Bespoke’s Morning Lineup – 7/20/23 – Complacency Climbs
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“If trouble comes when you least expect it then maybe the thing to do is to always expect it.” – Cormac McCarthy
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The S&P 500 and Nasdaq have benefited from the performance of mega caps this year, but this morning, a 4% decline in Tesla (TSLA) in reaction to earnings is weighing on futures for both of those indices. At this point, though, the declines are minor. The real test will come in the next couple of weeks when the trillion-dollar club of companies starts to report.
Overnight, Asian stocks were mixed with Japan and China lower while India and Australia rallied as payrolls down under came in better than expected. Stocks are faring better in Europe this morning as major benchmarks are higher across the board as an ECB policymaker suggested that just one more 25 basis point increase in rates could be all that’s needed for the current cycle.
The focus now shifts to this morning’s economic data in the US with jobless claims (initial lower than expected, continuing higher) and the Philly Fed (weaker than expected) at 8:30 and then Existing Home Sales and Leading Indicators at 10 AM. While the earnings calendar has been busy this morning, the lineup after the close is relatively quiet with reports of note including Capital One (COF), CSX (CSX), and Intuitive Surgical (ISRG). Then tomorrow we close out the week with American Express (AXP), AutoNation (AN), and SLB.
With the market rising faster than the temperature this summer, we can’t say we were surprised this morning to see that individual investor sentiment as measured by the American Association of Individual Investors (AAII) has turned bullish. In this week’s survey, the percentage of bullish respondents increased from 41% to 51.4% which is the highest level since April 2021.
That plus-50% reading in bullish sentiment also ended a streak of more than two years (116 weeks) where bulls were never in the majority in the weekly AAII poll. In the history of the survey (since 1987), there have been just three other periods where bullish sentiment went more than 100 weeks without a 50%+ reading, and the just-ended streak ranks as the third longest of all time. What’s notable about this chart is that the three longest streaks without 50%+ readings in bullish sentiment have now all occurred in the last ten years, and during that ten-year stretch, there have only been 17 weeks (out of 520) of 50%+ bullish readings.
With so few weeks where bulls were in the majority, you would think that it was an unsettled time for equities, but during this period, the S&P 500 has put up annualized returns of over 10% (not including dividends). Like the Cormac McCarthy quote above, markets climb a wall of worry, and sometimes, the more issues that investors are worried about, the better the forward returns. Conversely, just when you think things can’t go wrong for the stock market, you get years like 2022. Complacency kills.
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Reality Check for Housing Starts
After a blockbuster report for May where Housing Starts and Building Permits both surged, there was a bit of a reality check in June. While Building Permits were expected to come in at 1.50 million, the actual reading came in at 1.44 million representing a 3.7% m/m decline and a drop of 15.3% y/y. One positive of this report, though, was that single-family units actually increased 2.2% and are only down 2.7% y/y even as multi-family units plunged 12.8% m/m and over 30% y/y. With respect to Housing Starts, the headline reading also missed estimates by 46K (1.434 mln vs 1.480 mln). Not only did June’s reading miss forecasts, but May’s reading was revised lower, so that the originally reported 231K beat was more like 159K. Even after that downward revision, though, Housing Starts declined 8.0% m/m and 8.1% y/y.
Following May’s report, we noted that the 12-month moving average of Housing Starts had broken its streak of 12 straight declines, but this month, the moving average resumed its downtrend and fell to its lowest level since February 2021. Similarly, the 12-month moving average for Building Permits declined below 1.49 million for the first time since December 2020 and posted its 11th straight decline.
Taking a longer-term look at the 12-month moving average for Housing Starts, it remains in its well-established downtrend. As shown in the chart below, prior periods where this average peaked and started to rollover usually preceded recessions.
A comparison of Housing Starts versus the performance of homebuilder stocks is a perfect example of how the market tends to trade in advance of events. Just as homebuilder stocks peaked four months ahead of the peak in Housing Starts, they bottomed five months in advance of the recent low in the three-month moving average.
