It’s still difficult to fathom the moves in the US equity market over the last four months.  The fact that the Nasdaq and more specifically the Technology sector aren’t far from record highs is definitely something no one was expecting two months ago. There’s an old market saying that equities take the stairs up and the elevator down, but in the latest market cycle, the elevator up was almost as fast as the way down!

If you’ve been following the markets, all you’ve likely heard up until recently is that large-cap tech, and more specifically, Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB), are single-handedly driving the market higher.  The reality is not nearly as clear-cut.  Given their market caps, the “Big 5” (as they’re often referred to) have done a lot of heavy lifting, but in terms of performance, they’re hardly the only game in town.

The table below lists Technology sector stocks in the Russell 3000 with market caps of more than $1 billion that are outperforming all of the ‘big 5’ tech stocks on a YTD basis.  Actually, since Amazon is doing so well relative to the rest of the “big 5” these are all stocks that are outperforming Amazon.  If we looked for stocks that were doing better than the average return of the “big 5” the list would be a lot, lot longer (+16.4%).

Looking through the list of names below, the two top-performing names are Zscaler (ZS) and Twilio (TWLO), which have both more than doubled.  Behind these two, DocuSign (DOCU) and Sprout Social (SPT) are both knocking on the door of triple-digits. All 28 of the names listed have market caps of $1 billion, but the average market cap is just over $21 billion, while Nvidia (NVDA) is the largest company on the list with a market cap of $216 billion.  For the most part, these aren’t names that have been driving the indices, but anyone holding these stocks in their portfolio probably doesn’t care!  Start a two-week free trial to Bespoke Institutional to access all of our research and interactive tools.

Despite beating expectations of 44.4, the ISM Services report for May showed another month of contractionary activity. Although still at contractionary levels, May was not as weak as April as the headline index rose 3.6 points to 45.4.  Along with January of 2018, that 3.6 point MoM increase was the largest one month increase in the index since September of 2017. So like the manufacturing report on Monday, this month’s report for the non-manufacturing sector showed activity is still declining.

In combination with Monday’s manufacturing release, the composite index for manufacturing and services has shown back to back months with contractionary activity for the first time since August of 2009. Though activity for manufacturing and services both continue to contract, there was a significant pickup in May with the largest month over month increase (3.7 points) since September of 2017.

Like the headline number, most of the sub-indices also remain in contraction territory and around some of the weakest levels on record despite massive improvements from the prior month. Six of the ten sub-indices are still in the bottom 5% of all readings (since 1997) even after some of the largest one month increases on record.

The indices for Business Activity and New Orders are two categories that declined to record lows in April, but in May both experienced massive rebounds. For Business Activity, it’s 15-point m/m increase was the largest on record, and yet it still remains at a contractionary level of 41.  For New Orders, the 9 point increase to 41.9 was the second largest one month gain on record behind April of 2009 (+9.6). Here again, though it remains in the bottom 2.5% of all readings.

As we noted in Monday’s manufacturing report, the pandemic has seemed to massively disrupt supply chains. Even after experiencing the second largest drop ever (11.3 points to 67), Supplier Deliveries remain at their third highest level for any month in the history of the data.  That indicates further slowing lead times.  The respondent commentary offered some interesting insight’s into why supplier deliveries have slowed. One commented that “Production shutdowns have greatly increased lead times” while another noted that “if the product is coming out of China, the delays are even longer.”

In addition to the supply shock being observed, another area worth mentioning in this month’s report was that of commodities in short supply. With measures to thwart the spread of the virus still in place and supply chains still disrupted, cleaning supplies and protective equipment still dominate the commodities that are reported to be in short supply. As such, they also continue to rise in price.

One of the areas that perhaps remains the weakest in ISM’s survey has been that of Employment. There was not a single industry that reported an increase in employment in May, and the index for that sector only rose 1.8 points to 31.8.  Even with that uptick, it is below the lows from 2009. Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

Our Trend Analyzer tool lets Bespoke members quickly and easily check on the status of US stocks and ETFs.  Below are snapshots of our Trend Analyzer tool as of yesterday’s close for various ETFs across US indices and sectors as well as key country stock market ETFs.

Below is a look at the major US index ETFs from large caps to small caps.  All of them are currently in overbought territory in long-term sideways trends.  For these ETFs to turn back into uptrends, we’ll need to see a breakout to new highs in the near term.  New highs are quite a bit away for indices like the Russell 2,000 (IWM) that are still down significantly year-to-date.  But the Nasdaq 100 (QQQ) is a lot closer to a new high given that it’s up 11% on the year!  Heading into today, QQQ is only 0.8% away from its high made back in February.

Ten of the eleven major S&P 500 sectors are currently trading in overbought territory with Health Care (XLV) the only sector that’s not overbought.  Health Care is very close to overbought, however, which you can see in the snapshot below.

Notably, four of eleven sectors are now up year-to-date — Communication Services (XLC), Technology (XLK), Health Care (XLV), and Consumer Discretionary (XLY).  Energy (XLE) and Financials (XLF) are still down 20%+ year-to-date, while the Industrials sector is down 15%.

All of the major country ETFs are overbought as well, with four in extreme territory (which means they’re more than two standard deviations above their 50-DMAs).  These four that are the most extended from their normal trading ranges are Germany (EWG), Italy (EWI), Japan (EWJ), and France (EWQ).

