Earnings season has died down quite a bit from a few weeks ago, but our rolling averages on beat rates and guidance are still moving of course.  You can think of earnings and revenue beat rates as a “present situation” reading.  The rolling 3-month EPS beat rate shows the percentage of companies that have beaten consensus analyst earnings estimates over the last three months.  The rolling 3-month sales beat rate shows the percentage that have beaten revenue estimates.  (These charts are updated daily in the Tools section of our website for Premium and Institutional members.)

As shown below, both EPS and revenue beat rates continue to trend lower after reaching extremely elevated levels last summer.  At this point the sales beat rate is just barely above its long-term average.

If beat rates represent the “present situation,” then our guidance spread is an “expectations” reading.  The guidance spread represents the difference between the percentage of companies raising guidance and lowering guidance on a rolling 3-month basis.  And while beat rates have been trending lower recently, our guidance spread has been trending higher back up to the historical average.

As shown below, companies started to get much more optimistic about their futures in late 2017 right around the time that the GOP tax reform legislation was passing Congress.  From late 2017 through mid-2018, our guidance spread was at the top end of its historical range.  Then it began to crater in July and August, and it fell deeply into the red in early 2019.  It finally bottomed out towards the end of Q1, however, and it has been trending higher ever since to the point where it’s now just a notch below its historical average, which is slightly negative at -2.97%.  While the current reading is still negative, it’s on the right track.

Start a 2-week free trial to Bespoke Institutional for full access to our research and interactive tools.

Despite rising trade tensions with China, rising geopolitical concerns with North Korea and Iran, and a weak stock market, US consumers remain surprisingly confident.  In the latest read for the month of May, Consumer Confidence rose much more than expected, hitting a level of 134.1 up from last month’s reading of 129.2 and much higher than the consensus forecast of 130.  At current levels, overall sentiment isn’t far from its peak reading of the cycle (137.9) from last October.

While the gap between consumers’ perception of their Present Situation and Expectations remains uncomfortably wide, both measures saw comparable increases this month.  In the case of the Present Situation component, though, that reading is at a new high for the cycle (highest since December 2000).

The main reason consumers remain so confident in the face of macro headwinds is that the job market remains so strong.  The percentage of consumers responding that jobs are ‘plentiful’ rebounded to 47.2% in May, which is a new high for the cycle and the highest monthly reading since January 2001.

To us, the most surprising aspect of this month’s report is the fact that sentiment towards the stock market improved.  Even though all of the major US equity indices are down in May, the percentage of consumers expecting stock prices to rise increased to 42% from 37.3%, while the percentage of bearish consumers dropped to 22.2% from 24.4%.  From a contrarian perspective, it would be much more preferable to see sentiment turning more cautious as stock prices declined.  Start a 2-week free trial to Bespoke Institutional for full access to our research and interactive tools.

The DJIA is entering this last full week of May riding a streak of five straight weeks of declines in what is the longest weekly losing streak for the index in just under eight years.  While the current streak is the longest in years, it is also notable due to just how mild of a losing streak it has been.  Over the five weeks in which the DJIA has been down, its total decline has been a mere 3.67%.  To put that in perspective, the average decline for the DJIA during its 64 prior five-week losing streaks since 1900 has been a drop over 10%, and the last time the DJIA saw a smaller decline during a five-week losing streak was over 40 years ago in 1976!

While there have been 64 prior five-week losing streaks for the DJIA, there have only been eight prior streaks where the DJIA’s losses during the first five weeks of declines were less than 5% (table below), and there have only been three where the decline was less than the 3.67% we saw over the last five weeks. As shown in the table, of the eight prior mildest streaks, the DJIA went on to see a sixth straight week of declines more than half of the time for an average decline of 0.65% (median: -0.45%).  For all five-week losing streaks, however, the DJIA saw an average gain of 0.35% during week six with gains just over half of the time (51%). Start a 2-week free trial to Bespoke Premium for full access to our research and interactive tools.

