utilities) which is down close to 8%. Looking at where sectors finished out February relative to their trading ranges, not a single sector is overbought relative to its 50-day moving average, nearly half are below their 50-day moving averages, and four sectors are oversold. That’s not what you would expect to see in a year where the S&P 500 is up nearly 4% YTD.
While there’s a wide dispersion in sector performance after the first two months of this year, it’s a big improvement versus where the market stood at this time last year. Twelve months ago, more than 40 percentage points divided the best-performing (Energy) and the worst-performing sectors (Consumer Discretionary), six sectors were oversold, and the only sector above its 50-DMA was Energy. February wasn’t a great month for stocks, but it sure beats where things stood last year at this point.
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One of These Indices Is Not Like the Others
Looking across the major US index ETFs in our Trend Analyzer, one stands out (in a negative way) from all the others. At the moment, the Dow is the only major US index in the red on a year-to-date basis as we close the books on February. Even more notable, is the fact that it’s also the only one below its 50-DMA. Not only is it below its 50-day, but it is trading firmly in oversold territory sitting over 1.5 standard deviations below its 50-day. Today that dynamic of Dow underperformance continues as the index is falling another 0.3% as of this writing while the S&P 500, Nasdaq, and Russell 2,000 are all higher.
In the chart below, we show how far the S&P 500 and Dow are trading (in standard deviations) from their respective 50-DMAs over the past five years. For the most part, the two large-cap indices have tracked one another relatively well in spite of their differences in composition and price calculations. That makes the current situation in which the Dow is oversold without the same applying to the S&P 500 somewhat unusual, albeit not without precedence. While uncommon, there have been periods in which the indices have similarly distanced themselves from one another like most recently in the spring and fall of 2021.
Although there have been other times in which the Dow and S&P’s overbought/oversold readings have deviated from one another, the current example is abnormally large. With a gap of 1.66 standard deviations between the two indices’ overbought/oversold readings versus their 50-DMA spreads, today’s spread ranks in the bottom 1% of all readings since 1952 when the five-day trading week began. Additionally, such low readings have been exceptionally rare in the past 20 years. Outside of June and September of 2021, August 2015 was the last instance of the spread falling this wide with the Dow underperforming. Looking back even further, 2004 was the only other instance of the past 20 years. Click here to learn more about Bespoke’s premium stock market research service.
Tech Relative Strength Still Negative
Each day in our Sector Snapshot, we provide updated charts of the relative strength lines of each sector versus the S&P 500. Outside of a brief period last summer, Technology, the largest sector in terms of market cap, has seen its relative strength line sit in negative territory for nearly the whole of the past year. In other words, the broader market has outperformed the Tech sector almost every day for a year straight. In the chart below, we show the one-year relative strength line of Tech versus the S&P going back to 1991. After some of the most dramatic underperformance of the past couple of decades, Tech rebounded, and the sector has now only underperformed the broader market by a little less than 3% in the past year. While Tech’s relative strength is not as weak as it once was and is closing in on the first positive readings since the mid-summer, today marks the 131st trading day of consecutive negative readings. That is handily the longest streak in nearly a decade and one of only six other times a streak has eclipsed 100 trading days.
The current streak has yet to come to a close, but in the chart below, we show the performance of Tech and the S&P 500 following the conclusion of each of those prior streaks of 100 or more days. Overall, performance does hold a positive bias with positive returns a vast majority of the time. That being said, the average size of those gains is not exactly impressive. In the case of Tech, the average and median gains are smaller than the norm across these time periods. One year out is the starkest difference with an average gain of less than 5% compared to what has typically been a gain that sits in the mid-teens. Likewise, the S&P 500 tends to underperform the norm one year later, but short to medium-term performance is stronger than the norm. Six-month returns, in particular, have been impressive with a move higher every time and an average gain that is more than double that of the typical six-month performance since 1991. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 2/28/23 – “What?”
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“Life, Liberty, and the Pursuit of Happy Hour.” – Hawkeye Pierce
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After yesterday’s rally that lost momentum throughout the trading day, futures are looking to start the day higher again today as positive and not as bad as feared earnings have lifted the mood in early trading. Treasury yields are modestly higher but mostly behaving while crude oil is up close to 2%. European stocks are modestly higher and well off their lows of the morning as investors shake off stronger-than-expected inflation data out of France and Spain. On the economic calendar in the US, Wholesale Inventories were just released (weaker than expected; down 0.4% versus +0.1% consensus), and later this morning we’ll get Case Shiller data, Chicago PMI, Consumer Confidence, and Richmond Fed.
