Bespoke’s Morning Lineup – 1/26/24 – Weak But Improving Tone
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“You have to work hard in the dark to shine in the light” – Kobe Bryant
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
It was looking like a rough end to the week late last night and into this morning as futures dipped following some weak earnings after the close yesterday from the likes of Intel (INTC), KLA-Tencor (KLAC), and Visa (V), but it started to show some improvement as Europe opened for trading. Right now, S&P 500 and Dow futures are flat to slightly lower, while Nasdaq futures are a bit further below the flatline due to the 10% pre-market decline in shares of Intel (INTC). In the energy space, crude oil is down about 1% after a rally stalled out at its 200-DMA yesterday.
The week’s last batch of economic data included Personal Income and Personal Spending, PCE Deflator (all at 8:30), and Pending Home Sales at 10 AM. Personal Income was right in line with estimates (0.3%), and Personal Spending came in stronger than expected (0.7% vs 0.5%). On the inflation front, the headline PCE Deflator was right in line with forecasts on a m/m and y/y basis. On a core level, the m/m reading was inline (0.2%), but the y/y reading was better than expected, falling to 2.9% versus forecasts for an increase of 3.0%. Net net, this data continues to a backdrop of growth with receding inflation.
Heading into the last four trading days of January, the S&P 500 is up 2.6% YTD which is the strongest start to a year since…last year when the S&P 500 rallied over 5% at this point in the year. In the charts below, we summarize the performance of the S&P 500 during the last four trading days of January since 1953 (which is the first full year of the NYSE five-trading day week in its current form). As shown, in years in which the S&P 500 was down over 2%, median returns for the rest of the month were a gain of 0.14% with positive returns 55% of the time. In the 11 years when the S&P 500 was down less than 2%, the median return in the last four trading days was a decline of 0.27% with gains just 36% of the time. In the years when the S&P 500 was positive to start the year, though, January tended to finish off the month on a more positive note with gains over two-thirds of the time.
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Blue Chip High Fliers and Dogs
Within the blue-chip S&P 100 (the largest stocks in the US), there are currently ten stocks that are up at least 40% over the last two years and 20% over the last three years. Below is the list of these names sorted alphabetically. For each stock, we also include its market cap, its dividend yield (if it pays one), its next-year estimated P/E ratio, and of course, its 2-year and 3-year percentage change.
On average, these ten stocks have a dividend yield of around 1% and a forward P/E ratio of 27.9. Over the last two years, they’ve averaged a gain of 86.5%, while they’ve rallied an average of 123.7% over the last three years. While stocks like Advanced Micro (AMD), Broadcom (AVGO), and NVIDIA (NVDA) made the list, it’s not all Tech stocks. It also includes names like Costco (COST), General Electric (GE), Eli Lilly (LLY), and T-Mobile (TMUS) made the list as well.
While the NVDA’s and Eli Lilly’s (LLY) of the investment world have been on fire recently, there are also plenty of well-known blue-chip stocks that have been beaten down over the last few years. You can probably name a few off the top of your head, but below is a list of the eleven stocks in the S&P 100 that are down at least 20%+ over each of the last two and three years. This list is a who’s who of big-name companies that have been taken to the woodshed since early 2021. It includes names like Disney (DIS), General Motors (GM), 3M (MMM), Nike (NKE), Pfizer (PFE), Target (TGT), Tesla (TSLA), and Verizon (VZ).
A good thought exercise is to decide where you would rather put new money to work in the equity market right now. Would you go with the ten big winners above that have seemingly endless upside momentum, or would you rather go with the beaten-down blue-chips below that can’t seem to get out of their way? Of the two baskets, which do you think will outperform over the next year; the next two years; or the next three? We have our own opinion on the topic here at Bespoke, but the basket you decide on probably speaks volumes about the type of investor you are as well.
Shorts Keep Falling
After the close yesterday, the first update on short interest readings of the new year with data through January 12th was released. As we noted at various points earlier this year, breaking down the Russell 1,000 into deciles shows that by far the worst performing stocks this year have been those that entered the year with the highest short interest levels. As shown below, the 10% of stocks in the Russell 1,000 that began the year with the highest short interest as a percentage of float are down an average of 8.18% YTD. That compares with an average gain of 1.11% for the decile of the least shorted names. While all other deciles have also fallen so far to kick off the new year, their losses are not nearly as large; mostly in the low single digits (across all Russell 1,000 members, the average year to date decline is currently 1.6%).
Breaking things down by industry further illustrates the story. As shown in the first chart below, the industry groups that currently have the highest degrees of short interest through mid-month are retailers, autos, and durables and apparel stocks. Those are also three of the sectors that have averaged some of the largest declines year to date. In fact, autos is down the most with an impressive 11% decline.
