May 29th
Tough day in the markets off the back of the Italian elections which caused bondholders to scramble for the exits. The market is fearful that Italy will leave the EU causing a significant sovereign debt crisis. While I “feel” but I don’t know, I think the risk of contagion of Italian debt defaults being triggered thus blowing up global banks and possibly the country itself is overblown. This is typical muscle memory and investor fears will always be accompanied with a shoot first ask questions later. Yes, the Italian bond market is the 3rd to 4th largest bond market, however, it only accounts for 2% to 3% of the total Global bond market.
I could imagine a scenario if no new news on Italy surfaces tomorrow that the index pierces through today’s low of 2,676 on the S&P 500. Then a little more panic unfolds to close up on the day. I do think the 10-year yield sitting at 2.77 will be short lived and will catch a bid. If we see another leg lower on the 10-year yield it will make the financials an interesting set up for a long trade.
May 21st
A decent rally across all indexes today off the back of the Treasury Secretary’s comments about the trade war was on hold. I believe the market smelled this coming over a week ago and has been firming up. Last week the markets saw Peter Navarro excluded from several high profile dinners/meetings with China, the market certainly saw that as an easing stance on the trade war.
As we said on May 17th, the market was starting to look constructive as the higher yields were starting to be absorbed and the rating value and strong buy to strong sell ratio were improving. However, my bullishness is rather muted and still wouldn’t be overallocated equities.
I don’t see why the S&P 500 cannot achieve 2,770 as we mentioned on May 10th. Although, until we get to 2,770, it will be hard to justify a break above that resistance point.
May 20th
Over the last 7 days, Macquarie, Morgan Stanley and Bank of America all had a similar note about peaking equity markets and the relationship to peaking treasuries. Here is a chart from Morgan Stanley. You can read the full article on Businessinsider here.
May 17th
Not too much to go over since May 15th. Let’s look at the most important factors I am looking at today.
- The 10 Year Yield is trading at 3.11% today as the Philly Fed and weekly jobless claims came in strong. The market certainly seems to be coming to grips of higher rates, but, eventually, there will be a level the market will not easily digest.
- VIX – is now back to 13.08 and the market seems a little complacent right here.
- The S&P 500 rating value is now .37, which it’s not that strong, it has been increasing.
- Market breadth is improving but still slightly but not that constructive.
- XLE broke above the last resistance level we discussed. $78.86 is a big resistance level a close above this level, the ETF will have $80.90 as the next resistance level. See new level below.
May 15th
Mid-day
The S&P 500 is currently down 25 handles, actually performing a little better than I would have expected. Then again, short bonds might be the biggest short we have seen in a decade, therefore, this is not a shock. However, when rates go up corporate cashflows decrease thus impacting earnings and forward EPS will need to come down. I don’t fall into the camp that equity allocations will be reduced to increase bond allocations. Bond investors and equity investors for the large part follow their mandates and don’t typically jump across allocations unless there is a very flexible multiasset class policy. Below is a monthly chart of the 10-year yield going back to 1994 and as you see the long-term downtrend has been broken (bearish for bonds).
Lastly, the last thing long only equity investors need is market pundits starting more negative headlines that both the economy and corporate America cannot handle higher rates with out defaults.
PreMarket
Rates are jumping this morning after economic data (Empire Manufacturing) much stronger (input prices). The 10-year yield is now sitting at 3.05% and should be a headwind today for equities. More concerning is the 10-year yield just broke above a 30-year descending channel. Click image to see the chart going back to 1997. As you can see the 10-year yield has been in a bear channel or conversely bonds have been in a 30-year bull market. The question is will this be the start of a larger leg higher in yields?
The bigger headwind now developing is now the 2-year treasury, yielding 2.575. Investors are getting low duration risk with a decent yield. This will compete with stocks sooner than later for investors who are getting tired of equity volatility and a range-bound equity market. I don’t think current yields on the 2 and 10 are at levels yet that would cause this scenario just yet. But today’s moves does cause equity investors pause.
May 10th
Mid Day Update:
As mentioned this morning today was the “Momentum of Truth” no pun intended. We currently have broken the downtrend and a close here will give the index a fighting chance to push towards 2,777. I rather not try to forecast any more than that, but a weekly close above 2,777 will send the index to the January highs of 2,847.