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Chart of the Day – Nasdaq Extremes Relative to the 200-Day Moving Average
Dow Goes for Eight
Equities are again showing a positive tone today with each major US index trading higher, including a 0.44% gain from the Dow as of this writing. That puts the Dow on pace for its eighth straight daily gain. Looking throughout the index’s 100+ year history, such a winning streak is not particularly uncommon, however it has been a few years since such a run has been observed. Assuming the Dow finishes the day higher, it would be the first 8-day winning streak since September 2019. While plenty of streaks ended at eight days, there has been precedence of the Dow continuing its streak for even longer. That includes a near-record streak of 12 days recently in December 2017 or the record streak of 13 days in early 1970.
In the chart below, we show the performance of the Dow over the first 8 days of each winning streak that has gone for eight or more trading days throughout the index’s history. The Dow has risen 4.2% during the current stretch, which is essentially right in line with the past couple streaks from 2018 and 2019. That is also a little below the historical average of just under 5% (median: 4.6%).
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Bespoke Baskets Update — July 2023
Bespoke’s Morning Lineup – 7/19/23 – Cracking the Code
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“Quick decipherment is very important to avoid the systematic errors which invariably arise from prolonged reflection.” – Jean Francois Champollion
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224 years ago today a group of scholars who accompanied Napolean on his invasion of Egypt discovered a large slab of rock with hieroglyphic writings and other inscriptions in ancient Greek. They had no idea what the inscriptions meant, but they figured it had some significance, so they loaded it into their wagon and took it back to Europe with them. For years after, they tried to figure out what the writings meant, but it wasn’t for another 23 years before French philologist Jean Francois Champollion was finally able to decipher the “riddle of the Sphinx” and unlock the meaning of ancient Egyptian writings.
The Rosetta Stone may have taken decades to translate so that Europe’s ‘enlightened’ could fully understand its meaning, but investors have been trying for centuries to fully understand and translate the messages of financial markets, and for all the time, talent, and treasure, that has been spent trying to separate the noise from what’s really important, most investors are nowhere closer to understanding Mr. Market’s riddle now than when they first started…and anyone who is, isn’t telling!
One riddle a lot of investors can’t figure out this summer is what’s behind the levitating market. The S&P 500 has closed at overbought levels (1+ standard deviations above its 50-day moving average) every day since Memorial Day and the Nasdaq has been overbought since Cinco de Mayo. For ‘enlightened’ investors who had it all figured out that the ‘bear market rally’ from the October lows was going to reverse itself in the wake of, among other things, the bank failures in March and the debt ceiling deal in June, it’s back to the drawing board.
Futures are modestly higher this morning, and the weaker-than-expected Building Permits and Housing Starts report didn’t do much to derail the positive tone. Both Building Permits and Housing Starts came in weaker than expected, missing estimates by 46K and 60K, respectively. Not only that but May’s big 231K beat was revised lower by 72K.
The pace of earnings has been moderate and results relative to expectations have been mixed. Three notable EPS misses this morning have come from Financials like First Horizon (FHN), Goldman Sachs (GS), and Northern Trust (NTRS).
Besides trading at short-term overbought levels since early May, the Nasdaq 100 is also trading at a pretty extreme reading relative to its longer-term 200-day moving average. As of yesterday’s close, the index traded more than 26% above that level which is the most stretched reading in this indicator since September 2020 coming out of COVID, and before that late 2009 coming out of the Financial Crisis. While they were more common prior to 2000, these kinds of extremes don’t happen too often. Try to decipher the meaning of that one.
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Homebuilders Hopeful
Housing activity has been somewhat muted given a dearth of inventories, but the lack of available existing supply has been positive for homebuilders. The NAHB’s monthly survey of homebuilder sentiment moved higher in July for its seventh straight monthly gain. Even after the rebound, the current level of 56 represents just a 13-month high and is below the range of readings from the few years prior to the pandemic and historic readings in two years before the pandemic.
The improvement in the headline index was primarily driven by increases in present sales and traffic. Geographically, the Midwest and South saw some modest softening in sentiment whereas the West and Northeast were much more impressive. The Northeast in particular saw an 8-point jump which ranks in the top decile of all monthly moves on record and brings the index into the top quartile of historical readings.
Although homebuilder sentiment has been rebounding solidly, it pales in comparison to the strength of homebuilder stocks. Proxied by the iShares US Home Construction ETF (ITB), homebuilders have continued to set new 52-week highs on a near-daily basis. The ETF has now risen 56% over the past year and has continuously traded in overbought territory (currently extremely overbought with a price more than 2 standard deviations above its 50-DMA).