Meanwhile, insurance, utilities, and banks typically have the lowest levels of short interest. Performance is a bit more mixed here, but the group with the lowest average short interest reading, Insurance, is also the industry whose stocks have averaged the largest move higher so far this year. In fact, it is actually one of the few areas of the market to be sitting on a gain. As for Utilities, while also possessing low levels of short interest, the average stock has posted a large 5.3% decline.
Between this first short interest report of the year and where things stood at the end of last year, the average Russell 1,000 member did in fact see short interest rise marginally. In the table below, we show the 25 members that saw the largest increases. At the top of the list is recent IPO Instacart/Maplebear (CART). At the end of last year, short interest was already elevated at almost 29% of float. Since then, shorts have continued to pile in. Now over 40% of float is short, the most of any Russell 1,000 member. Ironically, in spite of the general underperformance of highly shorted names year to date, CART is actually headed into the final days of January up 5.67% in 2024. The next largest increase came from mobile game maker Playtika (PLTK). Short interest for this company has risen from just under 9% up to 15.4%. Unlike CART, this stock has experienced worse performance this year with a 13.5% decline. Of the list below, that is some of the weakest performance albeit there are far worse declines and higher current levels of short interest. Lucid (LCID) and Medical Properties (MPW) have seen declines of 30%+ YTD and more than a quarter of their float is shorted.
Chart of the Day – China’s Lost Decade
Bespoke’s Morning Lineup – 1/25/24 – The “Cullinan Six”
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“No pressure, no diamonds.” – Thomas Carlyle
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
The market is currently digesting the economic equivalent of a Thanksgiving dinner in terms of the sheer quantity of reports. Like Thanksgiving, most of the platters were good. Headline GDP came in much higher than expected, inflation readings were in line with or better than forecasts, and Durable Goods were weaker than expected at the headline level but stronger after stripping out transportation. The only “yams” on the table were jobless claims, but even they weren’t that bad as both initial and continuing jobless claims came in only modestly higher than forecasts. In reaction to the reports, futures have rallied as the S&P 500 is indicated to open up by about 35 basis points versus just modest gains ahead of the data.
119 years ago today, in a mine 18 feet underground, workers came across what was and still is the largest diamond ever discovered. Weighing in at 1.33 points, the 3,106-carat Cullinan diamond was immediately sold to the local government who then gifted it to Britain’s King Edward VII. The stone was ultimately cut into nine major stones (the Cullinan IX) and dozens of smaller ones, but the two largest, at 530 and 317 carats, respectively, remain on display in the Tower of London along with the other crown jewels.
The equity market’s version of the Cullinan IX is the Magnificent Seven, and while TSLA has had some trouble of late, the remaining “Cullinan Six” of Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), Nvidia (NVDA), and Meta Platforms (META) have continued to hum. Through yesterday’s close, the stocks were collectively 22.5% above their 200-day moving averages (DMA) with AAPL the closest at 7.1% and NVDA a seemingly outrageous 43.3% above its 200-DMA. While that may sound crazy, back in the summer NVDA was trading at more than double its 200-DMA.
Putting them all together, the chart below shows the daily historical market cap of the “Mag Six” stocks since the start of 2023 along with the 200-DMA. As of Wednesday’s close, the “Mag Six” had a combined market cap of $12.02 trillion which was more than $1.85 trillion above its 200-DMA. To put that in perspective, that’s the equivalent of over 65% of the Russell 2000’s entire market cap, and if just those six stocks were to experience a correction and pull back to their 200-DMA, it would knock about 5% off the price of the S&P 500.
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Chart of the Day – The Election Year Begins
Sliding Down on the Market Cap Ladder
There are any number of ways to illustrate the disparate performance of individual stocks based on market cap this year, but the chart below really drives the point home. The blue lines show the YTD performance of each stock in the S&P 500 starting with the largest in terms of market cap on the left all the way down to the smallest companies on the right. YTD, the second-best performing stock in the S&P 500 – Nvidia (NVDA) – is also the fifth largest company in terms of market cap. Besides NVDA, the only two other stocks up at least 15% YTD are Palo Alto Networks (PANW) and Juniper (JNPR). While just three stocks are up over 15%, seven are down over 15%, including Archer Daniels Midland (ADM) and Boeing (BA) which is down nearly 19%.
While the blue line shows the performance of the individual components, the red line shows the rolling 20 stock performance where the leftmost point on the line represents the performance of the 20 largest stocks in the S&P 500. As shown, the group of 20 stocks with the strongest YTD performance this year is right near the top of the market cap list (stocks 5 through 24 which includes NVDA and AMD). While there are exceptions, the main trend this year has been that the further you move down the market cap ladder, the weaker the YTD returns. The 20 smallest stocks in the S&P 500 also have the worst performance of any other point in the series. Not only that, but 17 of the 20 smallest stocks in the S&P 500 are down YTD, including each of the smallest sixteen.