PreMarket
Ok, today could be the “momentum” of truth for the S&P 500 and the break out of the medium-term downtrend. If we get a close above 2,710, (I was looking for further confirmation of 2,718), there is a high probability we move 100 S&P points. Buy programs will come into bid the market and discretionary manager will feel left out and need to chase. CPI came in slightly less than expected easing inflationary concerns and helping the futures move up 7.5 handles premarket.
May 7th
Back on April 19th, we talk about XLE next resistance level was $75.44. Today we are sitting right there as oil breaches $70 a barrel. This is going to now get interesting as XLE failed twice at $77.66 in Dec 2016 and January 2018. Will the third time be a breakout?
May 4th
Into the Close
We have seen this game several times in 2018. News driven algos on a better or worse data keep buying or selling all day on better or worse wage inflation. This was purely what happened today, it was not Apple hitting all-time highs because all sectors participated and the semis weren’t that relatively strong.
Once again I am hopeful and I will be constructive on the S&P 500 once we can close above 2,718 that would allow the index to retest old highs. That is a large glass of water to swallow at this juncture.
PreMarket
Today the S&P 500 is rallying in my opinion off of the jobs number, while it missed slightly, maybe weather related. But the market is getting a relief rally that wage growth is not showing inflation.
Also, many technicians are referencing the descending triangle as you may be reading on blogs. This is an important formation because once it breaks out of this formation it will be an explosive move. The problem is it is not predictive and you have a 50/50% chance to either the up or downside.
My take is the market is waiting for confirmation on the following: 1.) trade with China 2.) Economic Growth domestic and Global 3.) Inflation / rates. I think at this juncture, earnings have already been digested and we have contracted almost 2 multiples from the peak. Once again, I am defensive until the S&P 500 can get back above 2,718.
May 3rd
MidDay
Not too much on a fundamental or news driven day. The S&P 500 came about 5 points from our 2,588.50 level and had a very impressive reversal to 2,633. Zero hedge report that the reversal in equities came as ” White House Economist Mark Calabria commented after the first day of trade discussions in China that he was “optimistic” and that US has “discreetly” given China a list of asks and that the day ended “pretty positive.”
Even if the index were to close green, nothing has changed.
PreMarket
S&P 500 futures reversed about 10 points around 8 AM this morning, the catalyst is not exactly clear. However, news did hit that Iran will not rework their deal at the time the futures slide. Nothing else to review and my view on the markets remain the same.
May 2nd
The Close
Typical Fed day reaction, selling into the close. The Fed was hawkish on inflation, but dovish on growth, and that is something we mentioned last week about the possibility of stagflation. I would expect any morning rally to be sold. The market is trying to digest the dollar, the 10-year yield, possible economic slowdown and peak earnings. All late cycle issues. I am assuming many of you know this by now and this is nothing new, nor can I provide any greater insight than what the market is pricing in currently. All I can say is until the S&P rating value gains significant strength remain defensive.
For those who like looking at the 200-day moving average, tomorrow could possibly see the 8th retest of the average at 2,614. I think this is an insignificant level, but good for talking heads to discuss on TV. The bigger level to watch is 2,588.50. If this level fails to hold, next stop is 2,530.
PreMarket
- S&P 500: The index had a nice reversal yesterday off the lows of 2,625.51 to close at 2,654.80. While this was a nice rally, it provides no improvement for the S&P 500. The Index will continue to be range-bound until the index can get back above last weeks high 2,718 or we break below the Feb lows.
- Headwinds are all out into the open and known, rising dollar that looks to be breaking out (see chart below), 10-year yield bouncing around 3%, commodities are rising off the inflation trade and the concern of peak earnings. While all of these are headwinds the market is pricing this in as the S&P 500 is now trading around 16 forward 2019 earnings. So once again to reiterate, while I would be more defensive and late cycle trade ideas, this doesn’t mean the market has to have a large 10% to 15% correction.