40 years ago, tonight, nearly half of all Americans and three-quarters of all TVs in the United States were tuned into the same channel. Never had such a large number of Americans watched the same event at the same time. What were they watching? It wasn’t the Super Bowl. The Redskins had already beaten the Dolphins a month earlier after the strike-shortened season. No, on this Monday night, they were watching Hawkeye Pierce leave the 4077th Mobile Army Surgical Hospital for the last time on the series finale of M.A.S.H. Outside of its first season in 1972, when the show was almost canceled, M.A.S.H. was one of the top-rated shows on TV in every other season of its eleven-year run. M.A.S.H. fans watched the series finale and were sad to see it go, but subconsciously many of them were probably saying good riddance.
M.A.S.H. coincided with a dark period in the American economy, and its end can be looked back on as being symbolic of throwing some of the last vestiges of the 1970s behind us. The fact that the most popular comedy of the 1970s and early 1980s was set on a hospital base in a war zone where the plot of nearly every episode was interrupted by an incoming influx of war casualties says all you need to know about the psyche of Americans in the 1970s.
The chart below shows the performance of the S&P 500 from the first episode of M.A.S.H in September 1972 to the series finale in February 1983. Less than four months after the show first aired, the S&P 500 peaked and went on to lose nearly half of its value over the next 18 months before bottoming out and slowly reclaiming the declines of the bear market over the next several years. In fact, it took three-quarters of a decade before stocks finally made new highs again, and the real breakout of the 1980s bull market wasn’t for another two years after that in August 1982, six months before the show ended.
The performance of the S&P 500 during M.A.S.H. was bad enough in nominal terms, but when you factor in the crushing inflation of that period into the equation, performance was even weaker. After deflating the S&P 500 by headline CPI during the 1970s and early 1980s (gray line), you can see why M.A.S.H was a period of American history many were happy to forget. Is it any surprise that after a decade of high inflation, war, and general economic malaise, that as M.A.S.H. was getting ready to sign off, Americans were now turning the channel to a washed-up baseball player running a bar in Boston? Americans were ready for a drink. Cheers!
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Buffett Letters and Berkshire Hathaway (BRK.B) Performance
On Saturday, Warren Buffett’s annual letter to shareholders of Berkshire Hathaway (BRK.B) was posted. Amidst commentary on stock buybacks and a brief discussion of the company’s performance in 2022, the letter did not have any explosive market-moving news or commentary. As a result, price action today has been relatively uneventful. That same sort of sleepy price action also applies to the past few months. Overall, the Oracle of Omaha’s company has been treading water since last fall with a flat 50-DMA and 200-DMA to boot.
Although BRK.B is trending sideways over the past few months, looking back since the start of last year, the stock has performed remarkably well. As shown by the relative strength line below, strong performance in early 2022 (as the equities began to enter a bear market) led BRK.B to massively outperform the S&P 500 (SPY). Although still outperforming, the pattern at the start of this year has been the polar opposite of last year. Given equities have broadly rallied and Berkshire has been rather stagnant, the stock’s relative strength has taken a sharp turn lower headed into this weekend’s letter and the annual conference coming up in a few months.
In the table below, we break down the performance of the company’s b-shares after the release of Buffett’s annual letters. Again, the stock’s reaction today has been a bit muted, with the flat move lower than the historical average of a 0.54% gain. Going forward, performance has been mixed. While one week and one month out from the letter have averaged gains and positive moves more than half the time, three months later has seen BRK.B fall more than half the time. From there, consistent with what has tended to be Mr. Buffett’s optimistic long-term view, performance has tended to be more consistently positive with a move higher nearly two-thirds of the time one year later for an average gain of 13.7%. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 2/27/23 – Regrouping
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“Money cannot consistently be made trading every day or every week during the year.” – Jesse Livermore
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It may have only been four trading days, but last week was a tough one for the bulls. When the dust finally settled, the S&P 500 closed modestly back below its 50-day moving average as well as its uptrend from the October lows. If the market can recover quickly from here, technicians will look past Friday’s breakdown as it wasn’t entirely convincing, but for now, the burden of proof has shifted to the bulls. One thing we can be pretty confident of is that with less than 1% separating them, by the end of the week, the S&P 500 will probably either be above both its 50 and 200-day moving averages or below them.
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Bespoke Brunch Reads: 2/26/23
Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.
