Morning Lineup – ADP.U.
The bulls are out again this morning, but an ADP Private Payrolls that simply stinks has dampened the mood. While economists were expecting the headline reading to come in at 185K, the actual reading was just 27K. That was the weakest monthly print since March 2010 and the third weakest report relative to expectations since at least 2006.
Outside of the US, the World Bank lowered its global growth forecast down by 0.3 percentage points to 2.6% and said that risks to the global economy are firmly on the downside. On a similar note, the IMF lowered its growth forecasts for China slightly just as the May Services PMI for that country came in lower than expected. In Europe, Services PMI data was slightly better than expected coming in at a level of 52.9 compared to expectations of 52.5. Even if the economic outlook is cloudy, investors have been encouraged by the belief that the Fed is ready to act if needed. Whether the market and FOMC are both on the same page with regards to what “needed” means, though, is up for debate, but more data like this morning’s ADP report will likely move the FOMC closer to acting.
Please click the link below to read today’s Bespoke Morning Lineup for our take on what the rates markets are pricing, a recap of services sector PMIs, and just as important the latest data on Semiconductor sales.
As mentioned above, the ADP Private Payrolls report just came in weaker than expected, missing consensus expectations by over 150K. Using our Economic Indicator Database, we found that this month’s report was the weakest relative to expectations since January 2009 and just the third time since 2006 that the report has missed expectations by more than 100K.
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Equities Bounce Back Across Sectors
Equities roared back to life in Tuesday’s session as the major indices regained all of Monday’s losses and then some with the S&P 500 seeing its second strongest day of the year. Breadth was pretty strong among sectors as all but one, Real Estate (XLRE), finished the day higher. The Technology Sector (XLK) rose the most, surging 3.34%. This is only one day after a rout of tech giants (like Alphabet (GOOGL) and Apple (AAPL) in response to government investigations) dragged on XLK to finish the day just below the 200-DMA. Names like Facebook (FB) similarly dragged on the Communication Services sector (XLC) for the same reasons, but these losses were mostly made up for on Tuesday. Semis were a major factor in Tuesday’s tech rally as names like Advanced Micro Devices (AMD) and Nvidia (NVDA) rose as much as 7%. Materials (XLB) were the second best performing sector of the day as breadth in the sector was very strong with DowDuPont (DD) being the only S&P 500 Materials stock to be lower at Tuesday’s close. After gapping up to just above the 200-DMA, XLB rose further taking out the 50-DMA and finishing the day 2.81% higher. In addition to taking out the moving averages, XLB also broke out of its recent short term downtrend in dramatic fashion. Industrials (XLI) similarly saw a break out of its downtrend. Other cyclicals, the Financial Sector (XLF) and Consumer Discretionary (XLY), also performed well with both rising 2.71%. XLF’s chart has a similar pattern to XLB with Tuesday’s opening price sitting at the 200-DMA and finishing above the 50-DMA while also breaking out of its downtrend.
While cyclicals were bid up, defensives underperformed. The Consumer Staples sector was the best performing of the defensives as it rose 0.91%. Utilities (XLU) also managed to finish in the green, but it only rose 8.5 bps. Granted, Utilities finished well off of the day’s lows. Intraday, the sector had briefly dipped all the way below the 50-DMA. Finally, as previously mentioned, Real Estate (XLRE) was the only sector to move lower on the day, finishing down 0.55%. Similar to XLU, Real Estate finished off of the day’s lows near the 50-DMA. Start a two-week free trial to Bespoke Institutional to access our interactive Chart Scanner tool and much more.
The Closer – Unsustainable Surge, Fed vs Market, EM Rally, Auto Results – 6/4/19
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Looking for deeper insight on markets? In tonight’s Closer sent to Bespoke Institutional clients, we review the internals of today’s surge in equity prices and evaluate how sustainable this rally could be given breadth and price action in credit markets. Next, we provide our analysis of how the disconnect between the market and the Fed in regards to rate cuts in the near future. We then update our Bespoke EMFX Index which has popped higher. We finish with a look at the bounce in automakers and today’s Factory Orders release.
See today’s post-market Closer and everything else Bespoke publishes by starting a 14-day free trial to Bespoke Institutional today!
B.I.G. Tips – Treasury Yields Coming Off Extremes
We’ve just published a B.I.G. Tips report that discusses the recent plunge in 10-year yields and provides a look at how stocks and bonds have followed through in similar periods where the yield in the 10-year reached extremely low levels. To put the recent move in perspective, levels like Monday’s have only been recorded on thirteen prior days in the last 30 years! To read this report and access all of our other reports, start a two-week free trial to Bespoke Premium!
Severe Off-Season Earnings Weakness
Using our Earnings Explorer tool, we did a quick check today on how companies that have reported during this “off-season” have done. There have been 141 earnings reports since May 17th when the first quarter reporting period ended. Of these 141 reports, 71% reported stronger than expected EPS, while 62% reported stronger than expected sales. Only 6% have raised forward guidance while 11% have lowered guidance.
In terms of how company share prices have reacted to their reports this off-season, it has essentially been a bloodbath. The average stock that has reported has fallen 1.31% on its earnings reaction day, which is the first trading day following its earnings report. (For companies that report in the morning, its earnings reaction day is that trading day. For companies that report after the close, its earnings reaction day is the next trading day.)
Our rolling 3-month beat rate charts still show downtrends. While the bottom-line EPS beat rate remains nearly 3 points above its historical average, the top-line sales beat rate has recently dipped slightly below its average.