Below we highlight charts for a half-dozen US equity ETFs as we start this holiday-shortened trading week.  Over the past few weeks, investors have been largely turning away from stocks/ETFs that are more cyclical in nature.  Meanwhile, defensives such as REITS, like the REIT ETF (VNQ), have held up better.  In the case of VNQ, the ETF is actually headed into today right near a breakout of its 52-week high.  The Aerospace and Defense ETF (PPA), while more of a cyclical industry, is also sitting near highs from the past year as it has for a couple of weeks now. The S&P Insurance ETF (KIE) is another industry that is looking promising as it has pulled back to the bottom of this year’s uptrend.

Other industries that are more susceptible to global growth trends have been rolling over.  Namely, the S&P Metals and Mining ETF (XME) has been in a downtrend for some time now. After running up to the top of its downtrend channel in February, XME has fallen through prior support and is now approaching this past year’s lows.  The S&P Oil and Gas Exploration and Production ETF (XOP) and the S&P Retail ETF (XRT) are a similar story. After trading sideways for most of this month, XOP gapped lower on Thursday falling through support established at multiple points earlier this year.  The S&P Retail ETF (XRT) has a comparable chart pattern.  For XME, XOP, and XRT, the 52-week lows are the next critical support level to watch. Start a two-week free trial to Bespoke Institutional to access our interactive Chart Scanner and much more.

Since 1971 when Memorial Day was officially designated as the last Monday of May, the S&P 500 has experienced an average gain of 0.53% during the 4-day Memorial Day week.  On a median basis, the gains are slightly stronger at +0.59%.  And in years when the S&P 500 is up 10%+ year-to-date heading into Memorial Day week (as it is this year), the median gain has been 0.63% during the week.  In the chart below, we show the S&P’s change during Memorial Day week each year since 1971.  Blue bars are years in which the S&P was up 10%+ YTD through Memorial Day.

Now that “summer” has unofficially begun, we used our Stock Seasonality tool to find the S&P 500 stocks that perform the “hottest” during the summer months.  Below are the ten stocks with the strongest median gains from Memorial Day through Labor Day over the last 10 years.

Somewhat surprisingly, Apple (AAPL) ranks first with a median gain of 13% over the last ten years with gains 80% of the time.  AAPL has gained at least 7% in each of the last 3 summers, and the stock’s only decline of any significance came in 2015 when it dropped 14.5%.  Cooper (COO) ranks second with a median gain of 12.1%, followed by Alexion Pharma (ALXN), NVIDIA (NVDA), Align Tech (ALGN), and ABIOMED (ABMD).  Amazon.com (AMZN) also makes the cut with a median gain of 8.9% during the summer, ranking it 10th in the S&P 500.  For AMZN, its median gain isn’t quite as strong as stocks like Apple or NVIDIA, but it hasn’t fallen once from Memorial Day to Labor Day over the last 10 years!  Start a 2-week free trial to Bespoke Premium to access our Stock Seasonality tool and a wide array of investment research.

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.

While you’re here, join Bespoke Premium for 3 months for just $95 with our 2019 Annual Outlook special offer.

Assessing Achievement

IQ rates are dropping in many developed countries and that doesn’t bode well for humanity by Evan Horowitz (NBC)

IQ test results are starting to slide in a variety of developed countries, suggesting that the world is getting dumber, posing concerns about the ability to innovate…though interestingly American results buck that trend. [Link]

Many More Students, Especially the Affluent, Get Extra Time to Take the SAT by Douglas Belkin, Jennifer Levitz and Melissa Korn (WSJ)

An increasing number of students are getting extra time to take the SAT, and the doctors notes which allow for that advantage are easier to come by for the affluent. [Link; paywall]

What the Childhood Years of Tiger Woods and Roger Federer Can Teach Us About Success by David Epstein (Sports Illustrated)

An instructive comparison of two sports stars who took a completely opposite approach to early sports, yet both ended up at the absolute pinnacle of success. [Link]

The Peculiar Blindness of Experts by David Epstein (The Atlantic)

An obscure bet between a Malthusian scientist and a more hopeful economist offers a lens into the sometimes perverse incentives and frictions which have made long-term forecasting so unreliable in recent decades. [Link]

Tariff Trouble

New China Tariffs Increase Costs to U.S. Households by Mary Amiti, Stephen J. Redding, and David E. Weinstein (NYFed)