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Warfare
How Putin blundered into Ukraine — then doubled down by Max Seddon, Christopher Miller, and Felicia Schwartz (FT)
A detailed look at the psychology, advisors, and historical misconceptions that led Russia to its disastrous invasion of Ukraine, a war that has now claimed over 200,000 casualties within Russia’s military alone. [Link; paywall]
Sensitive US military emails spill online by Zack Whittaker (Tech Crunch)
A Microsoft Azure cloud server hosting Department of Defense emails was open to the public internet for two weeks, spilling years of emails and personal information, though none of the exposed emails appear to be classified. [Link]
State Policy
Frontier Institute Statement In Support of SB 323 (Frontier Institute)
A libertarian think tank in Montana has penned this endorsement of SB 323, a bill reforming zoning regulations and allowing higher density home construction. In what can only be described as trolling, the institute argues “we don’t want Montana to become like California” by preventing cities from building housing up instead of sprawling out. [Link]
Kids Buying Weed From Bodegas Wasn’t in the ‘Legal Weed’ Plan by Ginia Bellafante (NYT)
Legalization of marijuana in New York City is proceeding about how one would expect: messy, entrepreneurial, controversial, and confusing. The result is widespread underground marijuana sales at bodegas as legal dispensaries struggle to navigate state licensure. [Link; soft paywall]
Energy Markets
Global distillate fuel oil inventories by John Kemp (Reuters)
A helpful rundown on extremely tight global inventories of distillate (diesel) fuels which are extremely low thanks to the disruptions of the war in Ukraine. [Link; 15 page PDF]
Big Tech
Google asks some employees to share desks amid office downsizing by Jennifer Elias (CNBC)
Looking to save money on real estate amidst a boom in work from home, Google is asking employees at its cloud unit to share desk space at its 5 largest locations. [Link]
China tells big tech companies not to offer ChatGPT services by Cissy Zhou (Nikkei Asia)
OpenAI’s chatbot is not finding fans at the Chinse Communist Party, as regulators have instructed companies like Tencent and Ant Group to avoid offering access on their platforms. [Link; soft paywall]
The quietest place on earth will drive you insane (The Jerusalem Post/Walla! Health)
In a quiet enough room, you can hear your heart beat, the flow of blood through your body, and the creak of your bones. Why Microsoft would want to build a torture chamber like this is a bit beyond us but they did it. [Link]
Industrial Policy
Tesla Makes US the Focus of Battery-Making Efforts in Blow to Germany by Wilfried Eckl-Dorna (Bloomberg)
Tesla has decided to manufacture battery cells in the US instead of Germany thanks to the incentives in the Inflation Reduction Act passed last year. Tax credits in the act cover as much as 30% of the operating costs for cell manufacturers. [Link; soft paywall]
Business Models
Pay-Per-Chew: More restaurants trying subscription programs (Fox 5 NY)
In an effort to generate more predictable revenue streams and draw repeat customers, mom and pop shops are following the lead of Silicon Valley and offering subscriptions for loyal customers. [Link]
Odd News
The FBI searched the Pennsylvania wilderness for a cache of gold. A treasure hunter wants to know what it found. (CBS)
While the FBI claims there was nothing found when it searched for a Civil War-era gold cache, but competing treasure hunters think they might be hiding something. [Link]
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Have a great weekend!
Mixed Signals
There’s a ton of debate over whether the S&P 500’s 2022 closing low in October marked the start of a new bull market (20%+ rally on a closing basis without a 20% decline in between) or was just a pause in what is likely to be another leg lower. From the bear’s perspective, the tepidness of the rally off those October lows stands out. Already more than four months past those lows, the S&P 500 is only up 10.8%, and its maximum gain was 16.9%. It’s often said that bottoms tend to be so short-lived that the market gives investors a narrow window to get in near the lows, but here we are 135 days removed from that October low, and the S&P 500 still hasn’t reached the 20% threshold for a bull market. To put that in perspective, to find a bull market where it took the S&P 500 longer to reach the 20% bull market threshold, you have to go back to 1962; the ten bull markets between then and now all reached the 20% point faster and the average number of days that elapsed from the closing low to 20% was 57 days.
Although the market’s rally off the October lows has been relatively muted, sector leadership since those lows has hardly been led by defensive sectors. As shown in the chart below, Utilities, Consumer Staples, and Health Care are all up since those October lows, but all three are also underperforming the S&P 500. Meanwhile, cyclical sectors like Materials, Industrials, Financials, and Technology are all handily outperforming. In addition, despite all the concern about higher rates, the Real Estate sector has still managed to outperform.