You can track the performance of individual stocks in reaction to earnings using our Earnings Explorer tool, but below is a list we pulled that shows the worst performing stocks in reaction to earnings since the “off-season” began on May 17th. Twenty-two of the 141 stocks that have reported this off-season have fallen more than 10% on their earnings reaction days. The list is littered with retailers like J. Jill (JILL), Canada Goose (GOOS), Abercrombie & Fitch (ANF), Foot Locker (FL), Kohl’s (KSS), Lowe’s (LOW), Urban Outfitters (URBN), and Nodstrom (JWN). Start a two-week free trial to Bespoke Institutional to unlock our Earnings Explorer tool and much more.
Bespoke Stock Scores — 6/4/19
Chart of the Day: Interest Rate Markets In Their Own World
As-of yesterday, the short-term interest rate market was pricing a 59% chance of a rate cut at the FOMC’s July meeting, a 75% chance of two cuts by December, and a 53% chance of three cuts by December. As a result, interest rate contracts and short-term bonds have exploded higher in price with two year yields down over half a percent in a bit less than two months. The explicit bet is that the FOMC will be forced to cut rates in response to rising uncertainty related to trade tensions and a weakening global economy, combined with risks of outright recession. In recent commentary, FOMC members have been much less sure about the negative sides of the outlook. One member of the FOMC (St. Louis Fed President James Bullard, the most dovish member of the committee and a regional bank President who has a history of outlandish lurches in commentary) has said verbatim that a cut may be warranted, but no other FOMC member has said anything close to that. Today, Fed Chair Powell said the FOMC will “act as appropriate to sustain the expansion” and is “closely monitoring” how trade developments impact the economy; that’s a long way from getting markets ready for an imminent cut! So the market is clearly being much more aggressive than the Fed. Why?
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May 2019 Headlines
“Internationals” Catch A Break
With the US dollar taking a breather in the last couple of days, our index of Internationals has caught a bid in the early going today as it attempts to stabilize from a drop of just under 10% since late April. For those unfamiliar with our Internationals index, using our International Revenues Database, we classify any S&P 500 company which derives more than 50% of their revenues from outside the United States as part of the Internationals index, while any S&P 500 company which derives more than 90% of their revenues in the United States is part of our Domestics index.
The chart below shows the performance of both indices over the last 12 months, and given the relative weakness of the rest of the world’s economy versus the US, our Domestics index has consistently outperformed the Internationals. Since late May, though, the gap really widened as Internationals fell sharply in response to heightened concerns regarding global trade and possible retaliation from China and other countries in response to US tariffs on imports. Through the early going on Tuesday, the Domestics index is up 7.9% over the last year and down less than 2.5% from its recent high. The Internationals index, meanwhile, is down 2.91% over the last year and nearly 10% from its high less than six weeks ago.
In the second chart, we show a comparison between the Bloomberg US Dollar Index and the performance spread between the Domestics and Internationals indices over the last year. Typically, when the dollar is strong, Domestics outperform the Internationals and vice versa. That’s exactly what we are seeing now, as both the Dollar Index and the outperformance of Domestics relative to Internationals are right near 52-week highs. Going forward, any signs this week from the litany of Fed speakers that they are coming around to the market’s view of cutting rates sooner rather than later would likely pressure the dollar and lead to a boost for the Internationals. We could be seeing some early signs of that today as the Internationals index is bouncing from very oversold levels and trading higher by 1.7% compared to a gain of just 0.8% for the Domestics. Choose one of Bespoke’s three premium subscription options for our most actionable research.
Trend Analyzer – 6/4/19 – Mid-Caps Bouncing
As US tech giants are put under the microscope with Facebook (FB), Alphabet (GOOGL), and Apple (AAPL) all now under investigation, the Nasdaq (QQQ) fell over 2% yesterday. These declines have brought it to the deepest oversold levels of all the major index ETFs. QQQ is also now down the most over the past 5 days having shed 4.51%. While every other ETF in this group is still also extremely oversold, mid-caps have begun to bounce off of these extreme levels. The Core S&P Mid-Cap ETF (IJH), Russell Mid-Cap ETF (IWR), and S&P MidCap 400 ETF (MDY) have all managed small gains over the past couple sessions and are outperforming their peers. IWR is perhaps the most interesting of these three as the past two session’s gains have come after the ETF found support at the 200-DMA. Additionally, it now sits with the largest YTD gain of 13.54% Start a two-week free trial to Bespoke Institutional to access our interactive Trend Analyzer and much more.
Turning over to commodities, the rout of oil has continued and the ETFs tracking oil are about as oversold as it gets in our Trend Analyzer. In the past week, the United States Oil Fund (USO) and DB Oil Fund (DBO) have lost 10.14% and 9.46%, respectively. While holding up slightly better, the DB Energy Fund (DBE) has also fallen considerably, down 8.2% in the same time. Along with the DB Commodity Index (DBC), these three all closed over 3 standard deviations from the 50-DMA. On the other hand, while equities have slid, gold has gotten bid up as the DB Gold Fund (DGL), Gold Trust (IAU), and Gold Shares (GLD) now all sit over 3% higher from last week. Each of these gold ETFs now sit deep into overbought territory. Another interesting point to make on gold is that this recent run higher has brought the metal out of its short term downtrend, but on a longer term it is still moving sideways. The DB Precious Metals ETF (DBP) and silver (SLV) have similarly seen strong gains of 2.77% and 1.97 %, respectively.