- Until we start to see some strong S&P 500 rating value increase, reducing beta to long-term portfolios is warranted. To get a better sense of your portfolio beta, use the portfolio beta and use SHY as a proxy for your cash allocation. This will give you a true beta measurement in your portfolios.
April 30th
The Close
The S&P 500 hit a high of 2,682.92 before reversing and closing at 2,645.50. At this juncture, the index needs to hold the bottom of the range of 2,601. If the S&P fails this level, there is a good chance the index tests the lows of February 2,550. That takes the S&P forward multiple down close to 15%, pretty close to the historical mean of 14.50. Unless economic conditions roll over 15 forward 2019 earnings should be constructive for investors.
Midday
Another morning higher that refuses to hold the gains, pick a reason, but about higher rates today. The S&P 500 reversed about 20 points mid-morning while crude jumps above $69. The biggest culprit is Netanyahu accuses Iran of developing a secret project to test nuclear weapons. Not sure if this is the sole reason, but it certainly didn’t help.
- The semi’s once again are looking terrible, Apple should shed even more light on this industry group once they report.
- Commodities and energy continue to perform as seen below represented by the GSC (Goldman Sacs Enhanced Commodity Total Return Index).
April 27th
The Close
While the overall market remains hopeful and has been trading in a consolidation pattern for the last 2 months. I yet to see any reason to get aggressively overweight equities. Of course, there have been secular stories and even sector level ideas like energy over the last few months. However, I am growing more concerned that regardless of positive earnings beats, this market has plateaued for NOW!
- Very disappointing day for INTC and the Semi’s, the stock reversed 6% of strong earnings to close down .60%. In my opinion, this was the biggest issue for today’s lousy price action.
- The NASDAQ was up 100 handles premarket and closed up 1.
- While earnings so far have been exceptional, this was built in and pulled forward. While this doesn’t mean the market will correct, but it does not mean we will rally as investors are not going to pay up beyond the current 2019 earnings growth rate.
Premarket
What I am watching today.
- INTC, needs to hold its gains. As we mentioned this is much more important than AMZN for the Semi Industry to hold the line.
- NASDAQ up 106 points premarket
- GDP – first quarter 2.3%, better than expected 1.8%, but not moving the futures or the 10 year yield.
- Energy maybe under some pressure as XOM misses bottom line expectations, but the stock has been a lagger in the group anyway.
- Strong Buy to Strong Sell getting weaker as seen below
April 26th
The Close
- S&P 500 caught a nice bid off the face of facebook 9% move, while google rebounded slightly after weaker margins after earnings. The 2,666 level once again is finding a home base, which is close to the 50 day mean.
- AMZN after hours rose to 1,615 up 90 plus points as AWS its cloud hosting business grew at 49% above expectations of 45% and now accounts for 10% of total revenue.
- MORE IMPORTANTLY: Intel crushed earnings and raised guidance, Intel, in my opinion, is more important because the Semis were about to roll over. Additionally, AMZN is a singular story (secular), Intel is an industry story and cap ex-story. The stock is trading up 7.5% after hours, if this name reverses in tomorrows action, I would be very concerned of the overall direction of the market.
PreMarket
- Not too much happening this morning, the only real market mover is Mario Draghi’s conference. I highly doubt he will say anything of significance.
- Durable goods, 2.6, expectations were about 1.8, and a slightly revised up decent number.
- 10 year yield back down to 2.99%, which is a non-event, I think the market is starting to normalize here and without any sudden shocks, 3% is not a deal killer for the S&P.
April 25th
Mid Morning
The S&P 500 is testing the 2,600 level, the S&P 500 needs to defend this level at the close or the S&P 500 is going to have more pain. As of now, the index recovered 17 points off the lows and so far so good.
PreMarket
What I am looking at this morning:
Negative: 10-year yield hitting 3.03
Positive: Boeing earning came in strong, stock trading up 2% pre-market
Positive: S&P 500 futures rallying 10 handles even as the 10 year hits 3.03
It’s a slow morning and not too much else to add currently. It will be very interesting now that the 10 year broke that big level. There is not much resistance until 3.18.