Looking more recently at sector performance YTD, it’s a similar trend. Consumer Discretionary, Technology, and Communication Services have all outperformed the S&P 500 by a factor of at least 2x while defensive-oriented sectors are not only underperforming the market, but they’re also down YTD. The market may not exactly be following the bull market playbook, but sector leadership isn’t following a recessionary playbook either. Click here to learn more about Bespoke’s premium stock market research service.
Bespoke’s Morning Lineup – 2/24/23 – Victory or Death
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“I shall never surrender or retreat.” – Sam Houston
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Equity markets are poised to open lower this morning, and the tone has been weakening all morning as futures are right near their lows of the morning. Treasury yields and crude oil are higher, but the moves aren’t really enough to justify the magnitude of the decline in equity futures. Boeing (BA), which is down 3% in the pre-market, helps explain the weakness in Dow futures, but that doesn’t explain the weakness in S&P 500 and Nasdaq futures, which are actually down even more than the Dow.
There’s a lot of economic data to go through this morning. It started with Personal Income and Spending as well as PCE which were just released and will be followed by New Home Sales and Michigan Confidence at 10 AM. In terms of the early data, it wasn’t market-friendly. Personal Income was weaker than expected (0.6% vs 1.0%) while Personal Spending was higher than expected (1.8% vs 1.4%), so consumers are earning less and spending more. Maybe that’s due to higher-than-expected inflation where the headline PCE came in at 0.6% vs 0.5% m/m. Core was even worse relative to expectations coming in at a level of 0.6% versus 0.4% estimates m/m. As you’d expect, equity futures have sold off in reaction to the news while interest rates are higher. with the two-year on pace to close at a new high yield for the cycle.
When looking through the various sector price charts, there were several significant reversals just as they tested (or briefly broke below) some key moving averages. As shown in the charts below, Communication Services, Energy, Consumer Staples, Health Care, and Consumer Discretionary all reversed higher to varying degrees after trading down around their 200-day moving averages (DMA). In addition to those five sectors, Financials, Industrials, and Real Estate all managed to stage similar reversals as their 50-DMAs came into play.
Given this morning’s early weakness and the disappointing economic data, it may look like it was all for nothing. However, if markets can find a way to erase this morning’s weakness and close out the week on a positive note, that lack of surrender will be a difficult trend to ignore.
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Bespoke’s Morning Lineup – 2/23/23 – A Volatile Rally
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“Intuition will tell the thinking mind where to look next.” – Jonas Salk
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It may be the shortest month of the year, but after four straight days of declines for the S&P 500, February is seeming like a long month. This morning, futures are looking to reverse their losing ways, but based on some of the intraday selloffs we’ve seen in recent days, you can’t be too sure of anything. February’s weakness has put a damper on individual investor sentiment as the weekly survey from AAII showed that bullish sentiment plunged from 34.1% down to 21.6%. February hasn’t been a fun month so far, but when you consider the fact that the 10-year yield is up over 40 basis points MTD, it could have been a lot worse than a 2% decline for the S&P 500 and a decline of less than 1% for the Nasdaq.
We just got a slug of economic data with GDP, Personal Consumption, Core PCE, and Jobless Claims. Results relative to expectations were mixed. GDP was revised lower, both initial and continuing jobless claims were lower than expected, while Core PCE was higher than expected at 4.3% vs forecasts for 3.9%. As one might expect given the stronger inflation data, equity futures have seen a modest decline in the immediate aftermath of the report while interest rates are higher.
Even after this month’s weakness, the S&P 500 is still up nearly 4% YTD, but those gains have come with a good deal of volatility. Yesterday was the 35th trading day of the year, and already nearly half of all trading days have seen daily moves of at least 1%. Going back to 1953 which was the first full year of the five-trading day workweek, there have only been five other years where there were as many or more 1% moves in the first five trading days of the year. Of the five prior years where 17 or more of the first 35 trading days were moves of 1% or more, the only year where the S&P 500 was up YTD was 1988 (+7.51%). In all four other years, the S&P 500 was down in the first seven weeks of the year with losses ranging from 3.6% in 2003 to a plunge of 17.7% in 2009.
That’s the past. Looking ahead, of the five prior years shown, that volatility to start the year was followed more often than not by gains. In four of the five years shown below, the S&P 500 was higher for the remainder of the year. The only exception was a big one when in 2008, the S&P 500 started the year off with a decline of 8.5% in the first 35 trading days of the year and then went on to drop an additional 32.7% for the remainder of the year.
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