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“When you blow away the foam, you get down to the real stuff.” – T. Boone Pickens

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After a relatively hawkish tone from Fed Chair Powell where he reiterated his view that the regional banking system is doing fine, reports surfaced that PacWest (PACW) is mulling strategic options for its business.  Shares of PACW and other regional banks immediately plunged on the idea that things really aren’t fine, and that pulled futures for the broader market lower as well.  In earnings news, shares of Qualcomm (QCOM) are down over 7% after the company reported weaker-than-expected EPS and lowered guidance.  QCOM’s weak earnings report suggests that sales of handsets have been weak, and on that news, Apple (AAPL) is also trading lower heading into its earnings report after the close.

On the economic calendar today, jobless claims are the primary focus, but we also got updates on Non-Farm Productivity and Unit Labor Costs. Initial claims were slightly higher than expected (242K vs 240K) while Continuing Claims were significantly lower than expected (1.805 million vs 1.865 million).  Non-Farm Productivity fell 2.7% versus forecasts for a decline of 2.0%, and Unit Labor Costs rose 6.3% compared to estimates of 5.6%.

All the headlines surrounding the troubles in the banking sector have weighed on sentiment in the last week as the AAII sentiment survey showed that bulls were unchanged at 24.1%, but bullish sentiment jumped from 38.5% up to 44.9%.

When it comes to trends within individual asset classes, the typical pattern is one of a tide lifting or sinking all boats.  While it hasn’t necessarily been the case over the last two years, when the stock market rallies, most individual stocks rally and vice versa.  Similarly, when bonds rally rates usually fall, even if the move lower is to varying degrees.  One area of financial markets where we have been seeing a wide degree of disparity within the asset class is commodities.

The snapshot from our Trend Analyzer below shows where various commodity-related ETS currently stand relative to their trading ranges.  At the top of the list and all trading in overbought territory are ETFs related to precious metals like gold and silver.  Most of them are also up by double-digit percentages YTD.  While these ETFs have performed well both recently and on a YTD basis, most other ETFs in the sector are down sharply YTD and trading at oversold levels.  Crude oil ETFs like USO and DBO are down 7% over the last week while Natural Gas is sitting on a 55% YTD decline after falling an ominous 6.66% over the last five trading days.  Is it getting hot in here?

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See what’s driving market performance around the world in today’s Morning Lineup.  Bespoke’s Morning Lineup is the best way to start your trading day.  Read it now by starting a two-week trial to Bespoke Premium.  CLICK HERE to learn more and start your trial.

“Men in general judge more from appearances than from reality. All men have eyes, but few have the gift of penetration.” ― Niccolo Machiavelli

Below is a snippet of content from today’s Morning Lineup for Bespoke Premium members.  Start a two-week trial to Bespoke Premium now to access the full report.

If you were to apply the quote above to the markets, it would be that you should never invest based on the headlines.

It was nice while it lasted, but the Fed blackout will come to an end this afternoon when the FOMC announces its latest decision on interest rates and Powell holds a 2:30 PM Eastern press conference. There’s a bit of a positive tone in the markets ahead of the announcement, but that will all change later on.  The ADP Employment report crushed estimates surpassing forecasts by more than 100K, and while it hasn’t been particularly reliable in forecasting the Non-Farm Payrolls report, the strong reading suggests that the labor market is holding up even after yesterday’s weaker JOLTS report.  We’ll have to wait and see jobless claims and Non-Farm Payrolls later this week to get a better read on that sector. As far as the rest of the day is concerned, we still have ISM Services at 10 AM.

As large caps have carried the lion’s share of the weight in market performance this year, the performance gap between the Nasdaq 100 and the Russell 2000 has really widened.  Year to date, the Nasdaq 100 has rallied by 19.9% while the Russell 2000 has declined nearly 2%, and over the last six months, the gap has been similar at 19.8%.  The chart below shows the rolling six-month performance spread between the two indices, and while the spread has spiked in the last few months, it’s still lower than it was at post-COVID extremes in the fall of 2021 and the middle of 2020.  At the other extreme, the peak period of outperformance for the Russell 2000 was in Mach 2021 when US consumers were flush with stimulus cash.  Over the last 13 years, though, the performance gap has been in the Nasdaq 100’s favor as the spread has been positive 65% of the time since 2010.

With the gap in performance favoring the Nasdaq 100 nearly two-thirds of the time over the last 13 years, its relative strength versus the Russell 2000 has, up until recent years, been in a consistent uptrend.  After going parabolic in the early COVID days, relative strength has been in a sideways range for three years now.  Tighter credit conditions from the regional banking crisis this year have recently helped buoy the performance of large caps.  Now, with the Fed on tap this afternoon, will Powell continue the hawkish tone and keep a tight grip on the credit spigot for smaller companies, or will he take a softer tone and help grease the skids?

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