Breaking the S&P 500 into deciles based on market cap further illustrates this pattern. While 78% of the 50 largest stocks in the S&P 500 are up YTD with an average gain of 3.65%, less than a quarter of the 50 smallest stocks in the index are up YTD, and the average performance of those 50 stocks is a decline of 4.18%. If 2024 is going to be the year of broadening, it’s getting off to a slow start.
Nonstop Nasdaq
The mega-cap Tech-heavy Nasdaq 100 is up nearly 1% today as of this writing, which leaves it up 4.5% already in 2024. It’s been about a month now since the Nasdaq 100 took out its prior all-time highs from late 2021, but as shown in the chart below, the index is already 5.9% above those prior highs as the breakout continues.
Two more noteworthy stats:
The Nasdaq 100 is now up 64% during its current bull market that began on 12/28/22.
And, since the COVID Crash low that the Nasdaq 100 made on 3/20/20, the index is up a whopping 150%.
Below is a table showing historical bull markets for the Nasdaq 100 since the index came to be in the mid-1980s. The current bull market is its 16th using the standard 20%+ rally definition, and this bull is now right at the median when it comes to gains and length. As shown, the current bull has seen a gain of 64.3% over 392 days. The median gain for all Nasdaq 100 bull markets is a gain of 64.5% over 407 days.
When it comes to the average bull market, however, the current bull has a ways to go. Because of two very lengthy bulls that saw 600%+ gains in the 1990s and 2010s, the average bull market looks much different than the median bull market. As shown in the table, the average Nasdaq 100 bull market has seen a gain of 163.2% over 799 days — which is basically double the length and 100 percentage points stronger than the median bull.
Bespoke’s Morning Lineup – 1/24/24 – Tech Stays in the Driver’s Seat
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“The best argument against democracy is a five-minute conversation with the average voter.” – Winston Churchill
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
The rally continues to roll this morning as positive earnings from Netflix (NFLX) and ASML drag the rest of the market up along with it. Even with the positive tone from NFLX, there are several high-profile duds this morning as DuPont (DD), Kimberly Clark (KMB), and Texas Instruments (TXN) are all down either in reaction to earnings or due to lowered guidance. Besides the earnings news, China cut interest rates by 50 bps in a somewhat surprising move.
In terms of economic data, PMI Manufacturing readings out of major European countries topped estimates even as they remain in contraction territory. Here in the US, mortgage applications increased 3.7% last week, and we’ll get flash PMI readings for the Manufacturing and the Services sector later this morning.
Following yesterday’s gain, the S&P 500 has risen in each of the last four trading days notching three all-time closing highs in the process. The index is now up 2% YTD, in what has been a rally driven by Technology and Communication Services which are both up over 5% YTD. Besides those two sectors, Health Care is the only other one outperforming the market. On the downside, six sectors are lower YTD, and five of them are down at least 2% on the year. It’s somewhat interesting to note that of the eleven sectors, the only two that are up or down less than 1% are Consumer Staples (+0.75%) and Industrials (-0.63%).
There’s quite a bit of disparity in sector performance among large caps, but in the small-cap space, performance is more uniform, but unfortunately, it’s to the downside. The S&P 600 is down 2.3% YTD and all but three sectors are down at least 2%, including Energy (-6.2%), Utilities (-4.2%), and Consumer Discretionary (-3.3%).
The lower chart shows the YTD performance spread between large-cap sectors and their small-cap peers. Sectors where there has been the largest disparity in favor of large caps are Communications Services and Technology. These are also the two sectors that have the largest concentration of mega-caps, and that illustrates how even within the large-cap space, performance is centered towards the companies with the largest market caps. While large caps have largely outperformed small caps YTD, there have been a couple of exceptions. As shown in the chart, in both the Real Estate and Materials sectors large caps have underperformed their smaller-cap peers.
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S&P 500 Percent of Time at New Highs
The S&P 500 is flat on the session today as of this writing, but that doesn’t take away from the fact that it has traded at record highs in each of the past three sessions. As shown below, the S&P 500 has seen several significant drawdowns in its history, but it has always eventually recovered, and it has traded at or within 1% of an all-time high just as often as it has been down 20%.
Below we break down the percentage of time the S&P 500 has traded within various ranges of an all-time high (ATH) since 1952 when the five-day trading week began. This week joins the 7% of days that have seen the S&P 500 hitting record highs. That is the third largest share behind the 12% of days in which the index has been within 1% of a record high and the 8.5% of days when it is 1% to 2% below a record close. Expanding out a bit more, the S&P 500 has spent 44% of trading days since 1952 within 5% of an ATH compared to just 40.5% of the time when the index has been down 10% or more from an ATH.
