Stocks moved cautiously higher in a bifurcated week, with the S&P 500 achieving its eighth weekly advance from the last nine and ending up just south of all-time record levels, but tech stocks started slumping later in the week, particularly AI-related ones. With a jam-packed week coming up in terms of important economic data releases, there are some concerns that any disappointments could trigger something of a sell-off from these stratospheric levels.
The S&P 500 and NASDAQ indexes both closed at record highs yet again on Monday (that was the 30th record day this year for the S&P 500 and the sixth record day in a row for the NASDAQ), driven by another powerful rally (although notably on relatively low volume) in several AI-related Big Tech names, after Morgan Stanley called rising concerns about the possible over-valuation of AI-related stock prices “misguided”.
There was something of a rebound in European markets, recently battered by political turmoil across the continent. Treasury interest rates stayed muted which is helping a lot. Wall Street seems to be doing the Fed’s job for it, pushing market rates lower and lower over the last couple of weeks.
On Tuesday morning we learned that Retail Sales barely budged in May, rising just 0.1% and the prior months were revised lower. This pointed to a notable downshift in consumer spending after stronger readings earlier in the year.
Wall Street seemed unable to decide whether this was a welcome pullback that allows the economy to cool just enough to tame inflation and facilitate imminent Fed interest rate cuts or was a more ominous trend that hinted at deepening economic weakness.
With the day feeling a bit like a synthetic Friday ahead of the midweek market closure due to the Juneteenth holiday, the result was a low-trading-volume lackluster session with no real conviction either way, but Nvidia did manage to end Apple’s brief one week stint as the world biggest company by catapulting into the #1 spot with a $3.3 trillion+ valuation.
After a day off on Wednesday, traders put their game faces back on again on Thursday. Before the U.S. markets opened, the Bank of England kept local interest rates unchanged (unsurprising in the midst of a general election campaign) but the Swiss National Bank raised some eyebrows with another rate cut.
Stock prices pulled back a little, particularly in some of the AI tech names that had soared recently, resulting in Nvidia’s spell as the biggest company in the world coming to an end after just one trading day, ceding the spot as top dog to Microsoft.
Friday was a “triple-witching day” on the futures and options exchanges with about $5.5 trillion dollars’-worth of contracts in indexes, single-stocks and ETFs expiring along with multiple index rebalances. Triple-witching days are often characterized by prodigious amounts of hedging trades in mostly big name stocks, often in the last few minutes of the trading day, as institutional traders roll over existing positions or start new ones and the rebalancing of indexes can require significant purchases and sales of particular stocks that are respectively entering or exiting the index.
Stock prices sank further at the open, again pushed lower by AI names dropping further, but then stayed pretty stagnant the rest of the day. The triple-witching volatility kept within a narrow range and fears of related wild price swings never materialized.
I’m not a huge fan of technical analysis, but certain data points can be valuable in assessing where we stand, particularly at possible specific milestones. I know a lot of readers just read or listen to the first part of my weekly reports without looking too hard at the second part where all the numbers lie (LAST WEEK BY THE NUMBERS below), but there are definitely some technical breadcrumbs there when it comes to getting a picture of the situation in financial markets right now ..
While the S&P and the NASDAQ are relentlessly reaching new highs ..
we would expect a least a majority of the eleven sectors to be in a technical uptrend but just two (Technology and Utilities) are, based on their setups, momentum readings and relative performance to the broader market. Interestingly, these two sectors are 1) the traditionally most volatile and 2) the traditionally least volatile. This is unusual and underscores the extremely thin leadership in the stock market right now.
the number of S&P 500 stocks trading above their 200-day moving averages (see below) fell to a new 2024 low. This is a significant and potentially meaningful divergence with the performance of the index itself which continues to make record highs over and over again That doesn’t happen often. The takeaway is that the average stock is actually struggling, despite what we see in Mega Cap world.
the Fear and Greed Index from CNN takes into account a multitude of factors (see the details below) and measures the mood and confidence of market participants. Typically when markets are moving higher and certainly when multiple new highs are continually being recorded, you would expect the reading to head quickly into the Greed Zone, then eventually into the Extreme Greed Zone where the danger of the acute risk-on sentiment causing a swift, sharp reversal in prices becomes more elevated, with a crowded trade and and all bets being one-way. This is how markets cycle. However, we ended last week stuck in the Fear Zone indicating that many professionals seem to feel concerned that the current exuberance may be misplaced when applied to all of the S&P 500 stocks.
