Earnings season is now in full swing, and we’ve already seen reports from seven of the largest and most significant banks and brokerage firms.  While the results have been good, investors have been reacting with a sell the news attitude.  As shown in the table below, all seven of the major banks and brokerage firms reporting so far have topped EPS forecasts.  Revenues, on the other hand, haven’t been as positive relative to expectations with four beats and three misses.  Where the real weakness has been, however, is in stock price reactions.  Of the seven names reporting, five have either had or are on pace to have a negative one-day reaction to their earnings report, while just two – Bank of America (BAC) and Charles Schwab (SCHW) – are just marginally higher today in reaction to their reports.  While these two stocks are higher, we would note that BAC was down 3% in sympathy with the other banks on Friday, so the only one of the seven listed that is at the same levels or higher now than it was at last Thursday’s close is SCHW.

With the seven stocks listed below all beating EPS expectations but averaging a decline of close to 3% in reaction to their earnings reports, we wondered how common it is for EPS relative to expectations to come in so strong in an earnings season but the stocks reacting so poorly.  Using our Earnings Database and running some filters, we found just five other quarters in the last ten years where all seven stocks reported better than expected EPS.  Interestingly enough, of those five periods, the average one-day reaction of the seven stocks in that earnings season was negative four times.  The only earnings season where the seven stocks averaged a gain on their earnings reaction day was the Q4 2018 reporting period in January 2019.  The worst reaction of these seven stocks in an earnings season when they all topped EPS forecasts was last earnings season in October when they averaged a decline of 2.95% with five of the seven names declining.  It was only three months ago, but already last October seems like so long ago.  Not a client? Click here to view Bespoke’s premium membership options including Bespoke Institutional, which provides full access to our Earnings Explorer tool.

One of our Interactive Tools that subscribers have access to provides historical seasonality trends for the S&P 500.  Our Seasonality Tool allows users to track historical trends of the broader market, ETFs, and individual stocks over pre-defined and custom time periods over the last ten years.  Subscribers who have created custom portfolios can also track the names in these various baskets in order to see which ones have historically performed the best and worst over different time periods.

The gauges below are from the Seasonality Tool, and they show the S&P 500’s median performance over the last ten years for the upcoming week, month, and three months.  For each time period, we show the S&P 500’s median change during that span as well as how that performance ranks relative to all other periods throughout the year.  Using the one-week time period as an example, the S&P 500’s median performance over the upcoming trading week has been +1.15% over the last ten years.  Relative to all other one-week periods throughout the year, it ranks better than 89% of them.  For the one-month period, the S&P 500’s 3.11% median performance has been even better relative to other periods, ranking better than 94% of them.  Over the next three months, though, the S&P 500’s median gain of 3.17% is not quite as strong, ranking better than only 63% of other three-month periods.

One sector that has been strong during the upcoming one-month period is semiconductors.  In our Seasonality Tool, you can track that sector’s performance by looking at the ETF SMH, but below we wanted to summarize the performance of the Philadelphia Semiconductor Index (SOX) in the upcoming one-month period, not just over the last ten years but also going back to 1996.  As shown in the table, from the close on 1/18 (or the most recent close before that if 1/18 wasn’t a trading day) through the close on 2/18, the SOX has seen an average gain of 3.53% (median: 4.35%) with gains just over two-thirds of the time.  That’s more than twice as strong as the average gain of 1.3% for the SOX over all one-month periods since 1996.  Over just the last ten years, the performance of the SOX over the next month has been even stronger with a median gain of 4.85% and gains in every year except 2018.

With a rally of 7% already YTD, the semiconductor group has had a strong run to start the year and heads into this week at overbought levels.  It’s going to be hard to keep up at this pace, but at least one factor working in its favor is a seasonal tailwind.  Click here to view Bespoke’s premium membership options for our best research available.