On a year-to-date basis, the US (SPY) is now doing the best with a decline of just 3.69%, while the UK (EWU) is down the most at -21.55%.  Start a two-week free trial to Bespoke Premium to start using our Trend Analyzer tool today.

In today’s Morning Lineup, we noted that 100% of S&P 500 Industry Groups are now above their 50-DMAs. But individual stocks have been equally as impressive in regards to their 50-DMAs.  As of yesterday’s close, 96.24% of S&P 500 stocks finished the day above their 50-DMAs.  Including yesterday, there have only been five days since 1990 that has seen as strong if not stronger readings.  All of those occurred in mid-February and early March of 1991. So it has been quite some time since the S&P 500 last had this many stocks trading above their 50-days.

Given the strong reading for the broader index, for the first time since March of 2016, there are four sectors with 100% of their stocks above their 50-DMAs: Communication Services, Energy, Industrials, and Materials.  Consumer Discretionary is also close at 98.41%.  Every other sector has at least 90% of their stocks above except for Utilities. Granted, it is by no means weak or far behind the rest of the pack with a reading of 89.29%.

The charts below from our Daily Sector Snapshot show the percentage of stocks above their 50-DMAs by sector over the last year.  For the sectors with 100% of their stocks currently above their 50-DMAs, it has understandably been a while since the last time they read 100%. For Communication Services, the current string of days with 100% of stocks above their 50-DMAs has been the first since September of 2018. For Energy and Industrials, this has been the first time since February of 2019 and for the Materials sector, the last time that 100% of stocks were above their 50-days was July of last year. Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

While the US equity rally has been more “slow and steady” than “big and bold” in the last couple of weeks, credit markets have been flying. In the chart below we show the spreads on CDX HY, the index of high yield credit default swaps used as a reference for junk bond markets. As shown, the back half of May has been a very good period for high yield investors as spreads have run almost 200 bps tighter. They’re now at the tightest levels since the March blow-out in spreads as US equities plunged into the fastest bear market since the Depression. We covered high yield spreads in more detail in last night’s Closer report, which is available to Bespoke Institutional members.  Click here to start a two-week free trial.

Please click the image below to view our June 2020 market calendar.  This calendar includes the S&P 500’s average percentage change and average intraday chart pattern for each trading day during the upcoming month.  It also includes market holidays and options expiration dates plus the dates of key economic indicator releases.  Start a two-week free trial to one of Bespoke’s three research levels.

ISM’s monthly manufacturing report for the month of May was released this morning. For the first time since January, the headline manufacturing number was higher month over month, rising from 41.5 in April to 43.1 in May.  While that 1.6 point increase is an improvement, it’s still indicative of contractionary activity (anything below 50 is contractionary) as has been the case since the March report.  In other words, similar to what we have seen in the regional Fed reports, activity in May was still declining but not at as rapid of a pace as in April.

In addition to the headline index, most of the sub-indices also improved month over month in May albeit they are also still showing contractionary readings.  In fact, every index is still below 50 except for those of Supplier Deliveries and Inventories. Although those two are above 50, it is not necessarily a positive for broader activity as detailed below. Meanwhile, the only two indices that fell deeper into contractionary territory were those of Customer Inventories and Imports.

As we detailed last month, supply chains faced significant disruptions in April due to COVID-19 and that was reflected in the index for supplier deliveries which spiked to 76; its highest level since April of 1974. Higher readings for Supplier Deliveries indicates that delivery times are longer and lower readings indicate shorter delivery times. While May’s survey continues to show long delivery times, it did improve with the index falling 8 points to 68. That was the largest month over month decline for this index since an 8.2 point decline in October of 1981.

Business Inventories was the only other index to come in above 50 in May; reading 50.4.  That means business inventories expanded for the first time in a year (since May of 2019 when the the index was 51.4). ISM attributed that growth in inventories to businesses trying to get ahead of the aforementioned longer lead times in addition to all around weaker demand.

As previously mentioned, demand is understandably weak with New Orders coming in at 31.8.  That means nine of the last ten months have seen a contraction in New Orders with May being a fourth consecutive month.  That is despite the month over month pickup from 27.1 in April. The industries that are reporting growth in New Orders include Textile Mills, Nonmetallic Mineral products, Food, Beverage, and Tobacco, and Paper Products.

As a result of that weakness in demand in addition to issues with suppliers, the reading on Production also remains weak. Similar to New Orders, including this month there have been contractionary readings in eight of the last ten months. May marked a third consecutive month even with the 5.7 point month over month rise.  So again, things are still deteriorating but at a slower rate than in April. Of the previously mentioned industries that reported growth in New Orders, only Food, Beverage, and Tobacco, and Paper Products also reported growth in Production.  Additionally, the industries for Furniture and Wood Products also reported increased production.

Looking at the commentary section of this month’s report, it backs up some of the findings in the data and offers some other insights.  For example, one Transportation Equipment respondent reported that they have experienced “issues with suppliers that are affecting production.”  Interestingly, they also report that measures like social distancing are also having an impact while another respondent from the Machinery industry reported that they are evaluating the necessity of certain oversees operations.  Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.