As I alluded to in last week’s report, a microscopic number of stocks are driving everything right now. For example, just one stock, (NVDA) is responsible for more than a third of the S&P 500’s 14%+ gain so far this year, which is historically unheard of outside the tech bubble in the early 2000s. For my younger readers, that ended badly.
The data from the stock exchanges and the options market are showing that frothy retail investors and underperforming institutional traders are chasing gains in a FOMO frenzy only in this tiny subset of names instead of fishing in the overall broad market.
The vitality brought about by AI mania better not subside anytime soon because there have been weeks recently when it was literally the only reason that the indexes moved higher. That is why Thursday and Friday’s negative price action in AI is troubling.
Any continued backsliding in AI stocks would mean that the market will have seen some damage to two of the four “pillars of the rally” (stable growth, falling inflation, sooner-than-later rate cuts and AI enthusiasm) which would mean that the outlook for stock markets in general would worsen, not strengthen. This is especially true since the market now assumes that the two other pillars (falling inflation and imminent Fed rate cuts) are happening anyway, which means they are less substantial influences on how markets move now.
While risks to this rally continue to build in the distance, mostly in the form of a potential economic slowdown, the path of least resistance in the medium term remains higher for stocks with Mega Cap Tech poised to continue leading the bullish charge higher. Until it doesn’t.
In the words of the late, great David Bowie, “Take your protein pills and put your helmet on.”
OTHER NEWS ..
Housing Data Update [Prospective New Buyers, Cover Your Eyes] .. We got a lot of insight into the housing market last week. Mortgage rates fell again, reaching their lowest level since early April. Bigger picture though, it’s cold comfort for buyers looking at rates that are still almost triple what they were just three years ago (plus the massively inflated cost of homeowner’s insurance).
Wednesday’s print on new-home construction was gloomy, we saw a 5.5% drop in housing starts in May to the slowest pace since June 2020 and the previous months were revised lower. Compared to May of last year, new housing starts are now 19.3% lower, driven by softer multi-family construction. If you are looking for a silver lining, those kind of slowdowns could ease the rate inflation.
The data pile-on continued the next day when we learned that existing home prices rose in May to a new high with low inventory continuing to spur bidding wars in some markets. The national median existing-home price (which is not inflation-adjusted) rose to $419,300, a new record high since the data began being collected in 1999. This is 5.8% up from a year earlier.
Come On In! .. With immigration high on the election agenda, it was interesting to learn last week that the U.S. is projected to gain 3,800 millionaires from overseas in 2024. Only the United Arab Emirates expects to welcome more than that. The greatest numbers are leaving the China and the UK.
It Might Not Feel Like It But .. According to the Bureau of Labor Statistics, it now takes about the same number of hours (3.6 hours) for an average non-managerial worker to buy a week’s worth of groceries as it did in 2019 before the pandemic and the sky-high inflation era. Because wage growth has outpaced grocery price growth, it takes slightly less work to purchase a bag of groceries relative to a year ago.
ARTICLE OF THE WEEK ..
Great investing lessons to take from analyzing Roger Federer’s tennis career.
THIS WEEK’S UPCOMING CALENDAR ..
There’ll be a lot to digest this week.
FedEx, Nike, Walgreens, Micron, Carnival and General Mills release results in the coming five days.
Importantly, the latest Durable Goods report will be released.
Even more importantly, we will get a final and decisive Gross Domestic Product (GDP) reading for Q1 2024
Most importantly, we will see the latest Personal Consumption Expenditures (PCE) price index for May. This data point is what the Fed uses to judge what inflation is doing. Both the headline and core indexes are forecast to show a 2.6% annualized inflation rate.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Consumer Cyclical (two biggest holdings: Amazon, Tesla) for the second week in a row - up 1.8% for the week.
Last week’s worst performing U.S. sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) - down 1.0% for the week.
SPY, the S&P 500 Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from among the largest U.S. companies. Its price rose 0.4% last week, is up 14.6% so far this year and ended the week 0.7% below its all-time record high (06/20/2024).
