Bespoke’s Morning Lineup – 12/7/23 – Bad Gas
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“With confidence in our armed forces with the unbounding determination of our people we will gain the inevitable triumph so help us God.” – Franklin D. Roosevelt
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’s been a mixed start to the week for indices like the Nasdaq and Russell 2000 while the S&P 500 has been down for three straight days. This morning, futures are flat with a slight positive bias. Overnight in Asia, stocks traded lower on reports that the BoJ is gearing up for rate hikes. That led to a spike in yields and the yen and a decline of over 1% in the Nikkei. In Europe, the declines haven’t been as steep as GDP for the region declined 0.1% which was in line with forecasts, although Industrial Production in Germany unexpectedly declined.
Less than three months ago, the price of a gallon of gas in the US was pushing $3.90 and was up 21% on the year, and the price of crude oil was near $95 per barrel. Since then, crude oil prices have tumbled below $70 per barrel (as of yesterday’s close), and a gallon of gas is $3.20 which is down 17.5% from its peak and down slightly on the year. Next week’s CPI report on Tuesday and the subsequent FOMC report should be interesting.
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“big” Drops in Treasury Yields
Relative to where they were just over a month ago, Treasury yields are down sharply as bond prices have rallied. Earlier today, we posted on X that the iShares 20+ Year Treasury ETF (TLT) has nearly fully erased what was a 14% YTD decline as of 10/19 on a total return basis. The Treasury rally can also be seen loud and clear in the chart of the 10-year yield below where yields have gone from just over 5% to just over 4.1%.
Although yields are down sharply, the current decline in yield for the 10-year still doesn’t rank as the largest since the Fed first started hinting at higher rates in late 2021. In both August 2022 and April 2023, the 10-year yield experienced a drawdown of more than 90 bps, although neither of those declines in yield reached triple digits (one full percentage point). For this current rally in Treasuries to translate into the largest decline of the current cycle for the 10-year, it would need to fall to 4.05%, or seven basis points (bps) from current levels.
Chart of the Day: Retail Investors Back Down and S&P 500 Flies
Bespoke’s Morning Lineup – Weak ADP, Strong Russell 2000
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.
“It is not heroes that make history, but history that makes heroes.” – Joseph Stalin
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Futures have caught a bid this morning following overnight strength in Asia and also in Europe this morning. The just-released ADP report didn’t do anything to alter that positive mood either, as the headline report came in modestly weaker than expected (103K vs 128K). Non-farm productivity and Unit Labor Costs are just hitting the tape as we type this. It looks like Productivity was higher than expected (5.2% vs 4.9% estimate) and the best since Q3 2020 while Unit Labor Costs fell more than expected (-1.2 vs -0.9%).
Outside of equities, mortgage applications were up for the fifth week in a row, gold is slightly higher, crude oil is slightly lower, bitcoin is above $44K, and Treasury yields have a positive bias with the largest moves at the shorter end of the curve.
After a two-day rally north of 4%, the Russell 2000 gave back about 1.4% on Tuesday but still managed to close above both its 50 and 200-day moving averages for the third day in a row – something we haven’t been able to say since early August.
Whenever a major equity index trades at ‘extreme’ overbought or oversold levels (two or more standard deviations above or below the 50-DMA), it tends to be a sign of overwhelming bullishness or bearishness in the market. These types of readings are mutually exclusive and rarely occur close to each other. The last six weeks for the Russell 2000 have been an exception to that norm. As shown in the trading range chart below, after closing at extreme oversold levels on 10/27, the Russell surged over the next five weeks and closed at extreme overbought levels last Friday (12/1). With just 24 trading days separating the most recent extreme oversold reading from the first extreme overbought reading, it was the quickest that the Russell shifted between the two ranges since June 2021.
In the Russell 2000’s history since 1978, there have only been 16 other times that it went from the oversold extreme to the overbought extreme in 30 trading days or less, and in today’s full post for subscribers, we provided an analysis of the index’s performance following these prior periods. Sign up for a two-week trial to Bespoke Premium to view the full report.
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Sideways
The S&P 500 Equalweight index, which gives each stock in the index an equal 0.2% weighting, is currently trading at the same level it was at back in April 2021. Investors used to getting the standard 8-10% per year in the US stock market have gotten far less than that over the last two and a half years.
Below is a five-year price chart of the S&P 500 Equalweight index showing the sideways range it has been in for the last few years.