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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Retail Rippers

Penny-Stock Peddlers Piling Into Reddit Forum Prompt Rule Change by Sarah Ponczek (Bloomberg)

After an influx of schemes and promotions, moderators of a subreddit focused on low-price shares have moved to ban discussion of cryptocurrencies and any services, newsletters, or other social media accounts. [Link; soft paywall]

TikTok and Discord Are the New Wall Street Trading Desks by Caitlin McCabe, Gunjan Banerji and Mischa Frankl-Duval (WSJ)

There has been rabid interest in hot stocks promoted on social media, driving stampedes of small buyers in to obscure stocks which suddenly go parabolic thanks to the promotion on a range of social platforms. [Link; paywall]

Food & Drink

In Search of Ragu by Matt Goulding (Roads & Kingdoms)

The author goes searching for the plate that best captures the platonic ideal of pasta: rich, complex, and loaded with flavor buried in the depths of Bologna. [Link]

The Seven Essential Southern Dishes by Sheri Castle (Bitter Southerner)

While it’s impossible to completely distill a cuisine as varied and diverse as the South’s into a few dishes, the author gives it a shot. The results may surprise you, but don’t fret: each comes with a recipe to try. [Link]

This artificial ‘nose on a chip’ can sniff out wine, coffee, and noxious gas by Luke Dormehl (DigitalTrends)

A German company has developed a chip that can detect the chemicals that make scents smell to us the way they do. [Link]

Crypto

Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes by Nathaniel Popper (NYT)

Early adopters that stored bitcoin wallets on hard drives or other external media have millions of dollars at their finger tips but just out of reach. [Link; soft paywall]

Exclusive: Large bitcoin payments to right-wing activists a month before Capitol riot linked to foreign account by Jenna McLaughlin (Yahoo!)

A French programmer sent millions of dollars worth of bitcoin payments to far right activists in the month before the riot which sacked the US Capitol earlier in January. [Link; auto-playing video]

Real Estate

Manhattan Bargain-Hunters Drive a 94% Jump in Apartment Leases by Alex Wittenberg (Bloomberg)

With rents dropping sharply, the number of lease signings for Manhattan apartments has doubled versus a year ago, putting a bid under a bedraggled Manhattan market. [Link; soft paywall]

U.S. banks cast wary eye at mortgage borrowers as forbearance periods end by Imani Moise (Reuters)

With millions of borrowers receiving forbearance on their mortgages, banks are having a hard time trying to figure out whether non-payers are actually financially struggling or are just taking the opportunity to save some payments. [Link]

Tech

Why Joe Biden Can’t Bring His Peloton to the White House by Courtney Linder (Popular Mechanics)

Not averse to an occasional spin class, the President-Elect will have to leave his Peloton bike in Delaware because its Android tablet, internet link, microphone, and camera pose security risks in the West Wing. [Link]

Every Deleted Parler Post, Many With Users’ Location Data, Has Been Archived by Dell Cameron (Gizmodo)

After right-wing social network Parler was kicked off a number of services that were part of its core architecture, hackers exploited a number of vulnerabilities and managed to capture almost the entirety of the social network. [Link]

Medical Breakthroughs

Bupropion and Naltrexone in Methamphetamine Use Disorder by Madhukar H. Trivedi, M.D., Robrina Walker, Ph.D., Walter Ling, M.D., Adriane dela Cruz, M.D., Ph.D., Gaurav Sharma, Ph.D., Thomas Carmody, Ph.D., Udi E. Ghitza, Ph.D., Aimee Wahle, M.S., Mora Kim, M.P.H., Kathy Shores-Wilson, Ph.D., Steven Sparenborg, Ph.D., Phillip Coffin, M.D., M.I.A., et al. (NEJM)

A new study compared the effects of two drugs designed to reduce addiction to methamphetamines and found that while imperfect, there was a significant effect versus placebo. [Link]

Cancer Death Rate in U.S. Falls by Largest Yearly Amount on Record by Brianna Abbott (WSJ)

Thanks mostly to novel treatments for long cancer, recent data shows another huge drop in the cancer death rate to the lowest on record for women and near the lowest on record for men. [Link; soft paywall]

Baseball

He Just Wanted to Play Catch. They Got Relief From Troubled Times. by Mike Wilson (NYT)

A quest for a partner to play catch with led to a full pickup game that allowed all participants to escape the stresses of 2020 and just play ball. [Link; soft paywall]

