Tuesdays are the blah day of the week, not really doing much except to fill in the five day work week. But markets have deemed the day appropriate to shake off any Monday weakness, and hence the term turnaround Tuesday has been coined. With the S&P 500 closing at a one year low yesterday, today was full of potential for stocks, and indexes started in the green.
No capitulation to speak of yet, though positioning remains defensive and markets continued to slide lower today. Major indices flirted with June lows (SPX=3636, CCMP=10,565), but they held, as it seems we are at an inflection point from a technical/psychological perspective. Shorts may be more incentivized to cover at this point, rather than establish new shorts and/or double down. Nearly all sectors found their way into the red, barring a few, which eked out minute gains.
The negative momentum built and built and built, and the culmination was a day like today. There was a clear sell-off across the markets as indices tested their June lows (3639 on S&P futures and 11k on CCMP futures). The macro-environment remained little changed – 10-year yields remained above 3.67%, the resistance they blew through yesterday on the way to 4.0%. The dollar continued to steamroll everything in its path. The next technical target for the DXY is 120.
We currently reside in a bit of an information gap at the moment – the FOMC is now behind us but boy did that leave a mark. And while it feels like earnings never actually stop per se, Q3 figures won’t come for another 3 weeks. So we’re left to contemplate what to make of a week that’s seen global rate hikes of nearly 600bps. Like someone that was late to a not so surprise party, the Fed and its ilk are racing with a lead foot to get where they need to go.
Another Fed came and went. But whereas in the past the adage has largely been, fade the first move, today the first move was the right one. Sure we had the typical knee-jerk, but post that, equities were quickly jerked lower and stayed that way. It was a given from the get-go that the Fed would be aggressive, and while there was some debate around a 100bp hike, the reasoning behind the increased hike had to do with just the latest hot CPI print.
T-minus 24 hours and markets are in full tizzy. How much the Fed will raise, and maybe even more important, what they will say afterwards, has investors feeling very defensive. The hawkish message out of Jackson Hole, a still strong jobs market, and a CPI that hasn’t shifted, is making this meeting a tough call. Most expect 75bps and “higher for longer”, but the outlier would be 100bps. Does that mean 4.5% is the terminal rate? And if it is, when will the Fed get there?
Paralysis through analysis created a slow start to an important week. Another rate hike by the Fed is now less than 48 hours away, and the topic has been discussed ad nauseum with plenty of investors attempting to dissect not only the inflation picture, but also the peak level the Fed will get to. Given the current positioning amongst participants, doing nothing is the best way to be cautious. Weighting towards equities are already at lows, as short exposure via S&P futures (according to CFTC data) is at its highest level since June 2020.
Not the end to the week we were hoping for As I go to end the week with a view entrance that’s been used too often recently, it’s fitting – the same trends we have seen recently continue to be present. Still negative economic data combined with a yield curve that shows massive uncertainty in the short and long term gives investors plenty of pause as recession looms. Add on the fact that the US 10-year real yields are above 1%, the highest level since 2018, and the safe haven USD is the place to be. And yet, the VIX remains low – we seem due to grind lower (although a move like today is certainly harrowing). Positioning continues to be negative, with the latest non-commercial S&P futures data showing renewed selling. There’s plenty to talk about– triple witching was always going to induce some interesting moves, while unexciting (although slightly better than expected) University of Michigan data prevented the markets from a happy end to the week. There was a sour taste to the morning too – FedEx last night with a massive miss led it to its worst drop since the crash of the ‘80s. This led the S&P to dip below the short-term support we have been watching (3900 on S&P futures), although the 10-year yield couldn’t break its 3.5% resistance. The momentum to the downside continues, although for the optimists, the S&P bounced 6 out of the 8 weeks immediately post options expiry in 2022. There was certainly a defensive flavor to the day, with Staples, Telcos, and Utilities outperforming. Semiconductors also outperformed after INTC announced its dividend and a new processor. Any good news in such a damaged space sure to induce some covering. With the BofA Bull & Bear indicator barely ticking off of lows and overwhelmingly negative sentiment, contrarians must be licking their chops. Maybe things could finally get better once the Fed is out of the way (17% probability of a 100bp hike). Then again, why buy the dip now? Enjoy the weekend.
The respite after Tuesday’s bludgeoning was, sadly, short-lived. We remain in the same range we have been in, and the market feels like it’s still waiting. For what though? Too much on the horizon to pinpoint one event. Yesterday the number of 12-month price lows rose to 103, and as short-term breadth continues to deteriorate, we remain cautious. Indices are still above short-term supports though – 3900 on S&P futures and 12,000 on NASDAQ 100 futures. The headline move was actually in gold today – it has inched closer to the lower end of the range it’s been stuck in the past 2 years, and a significant break below 1676/1670 would open the potential for a further drop to 1569. This move would also reiterate the Dollar’s strength, which continues to push towards the long-term 120 target. Mortgage rates were also grabbing eyes today, as the US 30-year fixed mortgage, chugs its way to the next technical target at 6.5%. Homebuilders were unsurprisingly pressured. The indices were indecisive for most of the day before taking a turn lower in the afternoon. Energy and tech dragged as crude dipped after news yesterday that the US had to refill its strategic reserves. Tech was hurt by the move higher in yields, and mega names continue to populate our 12-month relative low list. Microsoft is on a relative support, as is the SOX. Google, Nvidia, and Meta are three more to monitor. Tech was also dragged lower by Adobe, which was today punished for news of a $20B acquisition of Figma, closing down 16.89%. Banks outperformed as yields moved higher, although the BKX’s move higher hid the fact that it continues to trade in the same tight range it has been this month. Tomorrow brings the latest University of Michigan data, and after admittedly “meh” retail data this morning & a hot CPI print, we will see what consumers are really feeling. Hopefully will be a good end to the week, although with triple witching tomorrow, things could get volatile.
The market rallied early this morning for reasons nobody predicted and nobody can explain. Lack of conviction? Probably. Repositioning going into Friday’s Triple Witch expiry? Likely. Profit giving followed by profit chasing? Definitely. Either way, US markets drifted sideways throughout the afternoon, then rallied into the close again with nary a positive headline in sight (but recession signs in the form of inverted curves ever present).