The spread between the S&P 500 Equalweight’s highest and lowest closing price over the last three years currently stands at 31%. As shown below, 31% is an extremely low 3-year high/low range; well below the average of 75.5% seen across all rolling 3-year periods going back to 1992. The tight spread now, though, comes after a period in which the high/low range had gotten well above its historical average. And the pendulum continues to swing…
Gamers Now Play the Waiting Game
Take-Two Interactive’s (TTWO) subsidiary, video game publisher Rockstar Games, has created some buzz in the past 24 hours. Originally scheduled for this morning, the company released the first trailer for the next installment of their popular Grand Theft Auto (GTA) series early last night after the video was leaked on X (formerly Twitter). The game will be set for a 2025 release and will be titled Grand Theft Auto 6 (GTA VI). The trailer has already broken the record for the most views of a YouTube video in under 24 hours (as of this writing it 77.3 million), and mind you, it hasn’t even been a full 24 hours since the video was put up.
There is a lot of interest in GTA VI, especially seeing as the previous installment from over a decade ago ranks as the second best-selling video game of all time; grossing over a billion dollars in sales in the first three days of its release. Additionally, the upcoming game follows the publisher’s last major title release, Red Dead Redemption 2, in 2018 which has earned the rank of the eighth best-selling game of all time. Despite any excitement from gamers, investors have been less receptive to TTWO’s trailer as the stock is trading down 1.7% today. Below we show the performance of the stock surrounding other debuts of Rockstar Games’ trailers and title releases going back to GTA: San Andreas in 2004 (this was the earliest example of a debut trailer for a game that we could find).
The GTA VI trailer targeted a 2025 release date for the game, which follows the formula of other recent releases with a roughly two-year lag time between a trailer and a game’s debut. As shown, performance in the year following a trailer debut has been somewhat mixed, but TTWO has often traded higher between a Rockstar game’s first trailer and when the game was released. So with the trailer out, investors and gamers alike will now be playing the waiting game until 2025.
Chart of the Day – SOX Sucking Wind
Bespoke Best of Breed Basket
Bespoke’s Morning Lineup – 12/5/23 – We’ll Drink to That
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.
“Once, during Prohibition, I was forced to live for days on nothing but food and water.” – W.C. Fields
In case you missed it yesterday, here’s a clip to yesterday’s segment from CNBC Overtime which discussed the broadening of the market rally. CNBC Overtime – 12/4/23
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’s looking like another weak start to the trading day following a weak overnight session in Asia after Moody’s lowered its outlook for China’s credit rating citing rising debt levels. Interest rates are lower as the 10-year yield is on the verge of breaking back down through 4.20%. Where it ends the day, though, will be dictated by the upcoming JOLTS and ISM Services reports at 10 AM.
90 years ago today, Utah ratified the 21st Amendment to the Constitution, and the US thereby achieved the three-fourths majority needed to officially repeal the 18th Amendment and end Prohibition on a national basis. While alcohol was technically illegal in the United States for the prior 13+ years, it was always part of the US culture and social scene, and its illegality only gave organized crime groups a wide open field to operate in. That ended with the 21st Amendment, although even with alcohol being legal on a national basis, several states maintained the Prohibition era through state temperance laws. Mississippi was a dry state for another 33 years before it finally ended Prohibition in 1966. We can only imagine what an Ole Miss tailgate would look like if Prohibition was still in place, but probably not this.
Regarding alcohol, we thought it would be a good time to check out how stocks in the sector have been faring lately. Overall, performance has been mixed. Molson Coors (TAP) has been the best performer this year, gaining more than 20%, but it’s down about 10% from its summer high. Along with TAP, other beer stocks have seen modest YTD gains this year. Even the embattled Anheuser-Bush (BUD) has seen a sharp rebound in the last month as the company’s Bud Light brand has been spending big on brand rehab inking deals with Ultimate Fighting (UFC) and NFL legends Peyton Manning and Emmitt Smith. While beer stocks have had a decent year, companies more involved in the spirits business, like Diageo (DEO) and Brown-Furman (BF/b) are both nursing hangovers.
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New Highs in 2024*
The equity market (and most other parts of the financial universe) has been in rally mode for about five weeks now, and while it would be greedy to think that the S&P 500 could rally the 4% needed between now and year-end to get back to its prior highs from the start of 2022, on a total return basis, the market is knocking on the door of new all-time highs. As shown in the chart below, the total return index is within 1.1% of its prior all-time high from 1/3/22. In addition to nearing its prior highs, the pattern of the S&P 500 looks a lot like a cup and handle which technicians consider to be a bullish formation.
For all the weakness that we’ve seen in the US Treasury market over the last couple of years, high-yield bonds have fared much better. As shown in the chart below, the iBoxx High Yield Total Return Index, which is the underlying index of the popular ETF (HYG), came into the week just 2.5% below its prior all-time high from 12/28/21. That’s impressive in its own right, but even more noteworthy when you consider the fact that long-term Treasuries (20+ year maturities), long considered the ‘safest’ area of the fixed income sector, or all financial assets for that matter, are still down over 40% on a total return basis from their Summer 2020 peak.