Mickey Mantle card crushes record after selling for $5.2 million by Dan Martin (NYP)

A 70-year-old baseball card topped the previous record price by more than 20%; it’s one of only about three left in good shape according to experts. [Link; auto-playing video]

Personnel Change

James Simons Steps Down as Chairman of Renaissance Technologies by Gregory Zuckerman (WSJ)

After a huge year for the internally-managed funds at Renaissance Capital but a very bad one for clients, one of the firm’s founders is stepping down. [Link; paywall]

Hippos

Invasion of the hippos: Colombia is running out of time to tackle Pablo Escobar’s wildest legacy by Sarah Kaplan (WaPo)

Hippos that escaped the mansion of Pablo Escobar after his fall have become an invasive species in Colombia, and one that is very close to making a permanent mark on the region’s biosphere. [Link; soft paywall]

PPP

‘It Was a Joke’: Some Small Businesses Got $1 Relief Loans by Stacy Cowley (NYT)

A small number of the five million companies that got loans through the Paycheck Protection Program got loans of less than $99, which comes across as something like a cruel joke. [Link; soft paywall]

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Have a great weekend!

The New York Fed’s reading on the manufacturing sector released this morning showed the region’s manufacturing sector still grew in January but at a slower pace.  Rather than the expected uptick to a reading of 6.0, the index fell to 3.5 from 4.9.  That is the lowest reading since the last contractionary reading (those below 0) in June.

While the headline number is still consistent with growth it stands at the low end of the historic range.   Similarly, demand related readings like New Orders and Shipments remain historically low, albeit still indicative of growth.  Of each component in the report, only the indices for Unfilled Orders and Inventories remain in contraction. Meanwhile, in addition to the headline index, the indices for Shipments, Unfilled Orders, and Number of Employees all showed deterioration in January.

Whereas indices like New Orders and Shipments sit at lower ends of their historical ranges, those concerning employment are stronger.  The index for Number of Employees showed slowing in hiring in January, though, firms were in fact continuing to take on more workers. Additionally, Average Workweek saw a bit of a bounce after declining in the final months of 2020.

The only indices to see dramatic moves higher in January concern prices.  Prices Paid rose from 37.1 up to 45.5 which is the highest level since September of 2018.  That 8.4 point increase was in the 87th percentile of all monthly moves for the index.  Higher prices are also being passed on to customers as Prices Received was higher rising to 15.2. For that index, the level and move higher were not as dramatic. though. as it is only at the highest level since February of last year. That acceleration in rising prices is consistent with what we saw in the ISM report on the manufacturing sector last week.  Click here to view Bespoke’s premium membership options for our best research available.

By far one of the biggest movers of the past few days has been video game retailer GameStop (GME). Since last Friday, GME has risen over 96% with a 57.4% rally in Wednesday’s session alone.  Today, the stock is up another 30.61% as of this writing and has reached one of the highest levels since November 2015. One likely factor behind the stock’s move has been a short squeeze of the company’s massive short base.  For more than a year now, short interest as a percent of equity float has been around or well above 100%.  The most recent reading as of the end of 2020 was 144.33%. In other words, there have been far more shares sold short than are available to trade. In a screen of all active stocks trading on US exchanges, we found only 18 that have more than 100% of their freely floating shares sold short, and they are all penny stocks with very small market caps.

While you would be hard-pressed to find a stock with as high of short interest as a percentage of the float as GameStop, generally speaking, stocks with high short interest have been some of the top performers this year.  In the chart below, we show the average YTD performance of Russell 3000 stocks broken into deciles based on their short interest.  The decile of stocks with the highest short interest as a percentage of float have by far been the best performers YTD, up for an average of 14.16%.  Even excluding GME, the decile’s average YTD performance is a 13.93% gain.  As you move across the deciles with lower short interest levels, performance gets worse. The tenth decile of stocks which consists of stocks with average short interest levels below 1% of float has only risen 3.6% on average.