Homebuilder earnings are also on deck in the next couple of weeks. Below, we show a screenshot from the Earnings Explorer function of our Custom Portfolios. As shown, all but three S&P 1500 Homebuilders are due to report through the first week of August. Of those, a vast majority have averaged positive moves on earnings.
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Chart of the Day – New Lows in High Yield Spreads
Bespoke’s Morning Lineup – 7/18/23 – Positive Earnings, Mixed Economic Data
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“Hidden talent counts for nothing” – Nero
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There’s not a whole lot going on in financial market trading this morning. Earnings news from the likes of Bank of America (BAC), Morgan Stanley (MS), and Schwab (SCHW) have been better than expected (as has been the case with every other report this morning), but that good news has been offset partially by a sales miss from PNC (the only sales miss this morning). Trading in Europe has also been subdued with modest gains after a mixed session in Asia.
The economic calendar is jammed packed this morning with Retail Sales (8:30), Industrial Production and Capacity Utilization (9:15), and Business Inventories and Homebuilder Sentiment at 10:00. After the close, the earnings calendar remains quiet, but there will be reports from Interactive Brokers (IBKR), JB Hunt (JBHT), and Omnicom (OMC).
As the market’s rally has started to broaden out, we’ve also seen a modest expansion in the daily percentage of stocks hitting new highs. The top chart below shows the net daily percentage of S&P 500 stocks hitting 52-week highs, and while the recent peaks in this reading aren’t necessarily strong on a long-term relative basis, they are higher than any other readings in the last year. We wouldn’t go so far as saying that it’s a broad rally, but it’s also much more than just seven stocks too.
One interesting sector is Financials. Given the trouble in the bank stocks during the first quarter, the sector has fallen way out of favor among most investors. Even this sector, though, has started to see an expansion in the percentage of stocks hitting 52-week highs and just recently saw the highest percentage in a single day in at least the last 12 months. Not only has the sector seen more of its components hitting new highs, but it has also routinely closed at its highest levels since March 9th (when SIVB started to implode) over the last two weeks.
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Employment Back and Prices Sliding in New York
The economic calendar is having a quiet start to the week with only the Empire State Manufacturing Survey from the New York Fed released today. The headline reading was expected to fall from an expansionary reading of 6.6 back into contraction in July. Instead, the index remained in positive territory at 1.1 which implies the New York region’s manufacturing economy grew modestly in July.
Albeit growing, activity is weak with this month’s reading registering in the 28th percentile of all months in the survey’s history dating back to 2001. The month over month decline was driven by broad weakness across categories. In fact, only three moved higher month over month: New Orders, Number of Employees, and Average Workweek. Expectations indices similarly weakened with most categories at far more depressed levels by historical standards. Of the twelve categories, eight are in the bottom decline of readings.
As noted above, New Orders stood out as one of the only readings to move higher. At 3.3, that reading is far from elevated or at a new high by any stretch. Meanwhile, Shipments indicated a major moderation compared to last month. In June, Shipments registered a reading of 22, which was surprisingly elevated relative to other categories. Falling 8.6 points month over month, now that index is more in line with other areas.
The two other notably strong readings were with regards to employment. Since the end of the first quarter, Number of Employees and Average Workweek have both been making their way higher with the July readings tipping back into expansionary territory. In other words, on a net basis, businesses are once again hiring and increasing hours worked. However, businesses have also appeared to have slowed down their expected spending plans for technology and capex.
On the back of cooling inflation data last week that sent stocks higher in hopes of a more dovish monetary policy, the Empire Manufacturing survey also provided a cheery look into the region’s inflation picture. Both Prices Paid and Prices Received have continued to fall dropping over 5 points month over month resulting in new new lows for each one. With regards to Prices Paid, the index is now at its lowest level since August 2020. Prices Received is similarly at the lowest reading in three years.
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Our daily research consists of a pre-market note, a post-market note, and our Chart of the Day. These three daily reports are supplemented with additional research pieces covering ETFs and asset allocation trends, global macro analysis, earnings and conference call analysis, market breadth and internals, economic indicator databases, growth and dividend income stock baskets, and unique interactive trading tools.
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