Previous research suggested that the average US household paid $414 more for goods based on 2018 tariff levels. The newest 15% tariff rate on $200bn of goods adds $831 to consumers’ costs, and notably the deadweight loss goes from 32% to 75% of the total tariff costs. [Link]

The US tariffs on China have been paid almost entirely by US importers: IMF study by Fred Imbert (CNBC)

An IMF study was also released this week suggesting that consumers have “borne almost entirely” the costs of tariffs levied by the Trump Administration. [Link]

Health Care

CVS to test unregulated vitamins and dietary supplements by Shamard Charles (NBC)

As a condition of stocking unregulated supplements, CVS will start requiring independent testing to make sure that what it sells to consumers will be what is advertised. [Link]

End-to-end lung cancer screening with three-dimensional deep learning on low-dose chest computed tomography by Diego Ardila, Atilla P. Kiraly, Sujeeth Bharadwaj, Bokyung Choi, Joshua J. Reicher, Lily Peng, Daniel Tse, Mozziyar Etemadi, Wenxing Ye, Greg Corrado, David P. Naidich, and Shravya Shetty (Nature)

Lung cancer screening that catches the disease early can lead to drastically lower mortality, so offering it at lower prices could have a major impact by broadening access. This paper demonstrates a deep learning technique that achieves a 94% success rate diagnosing lung cancer, offering a hope for cheaper access. [Link]

Climate Change

Geophysical constraints on the reliability of solar and wind power in the United States by Matthew R. Shaner, Steven J. Davis, Nathan S. Lewis, and Ken Caldeira (Royal Society of Chemistry)

Using 30+ years of data on weather and temperature patterns, the authors illustrate the physical constraints on operating a power grid exclusively on solar and wind technology, assuming no large-scale storage capable of matching electrical generation timing to demand timing. [Link]

Nudging out support for a carbon tax by David Hagmann, Emily H. Ho, and George Lowenstein (Nature)

The authors show that “nudge” efforts to reduce climate impact (fly less, reduce electricity or plastic consumption, etc) reduce support for larger climate change action because they are perceived as a burden. [Link]

Social Media

CrossFit, Inc. Suspends Use Of Facebook And Associated Properties (CrossFit)

After a large diet information sharing group was deleted by Facebook, CrossFit is abandoning the platform and all its properties. [Link]

Tech Dystopia

It’s Getting Way Too Easy to Create Fake Videos of People’s Faces by Samantha Cole (Vice)

Neural networks and other “AI” techniques are getting easier and easier to operate, leading to the possibility that video can be easily faked in order to deceive. [Link]

Hackers have been holding the city of Baltimore’s computers hostage for 2 weeks by Emily Stewart (Vox)

Hackers have taken control of computer networks operated by the city government, demanding about $100,000 in bitcoin to unlock them. [Link]

Tech Utopia

Driverless Cars Working Together Can Speed Up Traffic By 35% by Saravana (Gimate)

A new University of Cambridge study has shown that coordinated driverless cars could increase traffic volumes by 35% or more. [Link]

Personal Finance

Broke Millennials Are Flocking to Financial Guru Dave Ramsey. Is His Advice Any Good? by Kristen Bahler (Yahoo!/Money)

An evangelical radio host from Tennessee is offering tough love and uncompromising anti-debt messages to millions via the 15 hours per week he blasts from radios around the country. [Link]

Read Bespoke’s most actionable market research by joining Bespoke Premium today!  Get started here.

Have a great weekend!

Earlier this week we discussed the very poor condition of the corn crop’s spring planting. Apparently, corn speculators are taking the data to heart. The chart below shows the percentage of outstanding open interest that represents the number of contracts speculators hold long net of their short positions. This data is released weekly in the CFTC’s Commitment of Traders report. As shown, corn speculators have abruptly about-faced from a historically large short position to a very small long.  Start a two-week free trial to Bespoke Institutional to track futures positioning across asset classes.

The change has been one of the largest in the last 20 years, equivalent to 11.4% of open interest. In other words, as corn prices have surged, positioning has been cleared out. That could be a good sign for where prices head next if you assume that speculators are going to keep pushing contracts higher by building longs. On the other hand, with positioning now cleaned out, the contrarian view is that markets are vulnerable to bearish moves now without large and vulnerable shorts that are sensitive to price moves higher.