In the table below, we show the 30 Russell 3000 stocks with the highest short interest as a percentage of equity float. Across these names, they are up for an average of 15.76% in 2021, with only three not in the green: National Beverage (FIZZ), Acutus Medical (AFIB), and B&G Foods (BGS).  Including GME, the largest number (7) of these most heavily shorted stocks are retailers. In fact, Dillards (DDS) and Bed, Bath, & Beyond (BBBY) both find themselves in the top 5 alongside GME.  The former has over 90% of its float shorted while nearly two-thirds of BBBY’s float is sold short.  Click here to view Bespoke’s premium membership options for our best research available.

Overall, it was a bad week for jobless claims with both initial and continuing claims missing expectations. Initial jobless claims came in at the worst level since the week of August 21st rising to 965K versus forecasts for a jump to just 789K.  That 183K increase versus last week was the largest move higher since April when claims were rising in the millions per week. Additionally, of the states that offered comments on the changes in jobless claims, many noted layoffs in industries like retail, accommodations and food services, and transportation. Despite the acceleration in the vaccine rollout, due to the fact that case counts remain near record highs and COVID restrictions remain in place, businesses and workers in the customer-facing services sectors are still feeling the pain.

While the seasonally adjusted number managed to stay below a million, before seasonal adjustments that wasn’t the case.  Initial claims by this measure came in at 1.151 million this week, the highest reading and first time above 1 million since July 30th.

While the most recent week’s uptick is likely not all due to seasonality, as shown in the second chart below, the second week of the year usually does see a fairly large uptick in claims.

Last week we noted how PUA claims experienced a significant drop potentially due to the timing of the signing of the spending bill and the holidays. While there were yet again a handful of states unusually reporting zero PUA claims this week, total PUA claims across the nation were higher by 123.3K up to 284.47K this week.  In other words, both regular state claims and auxiliary programs contributed to this week’s uptick.

Continuing claims are lagged one week to initial claims meaning this week’s increase in the initial number was not factored into the continuing claims number, but nonetheless, it was also higher rising to 5.271 million from 5.072 million. That brings claims back to around where they were in mid-December.

Adding in all other programs to regular state claims adds another week’s lag.  As of the last week of 2020, total continuing claims across all programs fell to 18.422 million from 19.183 million the prior week. That number is likely to move higher given the significant uptick in initial claims this week, but another problematic aspect of total claims is the growing number of unemployed who have been out of work for a long period of time. The share of claims from extension programs like PEUC and Extended Benefits accounted for nearly 30% of the most recent week’s total claims. Click here to view Bespoke’s premium membership options for our best research available.

After two years at the helm, news broke this morning that Bob Swan will be stepping down from his position of CEO of Intel (INTC).  He will be replaced by VMware (VMW) CEO Pat Gelsinger on February 15th. While INTC has been a significant underperformer over the past year—it is the only semiconductor stock in the S&P 500 that is lower than it was one year ago—the immediate response from the market to today’s news has been overwhelmingly positive.  As of this writing, the stock is up 8.55% which would be its best day since March of last year around the time of the bear market lows.

Though there is plenty of time left in the day for those gains to be built upon or eaten into, the opening gap was substantial. Opening at $59.50, the gap up of 11.76% was one of the largest for INTC on record.  The only times since 2000 that there were larger gaps to the upside were in April of 2001 when the stock gapped up 12.64% on the 11th and 12.21% on the 18th. Going back before 2000, the only upside gap that was even larger was a 29.92% move in October of 1987, not long after Black Monday and when Intel’s stock was trading under $1 on a split-adjusted basis.

Today’s gap up on the news of a CEO change was also even larger than any move on earnings of the past nearly two decades.  As shown in the snapshot from our Earnings Explorer below, the best gap up on earnings news that INTC has experienced since late 2001 was a 7.27% gap following the Q1 results of 2008.

As previously mentioned, there is not much historical precedent for INTC from gaps up as large as today, but of the past four times that INTC gapped up at least 10%, performance in the weeks and months after have generally been pretty negative. The next week has usually seen some further moves higher with the only decline being the second gap up over 10% in April 2001.  As for returns throughout the next year, the stock has consistently declined. Like what you see? Click here for a trial to any of Bespoke’s premium membership options.