April 24th
Ok, who is tired of all the media pundits on CNBC piling on to the talk about PEAK earnings today. The peak earnings rhetoric hit the financial news media as CAT (Caterpillar reported a very strong quarter). So strong that the stock was up 5% premarket, until the conference call. But management said they believed they achieved the high watermark for the year, in other words, earnings peaked. The stock reversed an astonishing 11% peak to trough. I believe this was the biggest culprit in the S&P 500’s 35.75 point decline. Obviously hitting 3% on the 10-year didn’t help. Although I don’t think we would have ended the day red if the CAT reversal on peak earnings talk didn’t happen. While we won’t fully know who else will express a similar view, this is the most serious issue in my opinion for the market. Investors will not pay 17 forward earning on the S&P 500 if earnings have peaked.
We said at the beginning of earnings season after the banks reported that it was an ominous sign of expectations being too high. Today the S&P 500 once again broke that big level of 2,660 to the downside. And until the index can close above 2,715, this market is going nowhere. The index closed at 2,637.25 today and the next big support level comes in at 2,588. While there are always trades to be made, the overall backdrop is one where the opportunities are growing rather thin.
Let’s take a look at some negative headwinds. These are all known, but are they fully priced in?
Rates are looking to take out 3% off the back of inflation.
Investors are now talking peak earnings and believe 20% earnings growth for the S&P is behind us.
The semiconductor industry is on the verge of breaking a big two-year winning trend. Semi’s lead economic expansion and carry out the market at the end of the cycle most often. Of course, semi’s could just be under pressure as Apple suppliers are not seeing the orders they hoped for the new Apple iPhone. How many new versions of the same functions does a person need for $900?
Commodities, materials, and energy were leading until today, late cycle trades.
April 20th
Mid Day
The 10-year yield is back putting pressure on the market, but as we mentioned yesterday, for a different reason this time. The market is pricing in rising inflation and not overheating economic growth. Who really knows if this time is different with real inflation. As seen below the 10 year yield is now trading at 2.95 and has a lot of resistance at 2.97.
More worrisome than rates is a leading industry group within technology seems to be rolling over. If we were to look at the SMH (Vaneck Vectors Semiconductor ETF, we are seeing a 2.5-year upward trend about to roll over. A weekly break below $97.50 will be cause for concern.
PreMarket
What I am looking at today:
- Crude and energy might be under a little pressure off the back of Trump’s morning tweet. “Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!”
- The most important thing to watch today is the Fed speakers
- Charles Evans speaks at 9:40
- John William Speaks
- Keeping an eye on the 10-year yield coupled with XME
April 19th
The Close
In late-day trading, the S&P 500 was down 22 handles and news hit the tape that Rod Rosenstein told Trump he’s not a target in Mueller Probe according to Bloomberg (read here). The news rallied the S&P 500 10 handles but closed off its best levels at 2,693.13.
Today was a tale of two tapes. The technology sector was pressured by Taiwan Semiconductor as the company reported weaker demand and guidance from the higher end smartphone demand cycle. On the contrary, materials, energy, and financials caught a bid from the rate move. Commodities were a leading indicator of rates today and signaled the potential risk of inflation (see below). Conversely, financials were reactionary (lagging) and moved higher as rates moved higher off the back of higher inflationary worries.
Mid Day
Another day and another risk to worry about. Today’s flavor of risk are rates rising not from the fear of an economic slowdown, but inflation. Metals and commodities have been jumping in the last few weeks. The market is worried that if we see higher inflation without higher economic growth that is going to hit the income sheets of companies, reduce cash flow and thus the P/E needs to contract, ultimately causing stagflation. While I haven’t a clue if this is a real viable concern, this is what the market is worried about today.
Keep an eye on XME, you see break out above that $38.60 level, that might signal some more concern for the equity markets.
PreMarket
Futures down 10 handles this morning as the 10-year yield is back on the move to 2.90%. If you have been watching the market and the rating values you will notice that the energy sector has been constructive as oil climbs. XLE has been making a nice rounding bottom from a 1 to 3 as seen below. The next two major resistance levels for XLE is $75.44 and $76.81. While I dislike fossil fuels for a long-term growth story because of the obvious headwinds. The energy sector might be good for a short-term trade. A weekly close above $77 would be very constructive.