IWM, the Russell 2000 Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a group made up from among 3,000 largest U.S. stocks. Its price rose 0.7% last week, is down 0.2% so far this year and ended the week 17.4% below its all-time record high (11/08/2021).
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.87%
One week ago: 6.95%, one month ago: 6.94%, one year ago: 6.67%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
FEAR & GREED INDEX ..
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business as of Friday’s market close.
FEDWATCH INTEREST RATE TOOL ..
Will interest rates be lower than they are now after the Fed’s following meeting on July 31st?
Yes .. 10% probability (12% a week ago)
No .. 90% probability (88% a week ago)
Will interest rates be lower than they are now after the Fed’s next meeting on September 18th?
Yes .. 75% probability (68% a week ago)
No .. 25% probability (32% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.875 (0.50% lower than where we are now, implying two rate cuts before the end of 2024)
One week ago: 4.875% (implying two rate cuts), one month ago: 4.875% (implying two rate cuts)
All data based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
The 50-day moving average of the S&P 500 remains above the 200-day. This is a continued indication of an ongoing technical uptrend.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE ..
52% (260 of the S&P 500 stocks ended last week above their 50D MA and 240 were below)
One week ago: 42%, one month ago: 61%, one year ago: 63%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
68% (339 of the S&P 500 stocks ended last week above their 200D MA and 161 were below)
One week ago: 64%, one month ago: 78%, one year ago: 55%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the S&P 500 index stocks are trending higher or lower, as defined by whether the stock price is above or below their more sensitive 50-day (short term) and less sensitive 200-day (long term) moving averages which are among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market trend, with 50% considered to be a key pivot point. Readings above 90% or below 15% are extremely rare.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 44% (45% a week ago)
⬌ Neutral: 33% (30% a week ago)
↓Bearish: 23% (25% a week ago)
Net Bull-Bear spread: ↑Bullish by 21 (Bullish by 20 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Survey participants are typically polled during the first half of the week.
Data courtesy of: American Association of Individual Investors (AAII).
HIGH YIELD CREDIT SPREAD ..
3.23%
One week ago: 3.20%, one month ago: 3.27%, one year ago: 4.22%
This closely-watched spread is a strong indicator of the risk inherent in the professional marketplace and the extent to which such risk is growing or easing. The high-yield credit spread is the difference between the interest rates offered for riskier low-grade, high yield (“junk”) bonds and those for stable high-grade, lower yield bonds, including deemed risk-free government bonds, of similar maturity.
A reading that is high/increasing indicates that “junkier” bond issuers are being forced to move their yields higher to compensate for a greater risk of default and is considered to be a reflection of broadly deteriorating economic and market conditions which could well lead to lower stock prices.
A reading that is low/decreasing indicates a reduced necessity for higher yields. This reflects less prevailing market risk and more stable or improving conditions in the overall economy and for stock prices.
For context .. this reading was regularly below 3.00% for much of the 1990s, got as high as 10.59% after 9/11 and the subsequent Dotcom Crash of 2002, peaked at 21.82% in the Great Financial Crisis in December 2008 and spiked from 3.62% to 10.87% in the space of about a month during the February/March 2020 COVID crash. The historical average since 1996 is a little over 4.00%.
Data courtesy of: FRED Economic Data, St. Louis Fed as of Friday’s market close.
US TREASURY INTEREST RATE YIELD CURVE ..
The highest rate on the yield curve (5.49%) is being paid for the 3-month duration and the lowest rate (4.25%) is for the 10-year.
The most closely-watched and commonly-used comparative measure of the spread between the higher 2-year and the lower 10-year fell from 0.47% to 0.45%, indicating a flattening in the inversion of the curve last week.
The interest rate yield curve remains unusually “inverted” (i.e. shorter term interest rates are generally higher than longer term ones). Based on the 2-year vs. 10-year spread, the curve has been inverted since July 2022.
Historically, an inverted yield curve is not the norm and has been regarded by many as a leading indicator of an impending recession, with shorter term risk regarded to be unusually higher than longer term. The steeper the inversion, the greater the deemed risk of recession.
Data courtesy of ustreasuryyieldcurve.com as of Friday. The lightly shaded area on the chart shows the current Federal Funds rate range.
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